If you’re part of a service-disabled veteran-owned small business, you’ve probably heard of the “extraordinary circumstances” rule–but there’s a lot of confusion out there about what the rule is and how it works.
So let’s get right to it. Here are five things you should know about the SDVOSB extraordinary circumstances rule.
1. The extraordinary circumstances rule allows limited negative control by non-service-disabled veterans.
To qualify as an SDVOSB for federal contracts, whether under the SBA’s SDVOSB self-certification program or the VA’s SDVOSB verification program, a company must be controlled by service-disabled veterans. Control means, among other things, that individuals who are not service-disabled veterans ordinarily cannot have the power to block decisions made by the service-disabled veteran owners–a concept the SBA calls “negative control.”
The extraordinary circumstances rule allows negative control in a few cases. According to the SDVOSB control regulation, “SBA will not find that a lack of control exists where a service-disabled veteran does not have the unilateral power and authority to make decisions in ‘extraordinary circumstances.'”
2. There are five–and only five–extraordinary circumstances.
The SBA defines “extraordinary circumstances” to include five corporate actions:
- Adding a new equity stakeholder;
- Dissolution of the company;
- Sale of the company;
- The merger of the company; and
- Company declaring bankruptcy.
Nothing else qualifies as an extraordinary circumstance, no matter how extraordinary it may seem. The SDVOSB control regulation is unambiguous: these five actions are the “only circumstances” in which negative control by a non-service-disabled individual is permitted.
3. Allowing negative control in extraordinary circumstances is optional, not mandatory.
One of the most common misconceptions about the extraordinary circumstances rule is that SDVOSBs must offer certain non-service-disabled individuals (particularly, equity stakeholders in the company) negative control over the five extraordinary circumstances. Not so!
Some SDVOSBs want to offer some measure of negative control to non-service-disabled stakeholders, believing that this will help attract investors. Others have no interest in offering their non-service-disabled stakeholders any negative control whatsoever.
Under the extraordinary circumstances rule, it’s up to the SDVOSB. Allowing negative control in extraordinary circumstances is optional, not mandatory. An SDVOSB can offer a non-service-disabled veteran negative control in some, all, or none of the five extraordinary circumstances.
4. The extraordinary circumstances rule applies to VA VOSBs, too.
Alone among federal agencies, the VA has the power to award set-aside and sole source contracts to verified VOSBs. In fact, VOSBs have the second-highest priority for most VA contracts, below only SDVOSBs.
The extraordinary circumstances rule applies not only to SDVOSBs under the SBA and VA SDVOSB programs, but also to VOSBs seeking verification from the VA. The only difference, of course, is that in the case of a VOSB, the extraordinary circumstances rule allows non-veterans to have limited negative control over the decisions of veterans.
5. But be careful if you’re a WOSB or 8(a) Program participant.
Among the major federal socioeconomic contracting programs, the extraordinary circumstances rule is unique to the SDVOSB/VOSB programs.
Two other major socioeconomic contracting programs–the woman-owned small business program and the 8(a) Business Development Program–also require an eligible company to be controlled by certain individuals. While these programs’ control regulations look similar in many respects to the SDVOSB control regulations, the WOSB and 8(a) Programs do not include extraordinary circumstances provisions. SDVOSBs hoping to also qualify for these programs should be aware that allowing negative control for extraordinary circumstances may not pass muster in the WOSB or 8(a) programs.
There you have it: five things you should know about the SDVOSB extraordinary circumstances rule. If you have questions about how the rule applies to you, please email us or give us a call at 785-200-8919.