Government contractors who have attempted to recently register or re-register in the SAM database have been confronted with new questions asking about an “immediate owner” and a “higher-level owner.”  These new SAM questions have caused some confusion about what information, if any, a contractor must provide in SAM with respect to an “immediate owner” or “higher-level owner.”

The new questions originate in a recent amendment to the FAR, which requires all SAM registrants, if owned by another entity, to identify that entity by legal name, CAGE code, and type of ownership.  This blog post breaks down the new rule and explains when this rule will come into play.

The rule adds a new FAR subpart 4.18, which includes pertinent definitions such as “CAGE code,” “immediate owner,” and “highest-level owner. ”  Highest-level owner is defined as “the entity that owns or controls an immediate owner of the offeror, or that owns or controls one or more entities that control an immediate owner of the offeror. No entity owns or exercises control of the highest level owner.”  Immediate owner is defined as “an entity, other than the offeror, that has direct control of the offeror. Indicators of the control include, but are not limited to, one or more of the following:  Ownership or interlocking management, identity of interests among family members, shared facilities and equipment, and the common use of employees.”

The rule also created three new FAR clauses.  FAR 52.204-16, provides information on obtaining CAGE codes and requires the offeror to include its CAGE code with its proposal.  FAR 52.204-17 requires the offeror to identify if it is owned by another entity and, if so, to provide the legal name and CAGE code of such entity.  Finally, FAR 52.204-18, provides instructions on maintaining accurate CAGE information in the CAGE file and requires the contractor to inform its contracting officer if its CAGE code changes.

According to the FAR Council, the purpose of the new FAR provisions is to provide insight into 4 areas:  (1) federal spending patterns across corporations; (2) traceability in tracking performance issues across corporations; (3) contractor personnel outside the United States; and (4) supply chain traceability and integrity efforts.  The rule will also allow for greater transparency within the size and socioeconomic set-aside programs by requiring contractors to identify certain affiliates on their SAM profiles.

Here’s how the new rule works in practice.  After a SAM registrant is asked whether the registrant has a CAGE code, SAM asks two new questions:

Question 1:  Does  your entity have an immediate owner?

Question 2:  Does your entity have a higher-level owner?

FAR 4.18 offers some guidance about answering these questions.

First, an “immediate owner” or “higher-level owner” means a legal entity, not an individual.   If a legal entity (corporation, LLC, etc.)—has direct control of the registrant, the registrant has an “immediate owner.”  On the other hand, if direct control of the registrant is by one or more individuals, the registrant does not have an “immediate owner” within the meaning of the rule.

Another way of thinking about Question 1 is whether a legal entity has direct control and that entity has or is capable of acquiring a CAGE code, because under the rule all legal entities reported as an immediate owner or highest-level owner must have CAGE codes. If this is the case, the registrant’s answer to Question 1 is “yes.”

Question 2 is conditional to Question 1 and will only be required if “yes” is selected for Question 1.  A registrant will only answer “Yes” to Question 2 if the immediate owner is owned by a different entity. If the immediate owner is owned by individuals, the entity does not have a higher-level owner , and the answer to the question is “No.” Further, an immediate owner has at most one highest-level owner. So, if the immediate owner is owned by a legal entity that is, in turn, owned by another legal entity, the registrant will need to list the highest-level legal entity. As stated in the definition:  “No entity owns or exercises control of the highest-level owner.” Again, a highest-level owner must have a CAGE code.

What if the registrant is owned by a joint venture?  New FAR 52.204-17 states that if an entity has more than one immediate owner (such as a joint venture), then the registering entity must respond to both Question 1 and Question 2 for each participant in the joint venture.

Still confused? Let’s try a couple examples.

Example 1:  LaJoy Farms LLC , which is owned 100% by Farmer Bob, creates a new entity called Bogwert LLC. Bogwert is owned entirely by LaJoy Farms and has the same management teams. Bogwert registers on SAM. Bogwert will answer yes to the Question 1 because LaJoy is its immediate owner. Because no entity owns LaJoy, the answer to Question 2 will be no.

Example 2: Using the same companies, Bogwert creates a new entity called AmaNiki. Bogwert is still owned by LaJoy Farms. AmaNiki registers on SAM. AmaNiki will answer yes to Question 1 because Bogwert is its immediate owner. AmaNiki will also answer yes to Question 2 because Bogwert is owned by LaJoy Farms.  LaJoy Farms is AmaNiki’s highest-level owner.

This rule goes into effect on November 1, 2014.  Starting November 1, 2014, if a contractor is submitting an offer for a federal contract, the FAR requires that the contractor either update its SAM profile to answer the new questions, or list the updated information in its offer.