SDVOSB Regulations Reveal Typo in Exceptions to Ownership Conditions

As we’ve written about on the blog, SDVOSB regulations were consolidated under the SBA’s rules beginning October 1, 2018, and those changes included some good and bad changes. We recently noticed a single letter in one of the changes that, while most likely a typo, could potentially affect the meaning of one part of the new regulation.

The SBA’s SDVOSB regulations require that a service-disabled veteran unconditionally own the SDVOSB.

“Unconditional ownership” now means:

ownership that is not subject to conditions precedent, conditions subsequent, executory agreements, voting trusts, restrictions on or assignments of voting rights, or other arrangements causing or potentially causing ownership benefits to go to another (other than after death of incapacity).

Rather than saying “other than after death or incapacity,” the official regulation uses the word “of.”

The current SBA definition (now applicable to both VA and non-VA procurements) incorporates the definition of “unconditional” that had been contained in the VA’s former rules on unconditional ownership (and which used the word “or”). These rules, as we interpret them, seem to allow a right of first refusal before transfer of a service-disabled veteran’s ownership interest based on a veteran owner’s death or incapacity. The rule, in other words, appears to be intended to effectively reverse SBA’s prior position on this subject.

However, one interpretation of this phrase is that the exception only applies if the service-disabled veteran dies “of incapacity,” meaning death from any other means would not meet the exception.

While this interpretation would severely curtail the meaning of this exception (and it’s not even clear to us whether “death by incapacity” has any particular medical meaning), it is an open question until the SBA amends the regulation or otherwise addresses the issue. Even though this one letter is a small issue, we hope to see it corrected because it complicates the interpretation of the new SDVOSB regulations and creates unnecessary uncertainty for SDVOSBs looking to amend their governing documents to take advantage of the new rules.

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