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December 7, 2022

SBA Creates The Veteran Small Business Certification Program

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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 any North 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 qualifying veterans."17 Assessing control can be fact intensive, but certain bright-line rules exist. For example, a qualifying veteran must hold the business's highest position.18 This is typically the president, chief executive officer, general partner "with control over all partnership decisions," the managing member of a limited liability company "with control over all decisions of the limited liability company," and, if certain requirements are met, the chair of the board of directors of a corporation.19 An exception to this rule exists where the qualifying veteran is a member of the reserves and is called to active duty. In that case, a person other than the qualifying veteran may run the business during the period of active duty.20 The qualifying veteran must also be the highest paid person in the organization unless "the compensation to be received by the non-qualifying veteran is commercially reasonable" or "the qualifying veteran has elected to take lower compensation to benefit the concern."21 Even where these requirements are met, there are various circumstances where the SBA will consider a non-qualifying veteran to control the business. For instance, the business cannot depend on a person who does not qualify as a veteran such that the non-qualifying person may significantly influence the qualifying veteran's business decisions (e.g., the non-qualifying person provides "critical financial or bonding support or a critical license").22

To be clear, persons other than the qualifying veteran may participate in managing and have equity in the business, but the ultimate decision-making authority must rest with the qualifying veteran. Consent of persons other than the qualifying veteran may be required in five "extraordinary circumstances": "(1) Adding a new equity stakeholder; (2) Dissolution of the Company; (3) Sale of the company or all assets of the company; (4) The merger of the company; and (5) Company declaring bankruptcy."23

Additionally, a qualifying veteran "must have managerial experience of the extent and complexity needed to control the concern," but the qualifying veteran is not required to have specific technical expertise or licenses if the qualifying veteran exercises managerial and supervisory control over personnel who have the required expertise or licenses.24

Good Character

The SBA is eliminating the VA's "good character" requirement. Currently, the VA requires that "[i]ndividuals having an ownership or control interest in verified businesses must have good character."25 The concern cannot be suspended or debarred, "owned or controlled by debarred or suspended persons," or owned or controlled by persons convicted of crimes listed in FAR 9.406-2 that would provide a basis for suspension or debarment.26 Additionally, the concern cannot be "owned or controlled by a person(s) who is currently incarcerated, or on parole or probation (pursuant to a pre-trial diversion or following conviction for a felony or any crime involving business integrity)."27

The SBA has retained the requirement that the concern or a principal of the concern not be suspended or debarred,28 but it has otherwise eliminated the good character requirement.29 From SBA's perspective, "issues relating to moral turpitude or business integrity" are matters of responsibility best addressed by the contracting officer, not the SBA.30

When Does My Company Have to Be SBA-Certified, And What if CVE Has Already Verified My Business's VOSB or SDVOSB Status?

VOSBs and SDVOSBs that have been verified by CVE before January 1, 2023 "will be deemed certified by the SBA during the time that remains in the firm's three-year term of eligibility."31 To assist with this transition, the SBA may extend the eligibility period for a business by up to one year. The SBA intends to do so for all CVE-verified VOSBs and SDVOSBs with terms of eligibility that expire within the first year that the SBA's certification program is in effect (i.e., on or before December 31, 2023). Once the term of eligibility ends, the business must be certified by the SBA.32

For businesses that have not been verified by the VA CVE, there is a one-year grace period that ends on December 31, 2023.33 During this period, SDVOSBs may continue to rely upon their self-certifications.34 Beginning on January 1, 2024, an SDVOSB can rely on a self-certification only if it submitted a certification application during the grace period to the SBA and only until SBA issues a decision on that application.35 (Note that SBA's regulations do not establish a grace period for VOSBs. This is because (1) the VA issues VOSB set-aside contracts pursuant to its Veterans First Contracting Program and there is no equivalent governmentwide program outside the VA; and (2) the VOSB certification requirement is not new because businesses competing in VA procurements set aside for VOSBs are subject to the existing CVE verification (now SBA certification) requirement to be eligible to compete.)

Additionally — and consistent with SBA regulations regarding a business's size status and other socioeconomic statuses — a business's VOSB or SDVOSB status is determined as of the date on which the business submits its initial offer that includes price (or for indefinite-delivery, indefinite-quantity contracts where price is not required, at the time of the initial offer).36 This means that the offeror must meet the SBA certification requirement (subject to the grace period discussed above) at the time it submits its initial proposal for a VOSB or SDVOSB set-aside procurement or sole-source award. However, there are unique standards when recertifications are required at the order level.37

What Are the Certification Requirements for Joint Ventures?

