On January 29, 2018, the SBA issued a proposed rule to address and resolve the existing conflicts between the current eligibility requirements in the SBA and VA regulations. This action comes after specific direction in the 2017 National Defense Authorization Act for the SBA and VA to work together on a consolidated rule. Following this direction, the SBA seeks to amend the definitions in § 125.11 by incorporating language from the VA regulations and the SBA’s regulations.

Recent decisions in the Court of Federal Claims also recognized the inconsistencies in the regulations with regard to the requirements for unconditional ownership. See Veterans Contracting Group, Inc. v. United Sates, No. 17-1188C. This case was discussed in a prior blog post on January 5, 2018.

The proposed rule updates 13 C.F.R. § 125.12 and provides guidance on regarding the unconditional ownership requirement for an SDVOSB. The rule retains the general requirement that an SDVOSB must be “unconditionally and directly owned by one or more service-disabled veterans.”

This requires that the service-disabled veteran own not less than 51 percent of the business or not less than 51 percent of the stock (not including any stock owned by an employee stock ownership plan), and that one or more service-disabled veterans control the management and daily business operations of the company.

It also adds a requirement that the service-disabled veterans receive at least 51 percent of the profits of a corporation, partnership, or LLC. The rule also requires the service-disabled veteran receive profits commiserate with the veteran’s ownership percentage, similar to the regulations for the 8(a) program. In fact, the proposed rule relies on the 8(a) regulations, 13 C.F.R. § 124, for guidance throughout the revisions for 13 C.F.R. § 125.13. These changes intend to provide more clarity regarding requirements for control by the service-disabled veterans. The new requirements will require businesses to provide notification of supermajority voting requirements in § 125.13(f). The new additions also provide guidance as to when the SBA may find that a non-service-disabled veterans control the firm. The changes also add a rebuttable presumption that a person not working for a company regularly during normal working hours does not control the firm.

The proposed rule also modifies several definitions including the definition for service-disabled veteran with a permanent and severe disability to ensure consistency with the VA regulations. VO and SDVOSBs will still be required to meet the requirements of 13 CFR § 121 and the applicable size standards.