[Federal Register Volume 83, Number 19 (Monday, January 29, 2018)]
[Proposed Rules]
[Pages 4005-4011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-01392]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 125

RIN 3245-AG85


Ownership and Control of Service-Disabled Veteran-Owned Small 
Business Concerns

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: The U.S. Small Business Administration (SBA or Agency) 
proposes to amend its regulations to implement provisions of The 
National Defense Authorization Act for Fiscal Year 2017 (NDAA 2017). 
The NDAA 2017 placed the responsibility for issuing regulations 
relating to ownership and control for the Department of Veterans 
Affairs verification of Veteran-Owned (VO) and Service-Disabled 
Veteran-Owned (SDVO) Small Business Concern (SBC) with the SBA. 
Pursuant to NDAA 2017, there will be one definition of ownership and 
control for these concerns, which will apply to the Department of 
Veterans Affairs in its verification and Vets First Contracting Program 
procurements, and all other government acquisitions which require self-
certification. The legislation also provides that in certain 
circumstances a

[[Page 4006]]

firm can qualify as VO or SDVO when there is a surviving spouse or an 
employee stock ownership plan (ESOP).

DATES: Comments must be received on or before March 30, 2018.

ADDRESSES: You may submit comments, identified by RIN 3245-AG85, by any 
of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     For mail, paper, disk, or CD/ROM submissions: Brenda 
Fernandez, U.S. Small Business Administration, Office of Policy, 
Planning and Liaison, 409 Third Street SW, 8th Floor, Washington, DC 
20416.
     Hand Delivery/Courier: Brenda Fernandez, U.S. Small 
Business Administration, Office of Policy, Planning and Liaison, 409 
Third Street SW, 8th Floor, Washington, DC 20416.
    SBA will post all comments on www.regulations.gov. If you wish to 
submit confidential business information (CBI) as defined in the User 
Notice at www.regulations.gov, please submit the information to Brenda 
Fernandez, U.S. Small Business Administration, Office of Policy, 
Planning and Liaison, 409 Third Street SW, 8th Floor, Washington, DC 
20416, or send an email to [email protected]. Highlight the 
information that you consider to be CBI and explain why you believe SBA 
should hold this information as confidential. SBA will review the 
information and make the final determination on whether it will publish 
the information.

FOR FURTHER INFORMATION CONTACT: Brenda Fernandez, Office of Policy, 
Planning and Liaison, 409 Third Street SW, Washington, DC 20416; (202) 
205-7337; [email protected].

SUPPLEMENTARY INFORMATION: The Vets First Contracting Program within 
the Department of Veterans Affairs (VA) was created under the Veterans 
Benefits, Health Care, and Information Technology Act of 2006 (Public 
Law, P.L. 109-461). This contracting program was created for Veteran-
Owned Small Businesses and expanded the Service-Disabled Veteran-Owned 
contracting program for VA procurements. Approved firms are eligible to 
participate in Veteran-Owned Small Business (VOSB) and Service-Disabled 
Veteran-Owned Small Business (SDVOSB) set-asides issued by VA. More 
information regarding the Vets First Contracting Program can be found 
on the Department of Veterans Affairs website at https://www.va.gov/osdbu/faqs/109461.asp.
    The National Defense Authorization Act of 2017 (Pub. L. 114-328), 
section 1832, amended section 3(q) of the Small Business Act (15 U.S.C. 
632(q)) and section 8127 of title 38, United States Code, to 
standardize definitions for VOSBs and SDVOSBs. This section also 
requires the Secretary of Veterans Affairs to use the regulations 
established by the Small Business Administration (SBA) for establishing 
ownership and control of VOSBs and SDVOSBs. The Secretary would 
continue to determine whether individuals are veterans or service-
disabled veterans and would be responsible for verification of 
applicant firms. Challenges to the status of a VOSB or SDVOSB based 
upon issues of ownership or control would be decided by the 
administrative judges at the SBA's Office of Hearings and Appeals 
(OHA).
    In drafting this proposed rule, SBA consulted with VA in order to 
properly understand VA's positions and implement the statutory 
requirements in a way that is consistent with both SBA's and VA's 
interpretations.

