The Federal Trade Commission (FTC) insists the agency’s approach to mergers is beneficial to entrepreneurs and startups by claiming that “98% of [the 3,000 yearly merger] deals… are going through.” 

However, the FTC deliberately increased the regulatory cost of filing those deals to chill mergers, and in doing so, likely breached its obligations under the Regulatory Flexibility Act by failing to consider the impact of its changes on small businesses like startups. Roughly one-third of the 3,000 deals the agency claims “are going through” regard small businesses, which it does not consider. 

Here’s what you need to know: 

Many more startups are subject to the FTC’s merger review than the agency suggests. 

—Most mergers must undergo review from the FTC under the Hart-Scott-Rodino (HSR) Act. Before two companies can merge, the FTC needs to review a filing that the companies submit. If the FTC believes that the merger will harm competition, they can then sue to stop the transaction from closing. 

—In 2022, about 25% of the mergers that underwent review involved startups and small enterprises, according to FTC data. Of the roughly 3,000 transactions that the FTC reviewed under the HSR Act, 709 involved companies that had less than $50 million in sales revenue. Said differently, 709 of the 3,000 mergers that the FTC scrutinized were small enterprises. 

The merger review that the FTC requires has become more burdensome and expensive.

—While submitting a filing does not necessarily mean the FTC will move to block the merger in question, the process of submitting a filing itself is a costly task for smaller businesses. The FTC made it even more difficult for small enterprises last year, when it proposed changes to the HSR filing process.

—The Cato Institute explains: “The FTC estimates that the burden per filer will quadruple from the current 37 hours per filing to 144 hours under the changes, resulting in an additional $350 million in labor costs. Several law firms contend the burden would be much higher. Further, the FTC’s estimates fail to consider the costs of delaying transactions or abandoning them altogether.”

In determining new merger filing rules, the FTC did not take small businesses into account. 

—When the FTC moved to make the merger process more difficult, it did not actually consider what the effect would be on startups and small enterprises. Under the Regulatory Flexibility Act, the FTC must consider the effects that their regulations will have on small businesses. When the FTC submitted changes to the HSR merger process, however, they merely asserted without evidence that their new rules would not affect small businesses.

—The FTC wrote: “Because of the size of the transactions necessary to invoke an HSR Filing, the premerger notification rules rarely, if ever, 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.”

The FTC’s actions mean that life is harder, not easier, for small businesses.

—The FTC’s damaging proposed changes to the HSR merger process is just part of a larger approach that stifles investment and capital formation that small enterprises use to grow and innovate. Speaking against the FTC’s 2023 merger guidelines, Small Business and Entrepreneurship Council CEO Karen Kerrigan explained: “Competition is flourishing and many new businesses and entrepreneurs have big dreams to vastly scale and take their innovations national or global. These startups and innovative businesses often partner and merge with larger companies to connect with the capital, resources and talent they need to scale and bring their innovations to the mass marketplace. It is hard to see how any, any small business or startup will have the opportunity to merge or be acquired given these proposed set of guidelines.”