SBA Creates The Veteran Small Business Certification Program

Published date09 December 2022
Subject MatterGovernment, Public Sector, Government Contracts, Procurement & PPP
Law FirmArnold & Porter
AuthorMr Craig Holman and Thomas Pettit

On November 29, 2022, the Small Business Administration (SBA) issued a final rule establishing the Veteran Small Business Certification Program, which will take effect January 1, 2023. Currently, veteran-owned small businesses (VOSBs) and service-disabled veteran-owned small businesses (SDVOSBs) competing for VOSB and SDVOSB set-aside procurements follow different procedures depending on the procuring agency. For Department of Veterans Affairs (VA) procurements set aside for VOSBs and SDVOSBs, businesses must be verified by the VA Center for Verification and Evaluation (CVE) as a VOSB or SDVOSB at the time they submit their initial offer that includes price. To become verified, a VOSB or SDVOSB must apply to CVE for inclusion in the Vendor Information Pages database.1 A CVE verification is valid for a three-year "eligibility term" unless the period is shortened in accordance with 38 C.F.R. § 74.15(c).2 For non-VA procurements set aside for SDVOSBs (there is no government-wide VOSB set-aside program), SDVOSBs self-certify.

Section 862 of the National Defense Authorization Act for fiscal year 20213 and this SBA rule implementing that section change the verification process in two ways. First, the SBA will now be responsible for certifying VOSBs and SDVOSBs, and the VA CVE will no longer receive, review, or approve verification applications. Second, and effective January 1, 2024, SDVOSBs must be certified by the SBA to compete for SDVOSB set-aside procurements conducted by any federal agency.

This article addresses key elements of the SBA's new Veteran Small Business Certification Program and what businesses must do to be compliant. Although the intricacies of this rule are most relevant to current and prospective VOSBs and SDVOSBs, these changes are also relevant to other businesses, including large businesses, companies seeking to form a VOSB or SDVOSB joint venture that will compete in VOSB or SDVOSB set-aside procuremets, businesses holding small business subcontracting plans, and businesses considering acquiring a VOSB or SDVOSB.

Is My Business Eligible to Be Certified as a VOSB or SDVOSB?

The final rule establishes the requirements a business concern must meet to qualify as a VOSB or a SDVOSB, but most of the requirements are consistent with existing SBA and VA regulations. To qualify, a business must meet two requirements. First, it must qualify as small under anyNorth American Industry Classification System (NAICS) code listed in its System for Award Management (SAM) profile.4 This reflects a shift from the SBA's current regulations and proposed rule, which require a business to qualify as small under its primary NAICS code.5 Second, the business must be owned and controlled by one or more qualifying veterans.6

Applicants must take this process seriously because knowingly misrepresenting the status of the business (other than unintentional misstatements) can lead to severe penalties. The so-called "presumed loss" rule establishes a presumption that the harm to the government from a willful VOSB or SDVOSB status misrepresentation resulting in the concern receiving a VOSB or SDVOSB set-aside contract is "the total amount expended on" the contract-not just profit.7 If the concern is found to have violated the False Claims Act, that amount can be trebled. Additionally, the SBA may suspend or debar a concern or a person for misrepresenting a concern's status. The business and individuals involved in knowingly misrepresenting the VOSB or SDVOSB status of a concern or failing "to correct 'continuing representations' that are no longer true" may also face criminal penalties.8

Direct and Unconditional Ownership

The qualifying veteran's ownership of the business must be direct and unconditional.9 Ownership is direct if the qualifying veteran owns at least "51 percent of the concern directly, and not through another business entity or trust," including an employee stock ownership plan.10 The only exception to this rule is for a trust "where the trust is revocable, and qualifying veterans are the grantors, trustees, and the current beneficiaries of the trust."11

Ownership is unconditional if it is not "subject to any conditions, 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 or incapacity)."12 For instance, the SBA will not consider a veteran's unexercised stock options when assessing ownership because that "ownership" is conditional on exercising those options. The SBA will, however, consider stock options held by a non-veteran to be exercised.13 Encumbrances or ownership interests provided as collateral, such as to secure financing, do not deprive the veteran of control if the veteran "retains control absent violations of the terms."14 Of note, the SBA has established a new exception to the unconditional ownership requirement that allows a non-qualifying veteran to have a right of first refusal "to purchase the ownership interest of the qualifying veteran," if the right of first refusal is in line with "normal commercial practices."15 If the non-qualifying veteran exercises the right of first refusal and the purchase results in the qualifying veteran owning less than 51% of the business, SBA will decertify the concern.16

Control

A business meets the control requirement if "the management and daily business operations," including "both the long-term decision-making and the day-to-day operations" of the business, are controlled by one or more...

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