Section-by-Section Analysis

Section 125.11

    In response to the NDAA 2017 changes, SBA is proposing to amend the 
definitions in Sec.  125.11 by incorporating language from VA's 
regulations and also from SBA's 8(a) Business Development (BD) program 
regulations. SBA is proposing to define a surviving spouse and the 
requirements for a surviving spouse-owned SDVO SBC to maintain program 
eligibility. Further, SBA is proposing to add definitions for Daily 
Business Operations, Negative Control, Participant, and Unconditional 
Ownership. The added definitions are being adopted from SBA's 8(a) BD 
regulations found in part 124. SBA is adding a definition for Employee 
Stock Ownership Plan (ESOP). This definition is adopted from Sec.  
1832(a)(6). SBA is also proposing to replace the definitions of 
permanent caregiver, service-disabled veteran (SDV), and surviving 
spouse. SBA is adding a new definition for service-disabled veteran 
with a permanent and severe disability. These definitions are being 
updated in consultation with VA in an effort to ensure consistency 
across programs at both Agencies. SBA is also adding a definition for 
small business concerns. Concerns will need to meet all the 
requirements of part 121, including Sec.  121.105(a)(1), which requires 
that the firm be organized 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.'' This definition will address how to generally determine the 
size of a concern. VO and SDVO SBCs will still be required to meet size 
standards corresponding to the NAICS code assigned to each contract 
pursuant to Sec. Sec.  125.14 and 125.15.
    In addition, SBA is proposing to add a definition for 
``extraordinary circumstances'' under which a service disabled veteran 
owner would not have full control over a firm's decision-making 
process, but would not render the firm ineligible as a firm owned and 
controlled by one or more service disabled veterans. This definition 
will be used to identify discrete circumstances that SBA views as rare. 
The new definition will be used to allow minority equity holders to 
have negative control over these enumerated instances. SBA proposes 
five limited circumstances in which a service-disabled veteran owner 
will not have full control over the decision making process. Under the 
proposed rule, these five circumstances would be exclusive, and SBA 
would not recognize any other facts or circumstances that would allow 
negative control by individuals that are not service-disabled.

Section 125.12

    SBA is proposing to amend Sec.  125.12(b), which pertains to the 
requirement for ownership of a partnership. SBA's current regulation 
requires service-disabled veterans to own at least 51% of each type of 
partnership interest. Therefore, if a partnership had general partners 
and limited partners it was required that the service disabled veteran 
be both a general and limited partner. SBA is proposing to change the 
requirement so that service-disabled veterans will need to own at least 
51% of the aggregate voting interest in the partnership.
    SBA is proposing to add Sec.  125.12(d). This proposed paragraph 
incorporates the new statutory language with regard to public companies 
and ownership. Specifically, it should be noted that this language does 
not include any equity held by an ESOP when determining ownership for a 
publicly owned business.
    SBA is proposing to add a new Sec.  125.12(g). This new paragraph 
and its subparagraphs would provide clarity with regard to requirements 
for dividends and distributions. SBA's existing regulations require 
that ownership must also entail all the privileges and benefits of 
ownership. This new paragraph is adopted from SBA's 8(a) BD regulations 
in part 124. In general, one's right to receive

[[Page 4007]]

benefits, compensation, and the ultimate value of one's equity should 
be consistent with the purported amount of equity. For example, it is 
not consistent with SBA's regulations for a firm to state that a 
service-disabled veteran owns 60 percent of the equity but records show 
that he or she is entitled only to a smaller amount of the firm's 
profit, or that the residual value of that equity is less than 60 
percent if the firm is sold.
    SBA is proposing to add new Sec. Sec.  125.12(h) and (i). Pursuant 
to proposed Sec.  125.12(h), ownership decisions would be decided 
without regard to community property laws. This provision is similar to 
SBA's ownership regulations for women owned businesses. See 13 CFR 
127.201. SBA is also adopting regulations to allow firms owned by 
surviving spouses of service-disabled veterans to remain eligible for 
the program, and Sec.  125.12(i) provides the guidelines for this 
continued eligibility. Basically, this provision would allow the 
transfer of ownership in a SDVO SBC from a serviced-disabled veteran to 
his or her spouse upon the death of the service-disabled veteran 
without adversely affecting the firm's status as a SDVO SBC.

