United States: Preparing For New SBA Certification Requirements For Veteran-Owned And Service-Disabled Veteran-Owned Small Businesses

On November 29, 2022, the Small Business Administration (SBA) published a Final Rule, requiring all Veteran-Owned Small Business Concerns (VOSBs) and Service-Disabled Veteran-Owned Small Business Concerns (SDVOSBs) to obtain SBA certification of their size status to participate in any federal government agency VOSB or SDVOSB sole source or set-aside contracts on or after January 1, 2023. This is a significant change for procurements issued by agencies other than the U.S. Department of Veterans Affairs (VA), as it ends the current practice of permitting businesses to self-certify as VOSBs or SDVOSBs on those non-VA procurements. In addition to impacting VOSBs and SDVOSBs, this change will also impact other businesses forming joint ventures with VOSBs and SDVOSBs to pursue VOSB and SDVOSB set-aside contracts. This article summarizes the rules for SBA certification of VOSBs and SDVOSBs and key compliance obligations.

How to Qualify as a VOSB or SDVOSB

The Final Rule largely leaves unchanged the substantive requirements for qualifying as a VOSB or SDVOSB—with two key exceptions noted below—but shifts responsibility for certifying businesses as such from the VA to the SBA.

The first key change under the Final Rule is that, to be certified as a VOSB or SDVOSB for purposes of federal government contracts, a business must be small, inclusive of all domestic and foreign affiliates, in accordance with the SBA's employee-based or revenue-based size standard corresponding to at least one of the North American Industrial Classification System (NAICS) codes in the business's System for Award Management (SAM) profile.¹ This is a departure from the prior requirement for the concern to be small in accordance with its primary NAICS code.

The Final Rule did not change the requirement for VOSB/SDVOSBs to be not less than 51% owned and controlled by one or more veterans (for VOSB status) or by one or more service-disabled veterans (for SDVOSB status). Qualifying veterans must unconditionally and directly own at least 51% of the small business concern. "Direct ownership" means the qualifying veteran(s) must own the entity directly and not through a holding company or other entity. "Unconditional ownership" means that each qualifying veteran's ownership cannot be subject to any arrangement that could cause ownership benefits to go to another person or entity, other than after the death or incapacity of the veteran. Further, qualifying veterans must receive at least 51% of the annual distribution of profits for the concern, commensurate with the veteran's ownership interest in the concern. The concern must also be "controlled" by a qualifying veteran, which means the veteran controls the management and daily business operations of the concern and a qualifying veteran holds the highest officer position in the concern.²

The second key change implemented under the Final Rule is the removal of the requirement of the business to demonstrate "good character" in order to receive a VOSB or SDVOSB certification. That former requirement precluded certification for a business owned or controlled by an individual who was currently incarcerated or on parole or probation, even if the individual was not otherwise disqualified from contracting with the government. While a business seeking VOSB or SDVOSB certification no longer must affirmatively establish "good character," businesses still need to ensure that: (i) neither the company nor its owners have an active exclusion in SAM; (ii) they do not submit "knowingly false" information in SBA applications; and (iii) neither the company nor its "principals" have failed to pay significant financial obligations to the federal government (e.g., outstanding tax payments, defaults on federal loans, etc.).

When SBA Certification is Required for VOSB/SDVOSB Contracts

Prior to this new rule, only VOSB and SDVOSB sole source and set-aside contracts issued by the VA required government verification of a business's VOSB or SDVOSB status, which businesses were required to obtain from the VA Center for Verification and Evaluation (CVE). Other federal government agencies permitted businesses to self-certify their status as VOSBs and SDVOSBs. On or after January 1, 2023, to be eligible for the award of VOSB or SDVOSB sole source or set-aside prime contracts by anyfederal agency, the offeror must pursue SBA certification of its VOSB/SDVOSB size status. As long as the small business has a certification application pending with the SBA on or before December 31, 2023, the business can continue to self-certify for SDVOSB sole source or set-aside contracts until the SBA declines or approves the application. Such self-certifications will not apply to VA contracts. Small businesses that do not have applications pending with the SBA on or before December 31, 2023 will not be eligible to self-certify for SDVOSB sole source or set-aside contracts on and after January 1, 2024.

VOSBs/SDVOSBs with CVE certifications may continue to utilize the CVE certification in lieu of obtaining a new SBA certification for the remainder of the three-year CVE certification eligibility period. When the CVE certification expires, the VOSB/SDVOSB will need to obtain re-certification from the SBA under the new SBA procedures. If a VOSB's/SDVOSB's CVE certification expires in 2023, it may request, and the SBA may grant in its sole discretion, an extension of the CVE certification for an additional fourth (4th) year.

Notably, no SBA certification is required for VOSBs/SDVOSBs competing for contracts other than those restricted only to VOSBs/SDVOSBs (e.g., unrestricted contracts, small business set-aside contracts, subcontracts, etc.), and VOSBs/SDVOSBs may continue to self-certify their size status when competing for those other types of contracts.

