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Why File: A VOSB or SDVOSB Status Protest


Koprince Law LLC

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The second entry in our new “Why File” series covers some of the main reasons unsuccessful offerors file veteran-owned small business (VOSB) and service-disabled veteran owned small businesses (SDVOSB) status protests. Don’t worry if VOSB and SDVOSB are new acronyms to you–or you just need a refresher–we’ve got a Back to Basics blog for that. If you’re a seasoned vet (pun intended), you already know SBA now handles the Veteran Small Business (VSB) Certification Program (VetCert) (which covers VOSBs and SDVOSBs) administration and status protests. So, the following (non-exhaustive) list of some of the most common reasons VSB status is protested is based primarily on SBA regulations and cases. But please keep in mind, despite the commonalities discussed below, the question of whether to protest is highly fact-specific and demands careful consideration.

1. The qualifying veteran or service-disabled veteran (SDV) owner (Qualifying Veteran) does not appear to be meaningfully involved with the company’s operations.

This one might seem obvious. But contractors sometimes assume that because a VSB went through SBA’s certification process (or previously, through VA Center for Verification and Evaluation), they must be compliant–even where the Qualifying Veteran is MIA. But that’s not necessarily true. Despite the illegality and major potential (and even criminal) consequences, some VSBs represent (and even certify to) Qualifying Veteran-ownership and -control, while the Qualifying Veteran actually has little to no involvement in the VSB’s operations. And regardless of whether such misrepresentation rises to the level of an indictment or statutory violation, (as you might’ve guessed) it is certainly not compliant with SBA’s VSB eligibility requirements.

The VSB control rules say, “[t]o be an eligible [VOSB or] SDVOSB, the management and daily business operations of the concern must be controlled by one or more [veterans or] service-disabled veterans[,]” and control here “means that one or more qualifying veterans controls both the long-term decision-making and the day-to-day operations of the Applicant or Participant.” Note my emphasis on the “and” here. The facade of eligibility is often based on the assumption or claim that the Qualifying Veteran is never around the office or worksites because they are too busy making all the big decisions behind some velvet curtain. But as you can see, SBA’s rules speak directly to this. SBA requires the Qualifying Veteran to control the company both at the big picture management/long-term decision-making level and at the day-to-day operations level.

In fact, there used to be a VSB control rule that essentially required a Qualifying Veteran to live near (within a reasonable commute of) the company office and worksites. SBA’s most recent final rule on VSB eligibility (among other things) did away with the infamous “reasonable commute rule.” But that does not absolve Qualifying Veterans of their required multi-level management and control of company operations and decisions. In fact, there is a specific provision in SBA’s current rules that states:

A qualifying veteran generally must devote full-time during the business’s normal hours of operations, unless the concern demonstrates that the qualifying veteran has ultimate managerial and supervisory control over both the long-term decision making and day-to-day management of the concern. Where a qualifying veteran claiming to control a business concern devotes fewer hours to the business than its normal hours of operation, SBA will assume that the qualifying veteran does not control the concern, unless the concern demonstrates that the qualifying veteran has ultimate managerial and supervisory control over both the long-term decision making and day-to-day management of the business.

So, if the Qualifying Veteran is persistently absent from the office and worksites, a status protest would likely lead to SBA raising and investigating the issue of VSB control. But even if the Qualifying Veteran is around sometimes, just not during normal business hours, a status protest would still likely lead to such SBA compliance review (at a minimum). Even though this rule only says that SBA will assume there are control violations in such case, it is no easy feat to convince SBA of Qualifying Veteran control where the Qualifying Veteran is rarely physically present. Now, we may have seen some leeway provided by the COVID-19 pandemic–leading to assertions that the Qualifying Veteran virtually controls all operations. But SBA has historically been pretty tough on that one (even during the height of the pandemic).

