If you are a service-disabled veteran hoping to start a new SDVOSB, the VA’s Center for Veterans Enterprise has a message for you: quit your day job.
Yes, you heard that right. Under one of the the VA’s SDVOSB eligibility rules (38 C.F.R. § 74.4(c)(3) to be precise), “one or more veterans or service-disabled veterans who manage the applicant or participant must devote full-time to the business during normal working hours of firms in the same or similar line of business.”
The VA currently interprets this so-called “full-time management” rule to essentially bar a SDVOSB from receiving verification if a service-disabled veteran manager does not work 40 hours per week for the SDVOSB. If the veteran holds a second job, the VA CVE ordinarily denies verification, stating that the veteran cannot be working full-time for the SDVOSB if he or she is also working another job.
“Wait a second,” several service-disabled veterans have told me in surprise, “my company is brand new. There won’t be 40 hours of work to do until I win a contract. In the meantime, I need my current job to pay the bills. Isn’t there a special rule for my situation?”
The answer, unfortunately, is “no.” But there should be a special rule, because in my opinion, the full-time management requirement unfairly and needlessly penalizes SDVOSB start-ups.
Let’s back up a second and discuss the source of the full-time management rule. The rule is not an original creation of the VA . Rather, it was borrowed directly from the SBA’s 8(a) program, which requires in 13 C.F.R. § 124.106(a)(3) that “one or more disadvantaged individuals who manage the applicant or Participant must devote full-time to the business during normal working hours of firms in the same or similar line of business.”
Sound familiar? This language was written by the SBA way back in 1998, as part of an overhaul of the “control” requirements within the 8(a) program. As applied to the 8(a) program, the rule has worked fairly well, for the most part, for nearly 15 years.
But unlike the VA’s SDVOSB program, which is open to start-ups and mature businesses alike, the 8(a) program is intended for more mature businesses. In order to participate in the 8(a) program, a company ordinarily must have been in business in its primary industry classification for at least two years preceding its application. Although the “two years in business rule” may be waived, the SBA rarely issues such waivers–just ask anyone who ever tried to get one, especially in recent years. (Tribal companies have a special exception from the two years in business rule).
So, in importing the 8(a) program’s full-time management requirement, the VA borrowed a rule designed for companies with at least two years in business, and applied it across the board to brand new businesses and mature companies alike. The result is unfair to SDVOSB start-ups.
It makes little sense to require a service-disabled veteran to invest 40 hours weekly in a new company without any contracts, when (1) there may not be enough work to keep the veteran busy for those 40 hours; and (2) in order to obtain CVE verification, the veteran is forced to give up alternate income sources (the very income the veteran may need to capitalize the SDVOSB) before the company is successful. Indeed, as applied to start-ups, the full-time management rule creates a no-win situation for many SDVOSBs: they cannot realistically devote full-time to the company until it achieves at least a small level of success, but achieving such success can be impossible without CVE verification.
Applying the full-time management rule to start-ups is not necessary to ensure the integrity of the program. The overarching purpose of the full-time management rule–like all of the SDVOSB “control” rules–should be to ensure that one or more service-disabled veterans manages all of the company’s operations, rather than serving as a figurehead for non-veterans. For start-ups, especially those with no contracts, full management control need not mean investing 40 hours per week.
In the interest of fairness, the VA CVE should amend its requirement to specifically address start-up SDVOSBs. Here are three ways the rule could be changed to permit greater access to the VA SDVOSB program by start-ups, while ensuring that the underlying goal of control by service-disabled veterans continues to be met:
- Provide that so long as service-disabled veterans are the only owners, officers and employees of the company, it is not necessary for any service-disabled veteran to work full-time for the company. If there are no non-veteran owners, officers or employees, there is no risk that non-veterans will control the company, so full-time management should not be necessary.
- Replace the full-time requirement with a requirement that a service-disabled veteran manager (1) manage all of the company’s operations; and (2) work more hours for the company than any non-veteran owner, officer, or employee. This rule would allow service-disabled veterans flexibility during the start-up phase, while still ensuring that veterans do not serve as figureheads while non-veterans manage the company on a day-to-day basis.
- Establish cut-offs based on company age, number of employees, and/or revenue after which the full-time requirement would apply. For example, the full-time requirement could kick in when the company is two years old–as in the 8(a) program–or hits half a million dollars in annual revenues.
These ideas, of course, are just a starting point. Other means undoubtedly exist to help permit start-up SDVOSBs to gain VA CVE without unreasonably requiring the service-disabled veteran owners of those companies to surrender their livelihoods and dedicate full-time hours to a brand-new company with zero revenues.
So what do you say, VA? How about a change to the full-time management rule to benefit SDVOSB start-ups?