Effective October 1, 2018: SBA Issues Final Rule Regarding Ownership and Control Requirements for SDVOSBs

October 3, 2018

By Meghan F. Leemon
Practice Area: Government Contracts Law

Recently, I wrote a blog detailing the Department of Veterans Affairs’ (VA) final rule on verification guidelines for veteran-owned small businesses (VOSBs) and service-disabled veteran-owned small businesses (SDVOSBs), which provides that the VA will use the U.S. Small Business Administration’s (SBA) regulations. Just three days before taking effect, SBA issued its final rule on Ownership and Control of SDVOSB Concerns, amending its regulations relating to ownership and control for VOSBs and SDVOSBs.

For context and background, I also wrote about SBA’s proposed rule earlier this year and how VA’s and SBA’s regulations regarding ownership and control of a VOSB or SDVOSB have historically contained some variations, particularly with regard to the definition of “unconditional” ownership and control.

SBA’s final rule amends the definitions applicable to SDVOSBs by incorporating language from VA’s regulations and SBA’s 8(a) program, including definitions for “surviving spouse,” “daily business operations,” “negative control,” “participant,” and “uncontrolled ownership,” among others. These definitions are being updated in consultation with the VA in an attempt to create consistency across the two agencies. In fact, many of the revisions SBA is incorporating have already been in place at the VA for some time.

Importantly, the final rule adds a definition for “extraordinary circumstances,” under which a veteran owner would not need to have full control over a firm’s decision-making process without affecting the firm’s eligibility. However, this list is exclusive and limited to just five such circumstances. The five “extraordinary circumstances” are: (i) addition of a new equity stakeholder; (ii) dissolution of the company; (iii) sale of the company; (iv) merger of the company; and (v) the company declaring bankruptcy. It is also worth mentioning that SBA has added a requirement that applicants and verified firms must inform the VA of any supermajority voting requirements provided for in their corporate documents or required by state law.

The final rule also adopts certain rebuttable presumptions concerning the veteran owner’s lack of control. For example, if the owner does not work for the firm during the normal working hours in its industry, he or she will be presumed not to control the company. Additionally, if the veteran owner does not live or work near the firm’s headquarters or worksites, regardless of the firm’s industry, the owner will be presumed not to control the company. These presumptions are rebuttable, however, meaning you would be able to present facts and documentation demonstrating that you do indeed control the company.

While most of the revisions are being adopted as proposed, SBA did make some minor changes after reviewing the public comments. For example, the proposed definition of “Daily Business Operations” included the phrase “setting of the strategic direction of the firm,” which was noted as pertaining to long-term operations, rather than daily business operations. SBA agreed and deleted this reference. As another example, SBA incorporated provisions for when it may find that a non-veteran controls the company. SBA received one comment which recommended that it present the requirement as a rebuttable presumption, which it agreed with and adopted in the final rule. Circumstances under which a presumption will arise that a non-veteran controls include where the non-veteran receives higher compensation than the veteran owner, where a non-veteran individual or entity—who has an equity interest in the concern—provides critical financial or bonding support, and where a critical license is held by a non-veteran, to name a few.

If you have any questions about the VA’s or SBA’s final rule and whether your company continues to qualify as a VOSB or SDVOSB, the attorneys at PilieroMazza PLLC would be happy to help.

About the Author: Meghan Leemon is an associate with PilieroMazza in the Government Contracts Group at our Colorado office. She may be reached at mleemon@pilieromazza.com.
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