Joint ventures are not required to be certified. However, joint ventures must meet several requirements to be eligible to compete for VOSB and SDVOSB set-aside procurements. For example, a certified VOSB or SDVOSB must own and control the joint venture (though other joint venture members can participate in corporate governance activities and decisions as is commercially customary). Also, each JV member must be small under the applicable size standard, unless the members hold a SBA-approved mentor-protégé agreement.38 Of note, a VOSB or SDVOSB participant cannot be a member of more than one JV that submits an offer for a specific VOSB or SDVOSB procurement.39 Other requirements — including workshare and other mandatory terms of joint venture agreements — are detailed in 13 C.F.R. § 128.402.

How Does My Business Become Certified?

Businesses must apply electronically for certification.40 The SBA website will have specific instructions on that process.41 Once submitted, the applicant will receive an acknowledgement message that provides additional information, including the estimated lead time for processing.42

The applicant "must provide documents and information demonstrating that it is owned and controlled by one or more qualifying veterans and qualifies as a small business concern" in accordance with 13 C.F.R. Part 121 and under a NAICS code listed in the applicant's SAM profile.43 The SBA will publish a list of required documents no later than January 1, 2023, but it is ultimately incumbent upon the applicant to provide all documentation necessary to demonstrate that it qualifies as a VOSB or SDVOSB.44

There will be reciprocity between the SBA's 8(a) Business Development Program and the Woman-Owned Small Business (WOSB)/Economically Disadvantaged Woman-Owned Small Business (EDWOSB) Program. The VOSB/SDVOSB applicant can rely upon 8(a) Business Development Program or WOSB/EDWOSB Program acceptance or most recent annual recertification, as applicable, if (1) the person who qualifies the business for the 8(a), WOSB, or EDWOSB status is also a qualifying veteran and (2) no material changes in control have occurred since the acceptance or most recent annual certification.45 (Note that no reciprocity exists between the Veteran Small Business Certification Program and the HUBZone program due to material differences in the eligibility requirements for those programs.)

How Will SBA Process Applications?

The SBA's acknowledgement e-mail following receipt of the application will provide an estimated timeframe for approval.46 A concern's eligibility is determined based on the totality of the circumstances (again, this can be a fact-intensive assessment).47 The SBA may consider its own independent research in addition to information the applicant provides48 and may request clarification or additional documentation at any time.49 If an applicant fails to provide the requested information, then the SBA may apply an adverse inference and presume that the information not provided would show that the applicant does not qualify as a VOSB or SDVOSB.50 Applicants must keep the SBA informed of any changed circumstances that affect program eligibility (e.g., change in size status, changes in ownership or control, bankruptcy, or a call to active duty).51 SBA may deny an application or decertify a business if the business fails to inform SBA of a change in circumstances.52 The will communicate the approval (or rejection) in writing to the e-mail address provided in the application, along with the period of program eligibility if approved.53

What if the SBA Denies the Application for Certification?

The SBA is establishing a process for appealing a denial or decertification to the Office of Hearings and Appeals (OHA) depending on the basis for the denial or decertification.54 If the denial or decertification is based on a failure to provide sufficient evidence that the individual is a qualifying veteran, that cannot be appealed because veteran status determinations are made by the VA, not the SBA. (The individual might, however, be able to appeal the VA's determination in accordance with VA regulations or Department of Defense regulations, depending on the issue).55 Otherwise, a denial or decertification is appealable to the OHA.56 A denied or decertified applicant may also reapply for certification after 90 calendar days from the final decision of the SBA (if not appealed) or the OHA.57

Once My Business is Certified, How Do I Maintain the Certification?

A certified VOSB or SDVOSB must inform the SBA of material changes that could impact its eligibility within 30 days of the change and attest to continued eligibility.58 Failure to do so can result in decertification and penalties.59 The SBA's website will have more detail on the method of notification.

Additionally, the SBA can initiate program examinations at random or based upon a creditable tip that an applicant/participant does not meet eligibility requirements, and certified VOSBs and SDVOSBs must pay attention to and cooperate with those examinations.60 The goal of a program examination is to verify the accuracy of the applicant's statements or information.61 The scope of these examinations is broad and can include "documentation related to the firm's legal structure, ownership, and control" or any other information SBA might request."62 The SBA can draw an adverse inference from a concern's failure to cooperate, assume that the concern was improperly certified, and decertify the concern.63

Do Certifications Expire, and How Does My Business Recertify?

