PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Snubbing Small Business: Is the FTC Ignoring Rules that Protect Small Business from Burdensome Regulatory Costs?

By at 30 January, 2024, 8:28 pm

SMALL BUSINESS INSIDER

By Karen Kerrigan –

When federal agencies draft new regulations, they are required to comply with the Regulatory Flexibility Act (RFA) to determine if proposed rules will negatively impact small businesses. The Federal Trade Commission (FTC) appears to have side-stepped or glossed over this requirement when it “certified” that small businesses will not be affected by the significant changes it is proposing to update Hart-Scott-Rodino (HSR) pre-merger reporting requirements. FTC’s “certification” amounts to a mere four sentences, which lacks thorough data and appears to demonstrate that regulators did not comply with the RFA, where a detailed analysis is required to assess the impact of their proposal on small businesses.

It belies common sense that the proposal, which will expand the scope and sheer volume of detailed information businesses would be required to provide as part of the pre-merger notification process, will not impact small businesses. If the FTC did not comply with the RFA it would be a violation of federal law. Therefore, the proposed rule would have to be pulled, or vacated.

The FTC is proposing to vastly expand and add pricey complexity to the Hart-Scott-Rodino (HSR) rules that govern premerger notification and reporting when companies merge or are acquired. According to a U.S. Chamber of Commerce report, the proposed changes could impose more than $2 billion in costs on businesses and taxpayers. More than 2,000 filings occur each year (on average, some years much higher), many of which involve small to mid-size businesses (SMBs). When the FTC issued its pre-merger notification proposal, the value threshold triggering a pre-merger notice and filing was $111.4 million. The threshold was recently updated to $119.5 million. There are other tests that trigger a filing.

In its rulemaking proposal, the FTC asserts and certifies:

Because of the size of the transactions necessary to invoke an HSR Filing, the premerger notification rules rarely, if ever, affect small entities. The 2000 amendments to the Act exempted all transactions valued at $50 million or less, with subsequent automatic adjustments to take account of changes in Gross National Product resulting in a current threshold of $111 million. Further, none of the proposed amendments expands the coverage of the premerger notification rules in a way that would affect small entities. Accordingly, the Commission certifies that these proposed amendments will not have a significant economic impact on a substantial number of small entities. This document serves as the required notice of this certification to the Small Business Administration.

This unsubstantiated “certification” is likely wrong. By reviewing past HSR filings, FTC regulators can cull data to produce a detailed analysis, or at least some verifiable numbers that substantiate their certification.

The numbers we dug up, based on a 2022 report the FTC and Department of Justice (DOJ) provided to Congress, finds that 709 transactions were subject to HSR filings where the sales revenue of these acquired entities was less than $50 million. These deals likely involved the acquisition of a small business. The “less than” $50 million transaction range was the highest category of HSR transactions at 23.4% out of 3029 total transactions. Moreover, it would not be surprising if a fair number of the 513 transactions in the $50-$100 million range and 305 transactions in the $100-$150 million range involved the acquisition of a small business.

The scope and volume of information that filers are required to submit under the proposed changes will significantly increase the cost and time associated with the preparation of HSR filings. The FTC estimates s quadrupling of the financial burden, although outside reports estimate a much higher burden. For example, the U.S. Chamber’s report estimates costs that are “nearly seven times the Agencies’ estimate” – an actual average filing cost of $437,314 versus the FTC’s estimate of $66,240. Resource constrained small firms will be crushed – along with their aspirations and dreams of being acquired – by these excessive costs.

The RFA is meant to protect small businesses from the type of costly rules and procedures the FTC is needlessly pushing through the proposed HSR-filing changes. Besides requiring that federal agencies put some detailed effort and analysis into determining if and how small entities will be impacted by a proposed rulemaking, the RFA requires that agencies develop less harmful compliance alternatives, and alert small entities and communities impacted by these proposed actions, so that they “comment” and provide feedback on a proposed rule.

Federal government agencies are swift to ensure that businesses comply with their rules and regulations, and issue heavy fines it they do not. Federal agencies should set an example and fully comply with regulatory-process rules established by Congress. The rule of law works both ways.

Based on a review of the data, it appears that the FTC did not follow the rules. Therefore, Chairman Lina Khan needs to step up, vacate the rule, and comply with the laws that govern the federal regulatory process. After all, startups and small businesses would like their voice to be heard on this costly and dubious proposal.

Karen Kerrigan is president & CEO of the Small Business & Entrepreneurship Council.

 

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