SBA Set to Take Over Certification of Veteran-Owned Small Businesses

The U.S. Small Business Administration (SBA) published a final rule on Nov. 29, 2022, establishing its Veteran Small Business Certification Program for veteran-owned small businesses (VOSBs) and service-disabled veteran-owned small businesses (SDVOSBs).

Previously, entities seeking SDVOSB contracts with agencies other than the U.S. Department of Veterans Affairs (VA) self-certified their status, and for VA contracts, VOSBs and SDVOSBs were verified through the VA's Center for Verification and Evaluation (CVE). As of Jan. 1, 2023, responsibility for certification of VOSBs and SDVOSBs is transferred to the SBA, and certification will be required for firms seeking sole-source and set-aside contracts on the basis of this status government-wide. This Holland & Knight alert describes key aspects of the new SBA certification program.

How Were Firms Previously Certified?

Historically, to be eligible for VA set-aside contracts for VOSB and SDVOSB firms, a business had to go through CVE verification with the VA. For all other federal agencies, a firm seeking an SDVOSB sole-source award or set-aside contract self-certified its status. Section 862 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2021 transferred responsibility for VOSB and SDVOSB certification from the VA to SBA effective Jan. 1, 2023, and established a certification requirement for SDVOSB set-asides across all federal agencies.

When Will Firms Have to Apply to Remain Eligible?

Section 862 incorporated a one-year grace period beginning Jan. 1, 2023, for firms to apply to SBA for certification. Any firm verified through CVE prior to that date will be considered SBA-certified for the remainder of the time left on the firm's three-year eligibility term. The SBA may also extend a firm's eligibility term for up to one additional year. To reduce the burden of applications anticipated in the first year of the new program, SBA intends to provide this one-year extension to firms currently verified through CVE with an eligibility term expiring during calendar year 2023.

What Will the New Certification Process Entail?

Firms seeking SBA certification must provide evidence that the business is small and owned and controlled by one or more qualified veterans. For a firm to be certified or recertified as a VOSB or SDVOSB after Jan. 1, 2023, it must meet all of the requirements articulated in the SBA's revised eligibility regulations. The SBA is implementing the Veteran Small Business Certification Program in a new section of its regulations, 13 C.F.R. part 128. This new section retains many of the existing standards and concepts from the SBA's and VA's historical VOSB and SDVOSB programs, with a few notable changes:

• A firm need only be small under the size standard for at least one North American Industry Classification System (NAICS) code in its SAM.gov profile (rather than its primary NAICS code).
• SBA eliminated the requirement that an applicant possesses good character, one of the prior criteria for certification, deferring to the contract-specific responsibility determination and the separate requirement that neither the applicant nor a principal be debarred or suspended.
• SBA added two additional provisions clarifying the requirements for unconditional ownership by the qualifying veteran:
  • Non-qualifying veterans are now allowed to hold commercially reasonable rights of first refusal to purchase the ownership rights of the qualifying veteran, subject to the requirements that changes in ownership be notified to the SBA and decertification if the exercise of the rights results in less than 51 percent ownership by the qualifying veteran.
  • A collateral pledge or encumbrance of the qualifying veteran's equity that follows normal commercial practices does not change the qualifying veteran's unconditional ownership unless the terms of the pledge are violated.

These clarifications will be useful to VOSBs and SDVOSBs structuring equity investment and debt financing transactions with non-qualifying individuals.

Once SBA reviews the information provided by an applicant for certification, it will notify the firm of its decision and approved businesses will be designated as VOSB- or SDVOSB-certified in the certification database. Applications are submitted electronically, in response to which the SBA will provide an acknowledgement message with additional information, including estimated processing times. SBA will post instructions and a list of the minimum documentation required on its website by Jan. 1, 2023. Certifications are generally valid for three years, absent material changed circumstances that result in decertification, a finding of ineligibility through a status protest decision or an extension of up to one year at the SBA's discretion as noted above.

Are There Any Circumstances in Which a Firm May Continue to Self-Certify Its Status?

Self-certification will continue to be permitted for agency goaling purposes and at the subcontract level. The SBA signaled that it is considering sunsetting these options within five years through a separate rulemaking.

The VA will continue to be the only procuring agency that issues VOSB contracts, and other agencies may issue contracts restricted to SDVOSBs as sole-source awards or set-asides. Veteran-owned businesses that do not receive certification from the SBA within the requisite timelines will no longer be eligible to receive sole-source or set-aside awards restricted to VOSBs or SDVOSBs from any federal agency. Certification is required by the time of a firm's offer for a contract reserved for VOSBs or SDVOSBs, except small businesses that have submitted an application on or before Dec. 31, 2023, which can continue to self-certify for SDVOSB sole-source or set-aside contracts with agencies other than the VA until the SBA renders its decision. Thus, early attention to the criteria and required process will ensure contractors remain in compliance and continue to have access to these competitions.

For More Information

Holland & Knight's Government Contracts Group attorneys guide clients through all phases of the procurement process. For more information, contact the authors or another member of the Government Contracts Group.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.