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SBA Proposes Changes to SDVOSB Ownership and Control Rules

February 2, 2018

Earlier this week, on January 29, 2018, the U.S. Small Business Administration (SBA) published a Proposed Rule addressing ownership and control of Service-Disabled Veteran-Owned Businesses (SDVOSB’s). The Proposed Rule follows through on changes to the ownership requirements under the Department of Veterans Affairs (VA’s) programs that were anticipated by the SBA in its last semiannual Regulatory Agenda and that are mandated by NDAA 2017.  As we explained in our prior Bulletin covering the semiannual Regulatory Agenda (here), NDAA 2017 vested the SBA with responsibility for formulating one uniform definition of a “small business concern owned and controlled by service-disabled veterans” to be used for SDVOSB procurements by both the VA and by non-VA agencies.  NDAA 2017 also indicated that the definition should encompass certain categories of small businesses owned and controlled by service-disabled veterans (SDV’s).

SDVOSB Ownership

The Proposed Rule implements several of the NDAA 2017 requirements on ownership of an SDVOSB by making changes to the SBA regulation under 13 CFR 125.11, which sets out important definitions. 

U.S. Small Businesses

As an initial matter, as amended by the Proposed Rule, 13 CFR 125.11 requires a “small business concern owned and controlled by service-disabled veterans” to be a “small business concern,” and now defines “small business concern” to be a “concern” that, with its affiliates, meets the applicable NAICS code size standard for its primary industry under part 121 of the SBA regulations.  As the SBA stated in the preamble to the Proposed Rule, small businesses, therefore, must meet all of the requirements under part 121, including the requirement under 13 CFR 121.105(a)(1) that the firm be “for profit,” with a place of business located in the United States, and which operates primarily within the United States or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.

Owned By SDV and Managed By SDV or Spouse (if SDV Permanently and Severely Disabled)

As required by NDAA 2017, the Proposed Rule’s definition of “small business concern owned and controlled by service-disabled veterans” retains, with one modification discussed below, the following category of small business concerns under the current rule: small business concerns (i) that are not less than 51% owned by one or more SDV's or, in the case of any publicly-owned business, that not less than 51% of the stock of which is owned by one or more SDV's; and (ii) the management and daily business operations of which are controlled by one or more SDV's or, in the case of a veteran with permanent and severe disability, the spouse or permanent caregiver of such veteran.

In the case of publicly-owned businesses, however, the Proposed Rule now excludes stock owned by an ESOP, which is also now a defined term.  The Proposed Rule now also includes a definition for "daily business operations."

Owned By SDV Who Is Rated By The VA Permanently and Totally Disabled

As required by NDAA 2017, the Proposed Rule’s definition for “small business concern owned and controlled by service-disabled veterans” includes a new category for small business concerns that are at least 51% owned by one or more SDV's that have a disability rated by the VA as a permanent and total disability and who are unable to manage the daily operations of the business.  Alternatively, in the case of a publicly-owned business, ownership must be of not less than 51% of the company's stock (not including stock owned by an ESOP).

Unconditionally and Directly Owned

The Proposed Rule makes several changes impacting the rule under 13 CFR 125.12 for determining when a small business concern is at least 51% unconditionally and directly owned by one or more SDV.

In the case of a partnership, the current rule requires unconditional ownership of at least 51% of "every class of partnership interest."  Where a partnership includes general and limited partners, therefore, SDV’s currently are required to be both general and limited partners.  The Proposed Rule, however, requires one or more SDV’s to unconditionally own at least 51% of the “aggregate voting interest” of the partnership rather than of every class of partnership interest.

In the case of corporations that are publicly owned, the Proposed Rule excludes stock owned by an ESOP. 

The Proposed Rule also includes minimum dividend and distribution requirements that are intended to ensure SDV owners actually receive the benefits and value that typically accompany majority equity ownership.  As amended by the Proposed Rule, 13 CFR 125.12 requires SDV owners of partnerships, corporations and limited liability companies to receive at least 51% of the annual distribution of profits, 100% of the value of any stock or member interest that is sold, and at least 51% of retained earnings and 100% of unencumbered value of stock or member interest in the event of dissolution.

