SDVOSB Start-Ups Continue to Face Obstacles to CVE Verification

Several years ago, we argued that VA’s rule, requiring a veteran to devote herself full time to an SDVOSB during normal working hours, unnecessarily handicapped SDVOSB start-ups seeking CVE verification. This same requirement–though now in a slightly different form–continues to impede new businesses from obtaining verification, a key credential for many SDVOSBs. Beyond that, CVE’s application of the managerial experience requirement also poses a potential hurdle for incipient SDVOSBs.

These obstacles were front and center in a recent OHA decision: Valor Construction, Inc., SBA No. CVE-121 (2019). In that case, a start-up construction company requested verification from CVE. But CVE denied its approval on four grounds (two of which we’ll discuss here).

For one, CVE denied the company verification because the SDVO held outside employment as a business executive at an entertainment company, where he typically worked from 10:00 a.m. to 6:00 p.m. Because these hours overlap with the SDVOSB’s normal working hours, 8:00 a.m. to 5:00 p.m., CVE applied that presumption in 13 C.F.R. 125.13(k) to find the SDVO not in control. And it dismissed (given a lack of evidence) the SDVO’s contention that his outside employment was flexible, allowing him to address the SDVOSB’s needs during the business day.

Also, CVE denied the company’s application because the SDVO’s resume did not reflect any experience in the construction arena. Evidently, CVE wanted to see experience in the construction industry; and it found that the SDVO presented no information showing that he could manage and supervise construction projects or the other company owners who did have construction experience.

The hopeful SDVOSB challenged CVE’s denial at SBA’s OHA.

With respect to the first ground, the company argued that “as a start-up business established in 2017, Appellant presently has obtained no work contracts or revenues.” Given this paucity of work, the company had no normal working hours and CVE should have found that the SDVO’s outside employment didn’t pose a conflict.

OHA sided with CVE. It found that the company’s normal business hours were essentially the same as those at the SDVO’s other job. Given this overlap, OHA held that CVE properly applied the presumption in 13 C.F.R. 125.13(k) (“There is a rebuttable presumption that a service-disabled veteran does not control the firm when the service-disabled veteran is not able to work for the firm during the normal working hours that businesses in that industry normally work.”). And the SDVO provided no evidence, such as “documentation from the outside employer” to rebut the presumption.

On the second ground, the company argued that the SDVO possessed the managerial experience of the extent and complexity needed to run the company, citing his 25 years in the military and his 13 years as an executive in business operations.

Again, OHA was unpersuaded. It held that the SDVO’s resume confirmed that he did not have the requisite managerial experience in the construction industry; nor could this experience be meaningfully enhanced at the company because the company had no business.

CVE’s application of these requirements (and OHA’s review) seems unnecessarily inflexible.

All businesses, at some point, are start-ups with no business. An SDVO, in the initial phases of starting a business, should not be required to sit on her hands during normal business hours when the start-up, in reality, doesn’t have business. The fact the SDVOSB has little to no business should be sufficient, on its own, to rebut the presumption found in the normal working hours requirement. To do otherwise tends to limit SDVOSB status to those with independent access to capital.

Similarly, CVE is reading into the managerial experience regulation specificity that doesn’t exist. Under the regulation, an SDVO must only “have the managerial experience of the extent and complexity needed to run the concern.” 13 C.F.R. 125.13(b). The regulation requires quantity and quality of managerial experience; but it doesn’t require experience in a particular industry. The regulation, as written, comports with typical business practice: companies routinely hire executives whose careers have been spent in unrelated industries.

Thus, the business community generally acknowledges that managerial experience gleaned in one industry can be transferred successfully to another setting. On its face, the regulation reflects this reality, but CVE and OHA are taking a different approach and, in our opinion, closing the doors on companies that likely have a qualified and experienced SDVO at the helm.

The SDVOSB rules continue to be difficult for start-ups. But CVE and OHA should not add to the hurdles by reading requirements into the rules that aren’t there.