Section 125.13

    SBA is proposing to add several new paragraphs to Sec.  125.13. 
These proposed paragraphs incorporate provisions from SBA's 8(a) BD 
program and VA's former ownership and control regulations. SBA has 
always used 8(a) BD program regulations for guidance on eligibility 
issues for SDVO SBCs, and SBA will continue to do so. SBA proposing to 
adopt some but not all of its 8(a) BD regulations should not be 
interpreted as SBA abandoning this position. SBA is adding these 
specific regulations to add clarity and consistency, but SBA will 
continue to rely on part 124 for guidance. Many of the newly 
incorporated regulations deal with control by non-service-disabled 
veterans. These changes are intended to provide more clarity about the 
roles that non-service-disabled veterans can serve without creating 
control issues that may affect the concern's eligibility.
    SBA is proposing to add language to describe how to determine if an 
SDV controls the Board of Directors in Sec.  125.13(e). This language 
is adopted from SBA's 8(a) BD regulations and is being added to provide 
more clarity.
    SBA is proposing language that will require firms to provide 
notification of supermajority voting requirements in Sec.  125.13(f). 
This regulation will simplify the procedures for reviewing eligibility 
criteria related to super majority requirements.
    Proposed Sec. Sec.  125.13(h), (i), and (j) adopt policies and 
language from SBA's 8(a) BD program and VA's regulations. These 
provisions provide guidance on when SBA may find that a non-service-
disabled veteran controls the firm. These regulations add more clarity 
and detail to specific issues such as quorum requirements and loan 
arrangements with non-service-disabled veterans.
    SBA is proposing to add rebuttable presumptions Sec.  125.13(k) and 
(l). Proposed Sec.  125.13(k) would add a rebuttable presumption that a 
person not working for a firm regularly during normal working hours 
does not control the firm. This is not a full time devotion 
requirement. It just makes clear that this is a factor that SBA will 
consider, but is clearly rebuttable by providing evidence of control. 
Similarly, proposed Sec.  125.13(l) would add a rebuttable presumption 
regarding place of work. In this case, it deals with an SDV owner who 
does not live or work nears the firm's headquarters or its worksites. 
SBA will assume that this indicates a lack of control. The main issue 
in these instances is over delegation of authority to non-SDV 
individuals who do work at the office and who are at the work sites. 
SBA's regulations require control over day to day operations and remote 
observation and over delegation is not the same as control. As noted in 
this proposed rule, this is a rebuttable presumption.
    SBA is proposing to add Sec.  125.13(m), an exception to the 
control requirements in ``extraordinary circumstances.'' As noted 
above, SBA is proposing a new definition for extraordinary 
circumstances that includes a limited and exhaustive list of five 
circumstances. This proposed rule will allow an exception to the 
general requirement that SDVs control long term decision making.
    SBA is proposing to add Sec.  125.13(n), an exception to the 
control requirements when an individual in the reserves is recalled to 
active duty. SBA and VA do not think a firm owned by an SDV should lose 
its status due to the necessary military commitments of its owner when 
serving the nation.

Sections 125.22 and 125.23

    SBA is proposing to make changes to Sec. Sec.  125.22 and 125.23 to 
correct cross citations that were not updated when SBA renumbered its 
regulations. SBA is also proposing to update the values for sole source 
awards contained in Sec.  125.23 in order to be consistent with the 
inflationary adjustments made to those amounts in the Federal 
Acquisition Regulation (FAR).

Compliance With Executive Orders 12866, 12988, 13132, and 13771, the 
Paperwork Reduction Act (44 U.S.C. Ch. 35), and the Regulatory 
Flexibility Act (5 U.S.C. 601-612)

Executive Order 12866

    OMB has determined that this rule does not constitute a 
``significant regulatory action'' under Executive Order 12866. This 
rule is also not a major rule under the Congressional Review Act, 5 
U.S.C. 800. This proposed rule would amend the rules concerning 
ownership and control of VO and SDVO SBCs. As such, the rule has no 
effect on the amount or dollar value of any Federal contract 
requirements or of any financial assistance provided through SBA or VA. 
Therefore, the rule is not likely to have an annual economic effect of 
$100 million or more, result in a major increase in costs or prices, or 
have a significant adverse effect on competition or the United States 
economy. In addition, this rule does not create a serious inconsistency 
or otherwise interfere with an action taken or planned by another 
agency, materially alter the budgetary impact of entitlements, grants, 
user fees, loan programs or the rights and obligations of such 
recipients, nor raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
the Executive Order.
    This rule is part of a joint effort by the VA and SBA to reduce the 
regulatory burden on the veteran business community. This rule will 
consolidate ownership and control requirements in one regulation thus 
eliminating duplicate functions. Prior to the enactment of this 
regulation business owners had the burden of complying with both 
regulations. This regulation will eliminate that burden. The single 
rule will help streamline the verification and certification processes 
which will save business owners time and money. This will also lead to 
less confusion.

Executive Order 12988

    This action meets applicable standards set forth in section 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden. The action does not 
have retroactive or preemptive effect.

Executive Order 13132

    This rule does not have Federalism implications as defined in 
Executive Order 13132. It will not have substantial

[[Page 4008]]

direct effects on the States, on the relationship between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government, as specified 
in the Executive Order. As such it does not warrant the preparation of 
a Federalism Assessment.

