The VA and SBA have numerous regulations defining the eligibility requirements for participation in the veteran-owned and service-disabled veteran-owned small business programs. To help laypersons better understand these regulatory hurdles the VA publishes Verification Assistance Briefs.
These “are resources to assist applicants in obtaining VA Verification for the Veterans First Contracting Program” and understand SBA’s ownership and control criteria. The VA recently updated all of its existing Briefs and added some new ones. Read on for an overview of the 26 Briefs and a more detailed look at some of the more notable ones.
The VA has broken its Briefs into four categories: Eligibility, Ownership, Control, and Small Business Criteria. 17 of these Briefs are updates to ones that were previously several years out-of-date, and the remaining 9 are first-time Briefs. Structurally, the Briefs each (1) address a unique question, (2) provide the regulatory language addressing that question, and (3) paraphrase the regulations in an attempt to make them easier to understand. In some Briefs, such as Good Character Eligibility Requirement, the third component is just a regurgitation of the regulation. While simply paraphrasing regulatory language might not be that helpful, the VA does expand its insights on other Briefs, highlighted below.
Proving Veterans Are Entitled to Receive At Least 51 Percent of Annual Distribution of Profits
Whether a veteran-owned or service-disabled veteran-owned small business (VOSB and SDVOSB, respectively), the regulations require that the veteran(s) own at least 51% of the company and that the veteran(s) receive at least 51% of the annual distribution of profits. This Brief adds some key points to this regulatory context.
First, the Center for Verification and Evaluation (CVE) looks at several documents to determine compliance with the 51% rule. Not only will it review tax filings, but also “state and municipal statutes . . . the company’s by-laws, operating agreement, organizational documents, and other company business documents.” Second, there is a distinction between receiving profit vs the right to receive a profit. “Veterans are not required to draw profits from the company” Instead, CVE is concerned that veterans are entitled to receive at least 51% of the annual distribution of profits. This is a key distinction to keep in mind, especially since the veteran(s) may choose to forgo distributions and reinvest in the business. Reinvesting profits likely will not be an issue so long as the veteran(s) are entitled to receive at least 51% of the annual distribution of profit.
Demonstrating Control of a Limited Liability Company
In our experience, one of the most common areas of confusion is the level of control veterans must have over their companies. On the surface, this is a straight-forward answer: the veteran(s) must control the VOSB or SDVOSB. But how do super-majority or unanimous voting requirements impact this control? While these types of requirements are frequently found in business agreements, they may be noncompliant with the regulations.
This Brief touches on many different control requirements found throughout the regulations. First, the veteran(s) must own “[n]ot less than 51 percent” of the company. Second, the veteran(s) must also control “the management and daily business operations of the concern[.]” Third, and specific to LLCs, the veteran(s) “must serve as managing members, with control over all decisions of the limited liability company.”
Notably absent from the Brief is any mention of minority-owner control. While the Brief states that the veteran(s) must own a majority of the company and control management and daily business operations, the lack of any additional guidance implies there is wiggle room for allowing non-veteran owners to participate in these functions to some degree. Just one example of what could, and maybe should, have been added to this Brief: subject solely to the exception outlined below, non-veteran owners cannot have power to veto action by the veteran(s).
There are a few exceptions to this non-veteran control, as listed in the Brief under 13 C.F.R. § § 125.13(m) and 125.11. Those exceptions are classified as “extraordinary circumstances” and are:
- Adding a new equity stakeholder;
- Dissolution of the company;
- Sale of the company;
- The merger of the company; and
- Company declaring bankruptcy.
The VA touches on this control topic in three other Briefs: (1) Determining Board Governance and Control, (2) Determining Dependence on Non-Veterans or Non-Veteran Entities, and (3) Understanding Control of Long-Term Decision Making and Day-to-Day Operations (also includes helpful language on franchise agreements and signing authority). While having these resources is helpful, consolidating discussions of control into a single brief could have made for an easier user experience. Be sure to look through all four of these Briefs when you are reviewing veteran control issues as they all might have something relevant.
Conducting Business Under an Alias or an Assumed Name
This is one of the few Briefs which is a real value-add, primarily since the concept is not addressed in the regulations. This Brief is void of regulatory background and focuses only on VA’s recommendations for how to proceed if you want to operate your company under a name other than that registered with the state.
“Alias,” “Assumed Name,” and “Doing Business As” (d/b/a) all get to the same concept: that your company is registered under one name but does business under another name. For example, Bob Jones sets up a business under his own name. Instead of calling the business “Bob Jones,” which gives no indication of the type of business Bob specializes in, Bob registers an alias of “Bob’s Beautiful Baskets” to accentuate his basketmaking abilities. Similar alternative naming mechanisms may be used by LLCs, Corporations, and other businesses, depending on state law.
The Brief is useful in providing veterans guidance on how to document these alternative names. As a first step, the alternate name must be registered in accordance with state or local law. The veteran then may, but is not required to, list its alternate names on its VIP profile or on VA Form 0877. If an alternate name is listed in either of these areas, the veteran must register the alternate name with the applicable state or local government body and provide documentation of this registration.
Appealing a Denial of Verification or the Cancellation of a Participant’s Verified Status
Many of the Briefs are sparse in supplemental explanations. Surprisingly, this Brief on appealing a denial or cancellation of verified status followed this trend. This Brief provides regulatory background on some of the reasons a denial or cancellation may occur and then summarily hands the reins over to the Small Business Administration, which now processes appeals. Instead of providing a reference to SBA materials or allowing SBA to collaborate on the Brief for more insight, the VA provides two minor points. First, “[t]he rules governing appeals are published at 13 CFR part 134.” Second, “[a]ppeals must be filed within 10 business days of receipt of the denial or cancellation.”
In the absence of detailed guidance from the Brief, remember that, while each denial or cancellation is unique, SDVOSBs have the right to notice and an opportunity to respond. SmallGovCon has many additional resources addressing SDVOSB denial or cancellation and appeals of the same. Some are found in the related items below, others can be found through our search function.
Understanding and complying with the regulations may leave you feeling like Harry Potter in the Triwizard Tournament: overwhelmed and confused about how you got in this mess in the first place. The VA’s Verification Assistance Briefs are a good place to start, and provide some good insights, but will not get you to the finish line. Please do not hesitate to reach out to us for help navigating this process.
Questions about this post? Email us or give us a call at 785-200-8919.
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