The VA is proposing a major overhaul to its SDVOSB program regulations–including the rules governing ownership and control.
In a proposed rule released today, the VA is seeking to “find an appropriate balance between preventing fraud in the Veterans First Contracting Program and providing a process that would make it easier for more VOSBs to become verified.” And while the proposal isn’t perfect, it looks like a step in the right direction.
The VA’s proposal attempts to strike a better balance between ensuring that SDVOSBs are owned and controlled by veterans, on the one hand, while on the other hand tacitly acknowledging that overly-stringent “unconditional” ownership and control provisions can discourage minority investment and participation in veteran-owned businesses.
To that end, the VA proposes to amend its “ownership” regulation, which currently requires the veteran to “unconditionally” own his or her interest. This requirement has come under fire, including by the Court of Federal Claims, because the VA previously interpreted it to prohibit commonplace ownership transfer restrictions, such as a minority owner’s right of first refusal to buy a veteran’s shares in the event the veteran wished to sell those shares. (The VA changed its internal interpretation of the rule in 2013).
The VA’s proposal would allow “commercially reasonable” restrictions on a veteran’s ownership interest:
CVE will analyze conditions on ownership on a case-by-case basis. A condition(s) which is determined to align with commercially reasonable business practices will not be considered a prohibited condition. For purposes of determining commercial reasonability CVE will consider factors, including but not limited to, general use of similar conditions by concerns within the same or similar line of business and uniform applicability of the condition(s).
Like the current rule, the proposed regulation requires that at least 51 percent of each class of interest in the company be owned by veterans. The proposed regulation would clarify that the firm’s governing documents (e.g., operating agreement) must specify the breakdown of ownership interests.
The VA also proposes to remove the unpopular “community property” regulation, currently codified at 38 C.F.R. 74.3(f). This regulation, which applies only to married veterans living in certain states, has required veterans to (in essence) obtain spousal consent in order to establish a SDVOSB or VOSB. Explaining the proposed change, the CVE says that “in administering the program, this requirement was found to be unduly burdensome on veterans” and that “this provision does not significantly reduce the risk of fraud, waste and abuse in the program.”
The VA has also proposed changes to its “control” regulation, 38 C.F.R. 74.4. As with its ownership regulation, the VA proposes to dial back its across-the-board insistence on “unconditional” control over all aspects of the business. Instead, the VA proposes that a company’s governing documents could prevent a veteran from engaging in certain “extraordinary business decisions” without the consent of non-veterans:
The veteran(s) upon whom eligibility is based must have control over all decisions of the governing body, with the exception of extraordinary business decisions. Extraordinary business decisions include, but are not limited to, acceptance of new capital contributions, addition of members to an LLC or partnership, amendment of an operating or partnership agreement in a manner that materially alters members’ rights, material amendments to bylaws, issuance of additional shares of capital stock, and the sale or lease of all or substantially all of a concern’s assets.
Altogether, I think these changes are a positive step. Veterans and veterans’ advocates have long complained that the current regulations unnecessarily discourage minority investment in SDVOSBs–to the detriment of veterans. The VA’s proposal is a good effort to strike a better balance.
My biggest concern with the VA’s proposal is not with the new ownership and control concepts themselves, but the fact that these changes–even though they are largely positive–are confined to the VA. The government, however, runs two SDVOSB programs: the VA’s SDVOSB program (which applies to VA SDVOSB procurements) and the SBA’s program (which applies to most other agencies’ SDVOSB procurements).
The SBA’s SDVOSB regulations are less well-developed than the VA’s, but the SBA Office of Hearings and Appeals has strictly construed the strict ownership and control requirements under that agency’s SDVOSB program. At least under prior OHA precedent, ownership and control restrictions of the sort the VA is proposing would probably not pass muster with the SBA.
I worry that veterans will incorrectly assume that so long as their paperwork aligns with the VA’s requirements, they are eligible for SDVOSB set-asides government-wide. That might not be the case; corporate documentation that is approved under the VA’s proposed rule could nonetheless cause the company to be ineligible for non-VA SDVOSB contracts.
If so, the VA’s proposal will be meaningless, at best, for those SDVOSBs that bid on non-VA government contracts; those companies will have to follow SBA’s stricter rules. At worst, the proposal will inadvertently mislead SDVOSBs into altering their corporate documents in a manner that allows them to be verified by CVE–but then renders them ineligible for non-VA SDVOSB contracts.
I am not blaming the VA; I understand that it has little control over what another agency does with its own regulations (and has little control over the fact that the government unnecessarily runs two separate SDVOSB programs). However, I hope that the VA and SBA will work together to ensure that reasonable accommodations like those the VA is proposing are acceptable government-wide, not just for VA contracts.
In my view, the ownership and control changes are the most important changes the VA is proposing, but the proposal also makes a number of other changes to the program. Among these changes, the VA is better defining what daily control of a SDVOSB looks like, is requiring SDVOSBs to maintain necessary licenses throughout their participation in the program, and is updating several of its regulations to better explain how they apply to joint ventures.
Finally, it should be noted that while I’ve discussed SDVOSBs throughout, the VA’s rule applies with equal force to Veteran-Owned Small Businesses.
The VA is accepting public comments on the rule until January 5, 2015. To comment, follow the instructions in the proposed rule. I plan on filing comments of my own–and I’ll post them here on SmallGovCon when I do.
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