The SBA's VOSB and SDVOSB certifications are valid for three years, but the SBA has discretion to extend the eligibility period for one additional year.64 There are no limits on how many times a business may recertify, and VOSBs and SDVOSBs can reapply for certification within 120 days prior to the end of their eligibility period.65

Can My Business Lose Its Certification?

Yes, a VOSB or SDVOSB can exit the program or be decertified by the SBA in several ways, as discussed below. Decertification generally does not, however, impact a business's obligation to perform previously awarded contracts.66

Voluntary Withdrawal: A business can voluntarily withdraw from the program.67 It cannot reapply for certification until at least 90 calendar days after the decertification.68

Certification Expires: The SBA may decertify a VOSB or SDVOSB if the certification expires and the business is not recertified.

SBA Decertification: The SBA may decertify a VOSB or SDVOSB if certain criteria are met.69 If the SBA obtains information indicating that the business might not qualify as a VOSB or SDVOSB, it may propose the business for decertification and must notify the business of the proposed decertification using the e-mail address listed in the business's certification database profile.70 The SBA must provide the business with 30 calendar days after receiving the notice to submit a written response.71 The business must rebut each reason set forth in the notice of proposed decertification and must provide all documents showing the concern is eligible.72 Similar to the process for size protests, if the business fails to respond, provide the information requested, or cooperate, then the SBA may draw an adverse inference and presume that any withheld information would show that the business does not qualify as a VOSB or SDVOSB.73 If a decision is issued to decertify the business, the business may appeal that decision to OHA.74

Status Protest: If a status protest results in a determination that the VOSB or SDVOSB is not eligible for that status, the SBA must immediately remove the business from the certification database. The business must wait at least 90 calendar days after the decertification to reapply.75

Suspension or Debarment: The SBA must decertify a VOSB or SDVOSB if the business is subject to an active exclusion in SAM.76

How Does This Rule Impact Subcontracting?

The SBA will continue to allow SDVOSB subcontractors to self-certify for purposes of small business subcontracting plans and for goaling credit purposes.77 However, the SBA is in the process of reconsidering self-certifications for subcontracting and goaling credit purposes and "anticipates sunsetting these forms of self-certification after five years, through a separate rulemaking."78 To be considered a similarly situated entity for purposes of limitations on subcontracting, the entity must be certified as a VOSB or SDVOSB, as applicable.79

What if an Agency Identifies an Apparent Successful Offeror in a Procurement Set Aside for VOSBs or SDVOSBs That Might Not Qualify as a VOSB Or SDVOSB?

SBA status certifications are not beyond challenge. The SBA's regulations establish a process for filing a protest challenging the eligibility of an ostensible VOSB or SDVOSB with the OHA.80

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. See generally 38 C.F.R. Part 74.

  2. 38 C.F.R. § 74.15(a).

  3. Pub. L. 116-283, 128 Stat. 3292 (Jan. 1, 2021).

  4. 877 Fed. Reg. 73402 (Nov. 29, 2022) (to be codified at 13 C.F.R. 128.200).

  5. 13 C.F.R. § 125.12 (2022) ("Small business concern means a concern that, with its affiliates, meets the size standard corresponding to the NAICS code for its primary industry, pursuant to part 121 of this chapter."); see also 87 Fed. Reg. 73400, 73401 (Nov. 29, 2022).

  6. 87 Fed. Reg. at 73414 (to be codified at 13 C.F.R. § 128.200(a)).  If a veteran has a permanent and total disability, as defined in VA's regulations, that prevents the veteran from being able to manage the business's daily operations, the business qualifies if it is owned and controlled by that veteran's the spouse or permanent caregiver.  Id. (to be codified at 13 C.F.R. § 128.200(b)).

  7. Id. at 73424 (to be codified at 13 C.F.R. § 128.600(a)).

  8. Id. (to be codified at 13 C.F.R. § 128.600(e)(1)); see also id. at 73424-25 (to be codified at 13 C.F.R. § 128.600(e)(3)).

