The VA will begin using the SBA’s eligibility rules to verify SDVOSBs and VOSBs beginning October 1, 2018.

In a final rule published today in the Federal Register, the VA confirms that the SBA’s eligibility requirements will apply beginning next week–but in my eyes, one very important question remains unanswered.

As regular SmallGovCon readers know, the differences between the government’s two SDVOSB programs have caused major headaches for veterans.  Because the two sets of regulations have different eligibility requirements, a company may be an eligible SDVOSB under one set of rules, but not the other.

In 2016, Congress addressed the problem.  As part of the 2017 NDAA, Congress directed the VA to verify SDVOSBs and VOSBs using the SBA’s regulatory definitions regarding small business status, ownership, and control.  Congress told the SBA and VA to work together to develop joint regulations governing SDVOSB and VOSB eligibility.  The VA published a proposed rule earlier this year to eliminate its separate SDVOSB and VOSB eligibility requirements.

Now the VA has issued a final rule, set to take effect in just one week on October 1.  The final rule broadly reiterates that the VA is eliminating its separate SDVOSB and VOSB eligibility requirements because “regulations relating to and clarifying ownership and control are no longer the responsibility of VA.”  Instead, in verifying SDVOSBs and VOSBs, the VA will use the SBA’s eligibility rules set forth in 13 C.F.R. part 125.

The VA’s final rule answers a few questions from the public about the change.  Among the VA’s answers:

• Despite a common misconception, this final rule does not move the verification process from the VA to the SBA.  The final rule states, “[a]lthough the authority to issue regulations setting forth the ownership and control criteria for SDVOSBs and VOSBs now rests with the Administrator of the SBA, the [VA] is still charged with verifying that each applicant complies with those regulatory provisions prior to granting verified status and including the applicant in the VA list of verified firms.”
• The “VA and SBA will treat joint ventures the same way,” applying the SBA’s regulatory criteria.  This is important because the VA currently does not treat joint ventures the same way as the SBA.  Although the VA largely defers to the SBA’s joint venture rules, the VA has been requiring SDVOSB joint ventures to demonstrate that the SDVOSB managing venturer will receive at least 51% of the joint venture’s profits.  This conflicts with the SBA’s current regulation, which allows the SDVOSB managing venturer to receive as little as 40% of the joint venture’s profits, depending on how the joint venturers split work.
• Persons “found guilty of, or found to be involved in criminally related matters or debarment proceedings” will be immediately removed from the VetBiz database.  Additionally, owing outstanding taxes and unresolved debts to “governmental entities outside of the Federal government” may be disqualifying, but won’t lead to an automatic cancellation.

As you may recall, the SBA proposed to revise its own SDVOSB regulations earlier this year.  These proposed rules, when finalized, would apply to both the VA and SBA.

The VA’s final rule indicates that the SBA’s final rule also will take effect on October 1.  “VA and the SBA believe a single date on which all of the changes go into effect is the most effective path for implementation,” the VA writes.  As I sit here today on September 24, I haven’t seen the SBA’s final rule yet, but I assume it will be published any moment.  We’ll blog about it on SmallGovCon when that happens.

By consolidating the eligibility requirements for SDVOSBs and VOSBs, the SBA and VA will eliminate a lot of confusion.  In that sense, these changes are good news.  But I’m concerned about one important item that wasn’t raised in the VA’s response–that is, what happens to currently verified companies who no longer meet the eligibility requirements?  In other words, what happens to companies that were verified under the VA’s “old” rules, but won’t qualify as SDVOSBs under the SBA’s “new” rules?

Remember, many companies were verified as SDVOSBs and VOSBs based on the VA’s eligibility requirements, which (until October 1) aren’t identical to the SBA’s.  Perhaps most notably, the VA has long permitted companies to use reasonable “right of first refusal” provisions in their corporate governing documents.  The SBA, on the other hand, has deemed such provisions impermissible–a position that a federal judge called “draconian and perverse,” but nonetheless within the SBA’s broad discretion.

As I read the SBA’s proposed rules, anyway, the SBA hasn’t changed its position on this issue.  And while it sounds wonky, it’s actually very important: right of first refusal provisions are commonplace in operating agreements, bylaws, and shareholders’ agreements prepared by good corporate counsel.  It’s a virtual certainty that hundreds, if not thousands, of verified SDVOSBs and VOSBs have such provisions in their governing documents.

Are these companies now vulnerable to protest?  Will the VA CVE propose them all for cancellation?  Are they somehow grandfathered in?  (I highly doubt that, but I suppose you never know).  It’s a very important question and I hope one that the SBA and VA will answer soon.

My colleagues and I will keep you posted.

Update (September 28, 2018): The SBA has published its SDVOSB final rule, available here. 

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