Lastly, in addition to requiring ownership to be subject to community property laws, the Proposed Rule opens up ownership to a third category of owners – namely surviving spouses. Specifically, 13 CFR 125.12 adds a provision stating that a small business concern owned and controlled by an SDV continues to qualify as such a concern upon the death of an SDV as long as (i) the surviving spouse of the deceased veteran acquires such veteran's ownership interest in such concern; (ii) the veteran had a service-connected disability rated as 100 percent disabling by the VA or such veteran died as a result of a service-connected disability; and (iii) immediately prior to the death of such veteran and during the period it is otherwise an SDVOSB the small business concern is included in the VA’s VetBiz database.

A surviving spouse can continue to operate the SDVOSB until the tenth anniversary of the veteran’s death, the date he or she remarries, or the date he or she relinquishes ownership, whichever comes first.

SDVOSB Control

In addition to amending ownership rules, the Proposed Rule amends the SBA rules under 13 CFR 125.13 concerning control over an SDVOSB. The changes are intended, in part, to clarify the role that non-SDV owners can take without diluting SDV control.

The Proposed Rule adds new provisions relating to control over the Board of Directors of a corporation.  For example, in instances in which a super majority voting requirement exists for shareholders to approve corporation actions, the SDV or SDV’s must own at least the percent of voting stock necessary to overcome the super majority requirement.

The Proposed Rule also states that unexercised rights to change control or management of a business do not, in themselves, constitute control and management regardless of how quickly or easily the rights can be exercised.

The Proposed Rule also adds rebuttable presumptions on the control of a business with regard to business hours worked and proximity to the business locations.  Specifically, the Proposed Rule states that there is a rebuttable presumption that an SDV does not control a business if he or she is not able to work for the firm during normal business hours.  In addition, there is a rebuttable presumption that an SDV does not control a business if he or she is not located within a reasonable commute to a firm’s headquarters or job locations.  An SDV’s ability to communicate by phone, e-mail, or other technological means while delegating responsibility for managing the business to others will not in itself constitute a reasonable rebuttal.

To download a copy of the Proposed Rule go here, and to read other articles from The GovCon Bulletin™ go here.

DoD Pre-Releases 2018 SBIR & STTR BAA Topics!

December 1, 2017

On November 29, 2017, the U.S. Department of Defense (DoD) issued its STTR 18.A Program Broad Agency Announcement and its SBIR 18.1 Program Broad Agency Announcement, beginning the 30-day pre-release window during which small businesses can communicate directly and privately with the Technical Points of Contact who authored the BAA topics. Discussions with topic authors during the pre-release period often can be invaluable opportunities to obtain not only useful information about a particular topic, but also technical clarifications that can help companies assess how well their technologies align with technology needs reflected in the DoD topics.

Once the pre-release period is over, small businesses can obtain technical clarifications only by posting questions publicly and anonymously on the SBIR/STTR Interactive Topic Information System. Responses to questions will likewise be posted publicly. 

DoD will begin accepting proposals on January 8, 2018, which must be received by 8:00 pm on February 7, 2018.

To download the BAA's go to DoD's SBIR & STTR website here.

To learn more about the unique opportunities for small firms to develop technologies with funds awarded by the federal government under the SBIR and STTR programs, check out our GovCon webinar giving an overview of the programs, our GovCon Video Blog discussing SBIR data rights, and our podcast featuring a discussion between Mike Pansky, at InterKn, and Mark Amadeo about the SBIR and STTR programs and how small businesses can leverage SBIR and STTR data rights to protect their valuable technologies:

To read other articles from
The GovCon Bulletin™ go here.

Cybersecurity Safeguards: Ongoing Assessments & NIST's Draft SP 800-171A

December 14, 2017

As many contractors by now are aware, and as we explained in our 5-part GovCon Video Blog™ series (here) on federal government contract cybersecurity requirements, contractors that bid on and are awarded contracts with Department of Defense (DoD) agencies that are not solely for the acquisition of commercial off the shelf items have two cybersecurity obligations under DFARS clause 252.204-7012 and its implementing rule, DFARS 204.7304(c).  First, defense contractors have to provide "adequate security" for all covered contractor information systems - i.e., information systems that process, store, or transmit covered defense information.  Second, they have to submit timely cyber incident reports to DoD upon discovery of a cyber incident. 