So, now that most in-office business has resumed, a company would likely need to show SBA documentation of direct support for such long-distance management. And I am not saying it is impossible to run a VSB company from afar. SBA’s VSB control rules are not intended to target instances where such virtual/long-distance control is truly present. Rather, the rules are intended to weed out situations where a Qualifying Veteran is publicly positioned as the “face” of the company, while non-qualifying people or entities (Non-Qualifying Veterans) are really pulling all the strings. Such is often referred to as a “Rent-a-Vet” scheme. The VSB protest process plays a crucial role in detecting such schemes, helping to maintain integrity and fairness in the VSB Program. In fact, our next reason why to protest a VSB status relies on many of these same rules and policies–as well as others.

2. The Qualifying Veteran has a “side hustle.”

Even if you focus solely on the rules already discussed above, you can still likely see why a Qualifying Veteran’s “side hustle” or secondary employment could give rise to VSB control concerns. But SBA’s regulations take it one step further. The same rule requiring “full-time management” (covered above) also specifically prohibits the Qualifying Veteran holding the highest officer position in the company from engaging in any outside employment that would “prevent [them] from devoting the time and attention to the concern necessary to control its management and daily business operations.”

Generally, SBA’s determination whether any such employment “prevents” the required full-time management and control is intensely fact-specific. Sure, some secondary employment obligations can truly and completely be handled outside of normal working hours. Some are not too demanding or time consuming. And some in no way interfere with a Qualifying Veteran’s required control of their VSB company. In fact, there have been a decent number of SBA decisions finding VSB eligibility despite outside employment–but common to many of those decisions is the fact that the Qualifying Veteran can show their outside employment obligations can be met: (a) with less-than-full-time hours; and (b) at any hour of the day or night and/or during weekends. So, naturally, SBA has been less likely to allow it where the outside employment company; (a) operates during the same or similar business hours as the VSB company; and/or (b) requires more involvement than a veteran/SDV (that manages their VSB full-time) can reasonably dedicate.

As you can see, SBA’s decisions on Qualifying Veteran outside employment are incredibly fact-specific. Obviously, discovering that a Qualifying Veteran appears to be “splitting time” between two or more companies could lead to a reasonable and strong status protest. But a status protest may still be warranted (and even, have a good chance of success) where there are less obvious concerns with SBA’s outside employment rule. An SBA compliance investigation initiated by a status protest has the potential to reveal facts not typically considered public information–nor willingly provided to a VSB’s competitors–that may be relevant to the VSB’s: (1) noncompliance with SBA’s outside employment limitations; and/or (2) noncompliance with other applicable control, ownership, or general eligibility rules. That’s why we selected outside employment as one of our reasons to file a VSB status protest. Our next reason, too, goes to SBA’s control requirements.

3. A Non-Qualifying Veteran’s history and involvement with a Qualifying Veteran or their VSB company raises control concerns.

Now, we kept this reason to file a VSB status protest quite broad for a reason; it covers a lot of different provisions and limitations from SBA’s VSB eligibility regulations.

SBA’s VSB control regulations don’t just detail strict rules and standards a Qualifying Veteran must follow to show the required control. They don’t just discuss the level of involvement and dedication a Qualifying Veteran must demonstrate. Sure, they do all of those things (as we detailed above). But they, again, go one step further.

SBA’s regulations also place strict limitations on any Non-Qualifying Veterans that have a history with or are involved with the Qualifying Veteran and/or the VSB. Notably, SBA’s rules don’t exclude Non-Qualifying Veterans completely. In fact, SBA’s rules expressly state that a “non-qualifying-veteran may be involved in the management of the concern, and may be a stockholder, partner, limited liability member, officer, and/or director of the concern.” But SBA does have a wide variety of provisions in its control regulations that it enforces to keep any involved Non-Qualifying Veterans “in check,” if you will.

These various provisions prohibit all Non-Qualifying Veterans from exerting control over a VSB or its business operations. They restrict the financial support a Non-Qualifying Veteran may provide to a VSB and prohibit any financial dependence or influence. And they create certain presumptions or assumptions a VSB must overcome where there is: prior employment history between the Non-Qualifying Veteran and the Qualifying Veteran; or where a Non-Qualifying Veteran receives too much compensation from a VSB.

