SBA has issued its final rule for its takeover of the Veteran-Owned Small Business (VOSB) and Service-Disabled Veteran-Owned Small Business (SDVOSB) Certification program. The rule will have an effective date of January 1, 2023. We discussed the proposed rule in our post here. Below are a few key takeaways from the final version of the rule.
SBA issued the rule in line with the 2021 National Defense Authorization Act (NDAA), which transferred authority for certification of SDVOSBs and VOSBs from the VA to the SBA as of January 1, 2023 and created a one-year grace period for businesses to get certified.
Here are some of the key aspects of the final rule, as updated by SBA from the proposed rule.
New Year’s Takeover
SBA is taking over certification of SDVOSBs on January 1, 2023 (the Transfer Date). Self-certified SDVOSBs that apply within the one-year grace period after that date will maintain eligibility until SBA makes a final eligibility decision.
Despite comments to the contrary, SBA will continue to allow self-certification for SDVOSBs for purposes of subcontracting purposes and SDVOSB goaling credit. Interestingly, SBA says it will eliminate these forms of self-certification after five years.
SBA’s SDVOSB Rules
SBA is establishing a Veterans Certification Program (Vets Program) to handle the required certifications for SDVOSBs and VOSBs. SBA will house the Veterans Certification Program rules in a new 13 CFR part 128.
Generally, the eligibility rules would be similar to the SDVOSB ownership and control rules that currently exist in SBA’s rules. SBA has basically adopted the procedural rules from the VA’s former verification process. SBA will now provide certifications for VOSBs for VA set-aside contracts, but the eligibility rules are the same as for SDVOSBs. SBA generally adopted the procedures that the VA had used for application guidelines, rules on continuing eligibility, program examinations, and program exit procedures.
Some of these procedural rules adopted from VA include (1) the duty to notify SBA within 30 days of a change in ownership of an SDVOSB; (2) reapplication wait period of 90 days after a denial; (3) appeals to OHA of denials; (4) recertification within 120 calendar days before the end of an eligibility period; and (5) a three-year program eligibility term. This is not an exhaustive list, so please review the regulations and SBA’s guidance on the procedures.
Firms that were already certified with the VA will continue to be certified for the remainder of the 3-year eligibility term. SBA will grant reciprocity to participants in the 8(a) Program and Women-Owned Small Business (WOSB) program that are owned and controlled by veterans or service-disabled veterans.
Various Rule Changes
There are some interesting changes from how things worked under the CVE verification process.
- Right of Refusal. SBA is adding a “a limited exception for a commercially reasonable right of first refusal” to the general rule of unconditional ownership by a veteran. If the non-veteran exercises the right, the firm first must notify SBA of the change in ownership. This allows the non-veteran to have a “right of first refusal granting the non-qualifying-veteran the contractual right to purchase the ownership interests of the qualifying veteran” and this “does not affect the unconditional nature of ownership, if the terms follow normal commercial practices.” This is a change that could make things smoother for those companies with non-veteran investors.
- Size of Firms. Firms can qualify if they are small for any NAICS code listed on its SAM profile, not necessarily its primary NAICS code.
- Parole Removal. SBA removed consideration of whether an individual owner being incarcerated, on parole, or on probation should affect certification. Therefore, the good character review would be limited to whether a company was debarred or suspended.
- JV Certification. The final rule makes clear that “The joint venture itself need not be a certified VOSB or SDVOSB.” So, there is no certification process for joint ventures under this rule. However, it also states that a “VOSB or SDVOSB cannot be a joint venture partner on more than one joint venture that submits an offer for a specific contract set-aside or reserved for VOSBs or SDVOSBs.”
SBA received a number of comments on the so-called rebuttable presumptions and whether they should be amended. For instance, there is a “rebuttable presumption that non-service-disabled veteran individuals or entities control” an SDVOSB if the “non-service-disabled veteran individual or entity who is involved in the management or ownership of the firm is a current or former employer or a principal of a current or former employer of any service-disabled veteran individual.”
SBA has revised these rules (now at § 128.203) to be more consistent with 8(a) Program control rules to create more flexibility.
As an example, for full-time devotion, a “veteran cannot engage in outside activities that prevent the individual from devoting sufficient time and attention to the business concern to control its management and daily operations.” The old rule said that 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.” The new rule: “Where a qualifying veteran claiming to control a business concern devotes fewer hours to the business than its normal hours of operation, SBA will assume that the qualifying veteran does not control the concern, unless the concern demonstrates that the qualifying veteran has ultimate managerial and supervisory control over both the long-term decision making and day-to-day management of the business.” The effect seems to be similar, but SBA has changed it from a presumption to an assumption. It will be interesting to see how SBA applies this language.
One other note, there continues to be a list of five “extraordinary circumstances” that a non-veteran minority owner can have veto power over: adding a new equity stakeholder; dissolution of the company; sale of the company; the merger of the company; and the company declaring bankruptcy. SBA declined a request to add amending bylaws to this list, so non-veterans cannot have a veto power over amending the bylaws of an SDVOSB.
The SBA’s new rules will require veteran-owned businesses to get certified if they want to go after VOSB and SDVOSB set-asides. While they don’t change the substantive rules too much, there are a few important changes. SDVOSBs would do well to review these rule changes closely.
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