As we explained in part one and part three of our vlog series, in order to provide "adequate security" for covered contractor information systems that are part of a defense contractor’s IT system (as opposed to a federal government IT system), defense contractors generally must implement the security requirements contained in the National Institute of Standards and Technology’s (NIST’s) Special Publication 800-171 by December 31, 2017.  As the deadline looms large, compliance with SP 800-171’s security requirements – 110 in all, spread out among 14 different categories – may at first glance seem daunting and overwhelming. However, the security requirements for the most part are stated in general terms, and many, if not most of them, are likely already in place for defense contractors that follow commercial best practices. In addition, as we explained in part three and part four, DoD has instructed that implementation of SP 800-171, for the purpose of the December 31 deadline, can be demonstrated by the development of (i) a system security plan explaining which of the security requirements have been met, and (ii) a plan of action for any unmet security requirements.

The system security plan, as we explained in part four, is required under SP 800-171 to be periodically updated.  SP 800-171 in fact requries defense contractors to monitor security controls on an ongoing basis and to make periodic assessments to determine if the security controls are effective. 

In order to assist contractors in making these assessments, late last month NIST published a draft of Special Publication 800-171A, Assessing Security Requirements for Controlled Unclassified Information.  NIST’s draft SP 800-171A lays out a table for each security requirement under SP 800-171 that sets forth the security requirement, followed by an “assessment objective” section.  The "assessment objective" section essentially breaks down each security requirement into separate components and may serve as a check list for determining if a security requirement has been met.  Each “assessment objective” section, in turn, is followed by a "potential assessment methods and objects" section that proposes methods or procedures that contractors can use to make their determinations for whether assessment objective components or requirements have been met.

Although compliance with SP 800-171A is voluntary, once the draft is final, defense contractors should find that SP 800-171A will serve as a useful tool for maintaining compliance with SP 800-171 on an ongoing basis.  Public comments on the draft may be submitted to NIST through January 15, 2018. 

To download draft SP 800-171A go here.  To read other articles from The GovCon Bulletin™ go here.

FAR Amended To Remove Fair Pay And Safe Workplaces Provisions

November 6, 2017

Over the weekend, the Department of Defense, General Services Administration and National Aeronautics and Space Administration (the “FAR Agencies”), issued a final rule (here) putting the last nail in the coffin for the Fair Pay and Safe Workplaces provisions contained in the Federal Acquisition Regulation (FAR).

As we noted in a prior bulletin (here), President Obama signed Executive Order 13673 (EO 13673), Fair Pay and Safe Workplaces, which imposed a number of requirements on federal government contractors including that they disclose their own labor law violations (referred to as the "Blacklisting" rule) and, for contracts over $500,000, that they provide wage statements to workers covered under certain federal or state wage payment laws (referred to as the "Paycheck Transparency" rule) and documents informing independent contractors of their independent contractor status.  A final FAR rule implementing EO 13673 (the FAR EO 13673 Rule) was issued on August 25, 2016 (here).

Subsequently, however, a federal court decision enjoined enforcement of EO 13673 except for the Paycheck Transparency rule.  As we wrote about here, more recently Congress passed a joint resolution signed by President Trump on March 27, 2017 making the FAR EO 13763 Rule unenforceable.  On that day, President Trump also issued an executive order revoking EO 13673 (here).

The Final Rule issued over the weekend and that takes effect November 6, 2017, now removes the FAR EO 13673 Rule entirely from the FAR, declares that all of the provisions of FAR that implemented EO 13673, including the Paycheck Transparency rule are unenforceable, and states that the FAR EO 13673 Rule shall be treated as if it had never taken effect.  Accordingly, the preamble to the latest Final Rule directs contracting officers to modify, to the maximum extent practicable, existing contracts to remove any solicitation provisions and contract clauses related to the Fair Pay and Safe Workplaces rule because they are unenforceable by law. 

To read other articles from The GovCon Bulletin™ go here.