As reported in my previous blog post, action is finally being taken to address the overlapping and conflicting jurisdiction of the Department of Veterans Affairs (VA) and the U.S. Small Business Administration (SBA) over Veteran Owned Small Businesses (VOSBs) and Service Disabled Veteran Owned Small Businesses (SDVOSBs). As a first step, VA issued its proposed rules deferring to SBA’s regulations found in 13 CFR part 125.

As directed by the 2017 National Defense Authorization Act (NDAA), the SBA has now released its proposed consolidated rules for size, ownership and control of veteran owned businesses that, when finalized and adopted, will not only apply to the VA’s certification of VOSBs and SDVOSBs for procurements under the Vets First Contracting Program at the VA, but also to all acquisitions for other parts of the U.S. Government which require self-certification of VOSBs and SDVOSBs.

Some of the changes the SBA has proposed to its regulations are simply the adoption of what was previously included in the VA’s ownership and control rules. Yet some provisions of the proposed regulations are entirely new.

Among the changes that reflect the SBA’s adoption of the VA’s standards are the following:

• With respect to the unconditional ownership requirements to qualify as a SDVOSB, service-disabled veterans must receive at least 51% of the profits of the entity regardless of whether it is organized as a corporation, partnership or limited liability company, and the service-disabled veteran’s share of the profits must be commensurate with his or her ownership interest in the concern.
• With respect to the unconditional control requirements, the service-disabled veteran generally must be the highest-compensated in the company.

Among the newly added elements of the SBA regulations are the following:

• With respect to the unconditional ownership requirements, a new exception is included for employee stock ownership plans (ESOPs). Unfortunately, however, this exception is not likely to be of any benefit to veteran owned businesses given that, as drafted, the proposed exception is limited to “publicly traded” SDVOSBs. If such an entity exists, I am not aware of one. We can only hope that this blatant shortcoming is addressed and fixed during the comment period.
• Another new exception for unconditional ownership is added for surviving spouses of service-disabled veteran business owners. But this exception is also narrowly drafted, and applies only when the veteran has a 100% service connected disability or has died as a result of a service connected disability.
• With respect to unconditional control, a new exception is added for veterans with a “permanent and severe disability” in which case, the spouse or permanent caregiver may control the company provided that that they, “have managerial experience of the extent and complexity needed to run the concern.” While well-intentioned, this provision could also benefit from fine-tuning during the comment period. If a veteran has such a disability, why would the drafters of this provision expect the spouse or permanent caregiver to have the requisite expertise, as well as the necessary time or inclination, to take on the responsibility for running the business?
• Finally, with respect to unconditional control, new “rebuttable presumptions” are proposed to be added that specify the service disabled veteran will not be found to be in control of the business if he or she: (1) is not able to work for the firm during normal business hours; or (2) is not physically located within a reasonable commute to the firm’s headquarters and/or work locations. The second of these rebuttable presumptions seems especially problematic for two reasons. It first seems overly restrictive given the ever widening acceptability of telecommuting in today’s business world, and also disregards the reality that many of these businesses work on multiple client sites located across the country. Secondly, the value of the presumption being rebuttable is severely hampered by the fact that the SBA goes on to add the following as additional clarification: “The service-disabled veteran’s ability to answer emails, communicate by telephone, or to communicate at a distance by other technological means, while delegating the responsibility of managing the concern to others is not by itself a reasonable rebuttal.” Of course, the possibility exists that the details of these rebuttable presumptions could change as a result of comments received during the comment period.

Comments on the new SBA rules are due by March 30, 2018 and can be submitted here.

For more information, contact MWL Partner Peter A. Fish.