SBA’s VSB control rules say that a Non-Qualifying Veteran must not:

(i) Exercise actual control or have the power to control the concern;

(ii) Have business relationships that cause such dependence that the qualifying veteran cannot exercise independent business judgment without great economic risk;

(iii) Control the Applicant or Participant through loan arrangements (which does not include providing a loan guaranty on commercially reasonable terms); [or]

(iv) Provide critical financial or bonding support or a critical license to the Applicant or Participant, which directly or indirectly allows the non-qualifying-veteran significantly to influence business decisions of the qualifying veteran.

These first four regulatory limitations are pretty self-explanatory–all aiming to prevent any control over a VSB by a Non-Qualifying Veteran and even any power to control a VSB based on financial dependence or influence. SBA’s VSB control regulations go on to say that a Non-Qualifying Veteran may not:

(i) Be a former employer, or a principal of a former employer, of any qualifying veteran, unless the concern demonstrates that the relationship between the former employer or principal and the qualifying veteran does not give the former employer actual control or the potential to control the Applicant or Participant and such relationship is in the best interests of the concern; or

(ii) Receive compensation from the concern in any form as a director, officer, or employee, that exceeds the compensation to be received by the qualifying veteran who holds the highest officer position (usually Chief Executive Officer or President), unless the concern demonstrates that the compensation to be received by the non-qualifying veteran is commercially reasonable or that the qualifying veteran has elected to take lower compensation to benefit the concern.

Notably, the last two provisions don’t just give SBA the right to “raise an eyebrow” where the facts apply. They also set forth the method by which a compliant and eligible VSB can demonstrate to SBA that the required control and pure intentions are still there–specifically, where a Non-Qualifying Veteran (1) used to employ a Qualifying Veteran ready to venture out on their own, or (2) makes more money at the VSB than the Qualifying Veteran because it will truly benefit the company.

The provisions of SBA’s regulations discussed in this third reason–limiting certain aspects of Non-Qualifying Veteran involvement, rather than requiring certain aspects of Qualifying Veteran involvement–serve the same underlying policies as the control rules discussed in the first two reasons. So, this fourth and final reason to file is no exception.

4. The VSB has a franchise-type or affiliate agreement with another entity or individual.

We will keep this last reason to file a VSB status protest brief–especially since you can read all about it here. In a nutshell, consistent with all of the control rules and limitations we discussed above, anytime you discover that a VSB has a franchise-type or affiliate agreement with another person or entity, it could also be worth a status protest. At a minimum, SBA needs to closely review any such agreements to ensure there are not provisions limiting the Qualifying Veteran control–or allowing any Non-Qualifying Veteran control. So, the very existence of such an agreement could lead to a successful SDV status protest: (1) if SBA has not already had the chance to review it; or (2) if an SBA deep-dive into the agreement demonstrates that another entity or individual has control over (or the power to control) certain aspects of the SDV’s operations (e.g., marketing, websites, sales, or other day-to-day operations or long-term decisions).

* * *

Though the four reasons to file an SDV protest discussed above cover a wide variety of facts–they all rely on the same underlying goals and policies. Essentially, SBA only wants to certify VSBs and allocate VSB-designated contracting dollars where there is meaningful SDV involvement and sufficient SDV authority. SBA only aims to restrict the involvement of other entities and individuals to prevent anyone from exercising too much authority over a Qualifying Veteran or its VSB. This, again, is vital in preventing the infamous “Rent-a-Vet” schemes you see in the news. And so is the VSB status protests process.

Questions about this post? Email us. Needing legal assistance? Give us a call at 785-200-8919.

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The post Why File: A VOSB or SDVOSB Status Protest first appeared on SmallGovCon - Government Contracts Law Blog.

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