The VA’s Verification Assistance Brief for SDVOSB and VOSB joint ventures flat-out misstates the law regarding the manner in which joint venture profits must be split.
SDVOSBs and VOSBs often rely on Verification Assistance Briefs to guide them through the CVE verification process, and CVE analysts sometimes use Verification Assistance Briefs, too. Which begs the question: how many CVE-verified joint ventures are legally invalid?
The VAAR provides that a joint venture can be eligible for a VA SDVOSB or VOSB set-aside contract so long as the joint venture (among other things) adopts a joint venture agreement meeting the requirements of the SBA’s SDVOSB regulations. So far, so good–joint ventures are complex enough; the last thing we need is a separate, VA-specific list of SDVOSB joint venture requirements.
Effective August 24, 2016, the SBA overhauled its requirements for SDVOSB joint ventures. The SBA moved the regulations from 13 C.F.R. 125.15 to 13 C.F.R. 125.18, and made many substantive changes and additions.
The SBA made a further correction, effective December 27, 2016, which governs how profits are split. The current regulation on profits is codified at 13 C.F.R. 125.18(b)(2)(iv), which states that every SDVOSB joint venture agreement must contain a provision “tating that the SDVO SBC(s) must receive profits from the joint venture commensurate with the work performed by the SDVO SBC.” (Here’s a link to the Federal Register, which officially adopted this formula as law).
That brings us to the VA’s Verification Assistance Brief on joint ventures. Now, to be fair, I’m a fan of the Verification Assistance Briefs as a general matter. I like that the CVE has made the effort to put verification information in a user-friendly and accessible format. But the Verification Assistance Briefs are only helpful if they contain accurate and up-to-date information. As of the date of this post, the SDVOSB/VOSB joint venture regulation does not.
According to the Verification Assistance Brief:
4. The joint venture agreement must contain a provision “tating that the SDVO SBC must receive profits from the joint venture…commensurate with their ownership interests in the joint venture…” 13 CFR § 125.18(b)(2)(iv).
Later on the Brief reiterates:
The SDVOSB or VOSB must receive a distribution of profits commensurate with its ownership interests in the joint venture.
Wrong, wrong, wrong! This hasn’t been accurate since December 2016.
Far from being helpful, then, this Verification Assistance Brief is dangerous. It invites SDVOSBs and VOSBs to submit legally deficient joint venture agreements. It invites CVE analysts to approve legally deficient joint venture agreements. And, to the extent that the CVE has approved deficient SDVOSB or VOSB joint ventures (and I’d bet a fair bit that it has), it exposes those joint ventures to the possibility of successful SDVOSB status protests.
Has the CVE simply been slow to update its information to reflect the December 2016 change? Well, the Verification Assistance Brief (which, by the way, is the “Featured” Brief on the VA OSDBU website) says that it was “Reviewed and Revised May 2017.” Yikes. It needs a re-review, and fast.
One more thing: if the CVE has approved any JVs containing the wrong profit-splitting provision, the CVE ought to unilaterally contact those companies and ask them to revise their JV agreements now. It would be a horrible thing if a well-meaning JV were to lose an SDVOSB eligibility protest–and a contract–simply because it followed an incorrect Verification Assistance Brief.