  9. Id. at 73415 (to be codified at 13 C.F.R. § 128.202).

  10. Id. (to be codified at 13 C.F.R. § 128.202(a)).

  11. Id.

  12. Id. (to be codified at 13 C.F.R. § 128.202(b)).

  13. Id. (to be codified at 13 C.F.R. § 128.202(b)(2)).

  14. Id. (to be codified at 13 C.F.R. § 128.202(b)(1)).

  15. Id. (to be codified at 13 C.F.R. § 128.202(b)(3)).

  16. Id.

  17. Id. (to be codified at 13 C.F.R. § 128.203(a)).

  18. Id. at 73415-16 (to be codified at 13 C.F.R. § 128.203(b)).

  19. Id. (to be codified at 13 C.F.R. §§ 128.203(b)-(e)).

  20. Id. at 73416 (to be codified at 13 C.F.R. § 128.303(k)).

  21. Id. (to be codified at 13 C.F.R. § 128.303(h)(2)(ii)).

  22. Id. (to be codified at 13 C.F.R. § 128.303(h)).

  23. Id. (to be codified at 13 C.F.R. § 128.303(j)).

  24. Id.

  25. 38 C.F.R. § 74.2(b).

  26. Id.

  27. Id.

  28. 87 Fed. Reg. at 73414 (to be codified at 13 C.F.R. § 128.201(a)).

  29. Id. at 73402.

  30. Id.

  31. Id. at 73400.

  32. Id.

  33. Id. at 73419 (to be codified at 13 C.F.R. § 128.401(a)).

  34. Id.

  35. Id.

  36. Id. at 73417 (to be codified at 13 C.F.R. § 128.204(b)).

  37. Id. at 73420 (to be codified at 13 C.F.R. §§ 128.401(d)-(e)).

  38. Id. at 73421 (to be codified at 13 C.F.R. § 128.402).

  39. Id. (to be codified at 13 C.F.R. § 128.402(a)(3).

  40. Id. at 73417-18 (to be codified at 13 C.F.R. §§ 128.300-128.301).

  41. Id. (to be codified at 13 C.F.R. § 128.301).

  42. Id.

  43. Id. (to be codified at 13 C.F.R. § 128.303(a)).

  44. Id.

  45. Id. at 73417-18 (to be codified at 13 C.F.R. §§ 128.303(b)-(c)).

  46. Id. at 73417 (to be codified at 13 C.F.R. § 128.301).

  47. Id. (to be codified at 13 C.F.R. § 128.302(d)).

  48. Id.

  49. Id. (to be codified at 13 C.F.R. § 128.302(b)).

  50. Id. (to be codified at 13 C.F.R. § 128.302(c)).

  51. Id. (to be codified at 13 C.F.R. § 128.302(e)).

  52. Id.

  53. Id. (to be codified at 13 C.F.R. § 128.302(h)).

  54. Id. at 73428-29 (to be codified at 13 C.F.R. §§ 134.1101-134.1112).

  55. Id.

  56. Id. at 73418 (to be codified at 13 C.F.R. § 128.305).

  57. Id.

  58. Id. (to be codified at 13 C.F.R. § 128.307).

  59. Id.

  60. Id. (to be codified at 13 C.F.R. § 128.308(a)).

  61. Id.

  62. Id. (to be codified at 13 C.F.R. § 128.308(b)).

  63. Id.

  64. Id. (to be codified at 13 C.F.R. §§ 128.306(a),(d)).

  65. Id. (to be codified at 13 C.F.R. § 128.306(a)).

  66. Id. at 73418-19 (to be codified at 13 C.F.R. § 128.310(d)).

  67. Id. at 73419 (to be codified at 13 C.F.R. § 128.309(a)).

  68. Id.

  69. Id. at 73418-19 (to be codified at 13 C.F.R. §§ 128.309(b), 129.310(a)).

  70. Id. (to be codified at 13 C.F.R. § 128.310(a)).

  71. Id.

  72. Id. at 73419 (to be codified at 13 C.F.R. § 128.310(b)).

  73. Id.

  74. Id. (to be codified at 13 C.F.R. § 128.310(e)).

  75. Id. at 73418 (to be codified at 13 C.F.R. § 128.309(c)).

  76. Id. (to be codified at 13 C.F.R. § 128.309(d)).

  77. Id. at 73400.

  78. Id.

  79. Id. at 73407; see also 13 C.F.R. § 125.1.

  80. 87 Fed. Reg. at 73425-28 (to be codified at 13 C.F.R. §§ 134.102, 134.201, 134.1001-134.1013).

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