SBA VOSB/SDVOSB Certification Procedures

Companies must submit applications to the SBA for VOSB/SDVOSB certifications electronically following the instructions that will be posted on the SBA's website at www.sba.gov, which also contains a list of supporting documents required for the application. Applications must contain information demonstrating that the concern qualifies as a small business and is at least 51% unconditionally and directly owned, and controlled, by one or more qualifying veterans.

Once VOSBs/SDVOSBs obtain SBA certification, they are required to renew their SBA certification every three (3) years. VOSBs/SDVOSBs may apply for re-certification within 120 calendar days prior to the expiration of their SBA certification. The SBA may extend the eligibility period for the SBA VOSB/SDVOSB certification up to one (1) year during the re-certification process. In most cases, the SBA's denial of certification as a VOSB/SDVOSB can be appealed to the SBA's Office of Hearings and Appeals (OHA). The one scenario in which an SBA denial of certification is not appealable to OHA is when the denial is based on a failure to provide sufficient evidence of an individual's status as a veteran or service-disabled veteran.

A VOSB/SDVOSB must provide notice to the SBA of changes in ownership or any other material changes than can impact the concern's eligibility as a VOSB/SDVOSB.

Joint Venture Compliance Obligations

To qualify as a VOSB/SDVOSB joint venture under the new Final Rule, the joint venture itself does not need to obtain VOSB/SDVOSB certification from the SBA. Now, one way for a joint venture to be considered a VOSB/SDVOSB for the purposes of pursuing a contract restricted to pursue competitive or sole source VOSB/SDVOSB offerors is: (i) each VOSB/SDVOSB in the joint venture must obtain SBA certification, and (ii) other business concerns in the joint venture must qualify as a small business under the NAICS code assigned to the procurement. Additionally, a joint venture between an SBA-approved mentor and a SBA-certified VOSB/SDVOSB protégé will qualify as a small business and be eligible for a contract restricted to VOSB/SDVOSB offerors so long as the protégé qualifies as a small business in accordance with the NAICS code assigned to the procurement. All joint venture agreements must comply with the requirements set forth in 13 C.F.R. § 128.402(c), including that the VOSB/SDVOSB must own at least 51% of the joint venture.

For a joint venture pursuing a contract opportunity restricted to VOSBs or SDVOSBs, each certified VOSB/SDVOSB in the joint venture must certify to the contracting officer at the time of offer that it is an SBA-certified VOSB/SDVOSB, a small business under the applicable size standard (inclusive of all domestic and foreign affiliates), and will comply with the limitations on subcontracting in accordance with 13 C.F.R. § 125.6. Moreover, post-award, annually and at the end of contract performance, the certified VOSB(s)/SDVOSB(s) in the joint venture must submit reports to the contracting officer and the SBA explaining how the VOSB/SDVOSB is satisfying the performance of work requirements.

Recommended Next Steps

VOSBs/SDVOSBs

VOSBs/SDVOSBs that are not currently certified by the VA, but are intending to pursue set-aside or sole source contracts, should begin preparing the documentation required to be included in SBA applications to ensure compliance with the SBA requirements when they take effect on January 1, 2023. Applicants should monitor the SBA's website, as the SBA indicated its intent to release additional guidance on submission requirements prior to January 1, 2023.

After application submission, applicants should ensure they timely respond to requests for additional information from the SBA. Failure to adequately respond to SBA requests for additional documents, information, or clarification could constitute grounds for application denial.

Post-certification, businesses should implement a process to ensure that the SBA is updated regarding changes in ownership or other material changes that could impact the concern's eligibility for a VOSB or SDVOSB certification. Joint ventures seeking to pursue VOSB/SDVOSB-restricted contracts should ensure that their joint venture agreements comply with the SBA's requirements and that VOSB/SDVOSBs perform their portion of the work required under the contracts.

Large Businesses and Other Small Businesses

Non-VOSB/SDVOSB joint venture participants will need to conduct additional due diligence to ensure that its joint venture can continue to apply for VOSB/SDVOSB sole source or set-aside contracts in accordance with these new rules. Companies entering into teaming agreements with VOSB/SDVOSB team members as the proposed prime contractor should include in the teaming agreement requirements that the VOSB/SDVOSB maintain its SBA certification and notify the team member if the VOSB/SDVOSB loses such certification.

Importantly, large businesses required to submit small business subcontracting plans can continue to rely on self-certifications of VOSBs and SDVOSBs for subcontracting plan purposes. While the SBA may change these self-certification requirements after five (5) years through a separate rulemaking, for now, large businesses can continue to rely on self-certifications from VOSB/SDVOSB subcontractors.

Footnotes

1. See Stay "Small" Longer: Recent Changes Make It Easier for Growing Businesses to Pursue Small Business Contracts from the Federal Government for an explanation of the current methods for calculating a business's size status. Note, however, to qualify as a VOSB or SDVOSB for a specific federal government contract, the business must still not exceed the relevant size standard corresponding to the NAICS code assigned to the contract at the time of offer submission.

2. If the service-disabled veteran has a permanent and severe disability, his or her spouse or permanent caregiver can operate and control the management and daily business operations. See 13 CFR §128.102 for definitions of "permanent and severe disability" and "permanent caregiver."