Recently, SBA’s VetCert Program announced that it had gotten through its backlog, meaning that the system has returned to normal, so to speak. With this in mind, many new service-disabled veteran-owned small businesses (SDVOSBs) no doubt are looking at getting into the SDVOSB program. Indeed, some of you reading this may be the owners of some of those businesses. Considering that we just looked at an SDVOSB appeal regarding the control requirements for an SDVOSB, today, we’re going to go further and provide a general rundown of the SDVOSB Program to update our past post on this topic.
First, the plain requirement for SDVOSB eligibility is as follows in 13 C.F.R. § 128.200: 1. The business must be small under at least one NAICS size standard. 2. The business must be at least 51% owned by one or more service-disabled veterans. 3. The business must be controlled by one or more service-disabled veterans. Of course, that raises a lot of questions: What does it mean to control an SDVOSB? What counts as ownership?
Ownership
When it comes to ownership, 13 C.F.R. § 128.202, the ownership must be direct and unconditional. When it comes to direct ownership, this means the service-disabled veteran(s) must own the company themselves, not through another company (there is a limited exception for certain trusts, such as living trusts, where the trust is revocable, and qualifying veterans are the grantors, trustees, and beneficiaries of the trust). As for unconditional ownership, this means that there can’t be things like outstanding stock options that would give non-veterans majority ownership, restrictions on voting rights, or any other such thing that places such limits on the veteran’s ownership. There is a limited exception for rights of first refusal that follow normal commercial practices, but otherwise, this requirement is strictly observed. Furthermore, service-disabled veterans must receive at least 51% of distributions and dividends.
Control
Control is a trickier question than ownership. 13 C.F.R. § 128.203 observes that “the management and daily business operations of the concern must be controlled by one or more service-disabled veterans.” What this means is that “[c]ontrol by one or more qualifying veterans means that one or more qualifying veterans controls both the long-term decision-making and the day-to-day operations of the Applicant or Participant.” To show this, a qualifying veteran must hold the highest position in the company and also have the sort of management experience needed to run the company. Furthermore, voting rights in the company must give qualifying veterans absolute final say over all company activities, save for what can be described as “extraordinary actions.” These are listed at 13 C.F.R. § 128.203(j), and include things like dissolving the company or merging with another company. For those sorts of actions, non-service-disabled veteran owners may have the power to block the same.
In addition to the above, the qualifying veteran that manages the company must “generally devote full time to the business concern during its normal hours of operations.” In other words, while the veteran isn’t prohibited from having another job, they can’t have outside employment that prevents them “from devoting the time and attention to the concern necessary to control its management and daily business operations.” If the veteran has another job that affects the hours they can devote to the SDVOSB, SBA will presume they do not control the concern, but one can show that such a veteran still controls the concern with sufficient evidence.
Finally, while non-veterans can assist in the management of the concern and have ownership in the concern, they must not exercise control over the concern. They further can’t control the concern through loans or financing, or have such a relationship with the service-disabled veteran(s) that control the concern that the veterans are reliant on these otherwise ineligible individuals. Furthermore, non-service-disabled veterans should not receive more compensation than the qualifying veteran that holds the highest office in the company (that takes into account distributions and other forms of compensation). Otherwise, SBA presumes service-disabled veterans do not control the company, although, again, this can be rebutted with sufficient evidence showing control.
Certification
Although SDVOSBs used to be able to self-certify, SBA now requires that a company apply for SDVOSB status. 13 C.F.R. § 128.300. This is done through SBA’s VetCert Program. When applying, companies will be asked to provide a set of documents such as their operating agreement/bylaws, articles of organization, and the like. Once certified, certification lasts for three years. 13 C.F.R. § 128.306. Once certified, you must further let SBA know of any material changes to the company that could affect eligibility, such as change in ownership or business structure, within 30 days of such change. 13 C.F.R. § 128.307.
Contracts
Only certified SDVOSBs or eligible SDVOSB joint ventures can bid on SDVOSB set asides. 13 C.F.R. § 128.401. Generally, so long as the SDVOSB was certified and eligible at the time it made its offer, it is considered eligible even if that is no longer the case at the time of award, although with sole source awards, the business must be certified and eligible at the time of award. With SDVOSB set-aside multiple-award contracts, the same rule generally applies: What matters is status at time of offer, but there is an exception if the contracting officer requests recertification. If the multiple-award contract is unrestricted (other than GSA schedule contracts), then generally the company must be a certified and eligible SDVOSB when it submits an offer for a task order set aside for SDVOSBs under such a contract.
Summary
This is just a basic summary of the rules regarding the SDVOSB Program. Naturally, there can be a lot of nuance to some of these requirements. As such, we always recommend that if you have further questions, you reach out to federal contracting counsel.
Questions about this post? Email us. Need legal assistance? Call us at 785-200-8919.
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