Executive Order 13771

    This proposed rule is expected to be an Executive Order 13771 
deregulatory action. Details on the estimated cost savings of this 
proposed rule can be found in the rule's economic analysis. This rule 
is part of a joint effort by the VA and SBA to reduce the regulatory 
burden on the veteran business community. This rule will consolidate 
ownership and control requirements in one regulation thus eliminating 
duplicate functions. Prior to the enactment of this regulation business 
owners had the burden of complying with both regulations. This 
regulation will eliminate that burden. The single rule will help 
streamline the verification and certification processes which will save 
business owners time and money. This will also lead to less confusion.

Paperwork Reduction Act

    The SBA has determined that this rule does not impose additional 
reporting or recordkeeping requirements under the Paperwork Reduction 
Act, 44 U.S.C. Chapter 35. However, this rule does include an 
information collection for the VA and the OMB approval number for this 
collection is 2900-0675.

Regulatory Flexibility Act

    The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601-612, as 
amended, requires Federal agencies to consider the potential impact of 
regulations on small entities during rulemaking. Small entities include 
small businesses, small not-for-profit organizations, and small 
governmental jurisdictions. Section 605 of the RFA allows an agency to 
certify a rule, in lieu of preparing an analysis, if the rulemaking is 
not expected to have a significant economic impact on a substantial 
number of small entities.
    This proposed rule will merge SBA and VA regulations concerning 
ownership and control of VO and SDVO SBCs as directed by Congress. The 
proposed regulation is not attempting new regulation, but to streamline 
two already existing regulations into a single regulatory framework. 
While SBA does not anticipate that this proposed rule would have a 
significant economic impact on any small business, we do welcome 
comments from any small business setting out how and to what degree 
this proposed rule would affect it economically.
    There are approximately 21,000 firms registered as SDVO SBCs in SAM 
and approximately 13,000 firms that have been certified by the VA. To a 
large extent SBA's and the VA's ownership and control rules were 
substantially similar in terms of the regulatory language, and in many 
instances identical. Thus the vast majority of these firms will not be 
impacted by this rule. For example, this rule will not impact firms 
that are 100% owned and control by an SDV. To the extent there are 
differences in SBA's and the VA's ownership and control rules, this 
rule will reduce cost and positively impact all SDVO firms, because 
there will be one set of criteria to measure SDV ownership and control 
throughout the Federal government. Further, SBA's current rules do not 
ignore ESOPs when determining ownership, which means firms that are 
majority owned by ESOPs are not eligible for SDVO set-asides or sole 
source awards. We have no data on the number of firms that this rule 
will be impact, but the number is very small. After consulting with 
industry representatives, many firms owned by ESOPs are entirely owned 
by the ESOP, especially those that operate in industries with employee 
based size standards. Those firms will still not qualify if this rule 
is finalized because there is still a 51% SDV ownership requirement of 
the remaining ownership interest, not including ESOPs. However, some 
firms that intend to institute an ESOP may do so in way that allows the 
firm to qualify under this rule, once it is finalized. With respect to 
surviving spouse, SBA's current rules do not recognize ownership or 
control by a surviving spouse. Although the VA does allow firms owned 
and controlled by surviving spouses to qualify under its certification 
program, the number of firms that qualify under the exception is 
extremely small. To the extent firms qualify under the surviving spouse 
exception the benefit will be positive, not negative. Firms that were 
previously not eligible to continue as SDVO firms will be able to 
continue for a period of time, when and if this rule is finalized.
    Therefore, the Administrator of SBA determines, under 5 U.S.C. 
605(b), that this proposed rule would not have a significant economic 
impact on a substantial number of small entities.

List of Subjects in 13 CFR Part 125

    Government contracts, Government procurement, Reporting and 
recordkeeping requirements, Small businesses, Technical assistance, 
Veterans.

    Accordingly, for the reasons stated in the preamble, SBA proposes 
to amend 13 CFR part 125 as follows:

PART 125--GOVERNMENT CONTRACTING PROGRAMS

0
1. The authority citation for part 125 is revised to read as follows:

    Authority:  15 U.S.C. 632(p), (q), 634(b)(6), 637, 644, 657(f), 
657q; and 657s; 38 U.S.C. 501 and 8127.

0
2. Revise Sec.  125.11 to read as follows:


Sec.  125.11   What definitions are important in the Service-Disabled 
Veteran-Owned (SDVO) Small Business Concern (SBC) program?

    Contracting officer has the meaning given such term in section 
27(f)(5) of the Office of Federal Procurement Policy Act (41 U.S.C. 
423(f)(5)).
    Daily business operations include, but are not limited to, the 
marketing, production, sales, and administrative functions of the firm, 
as well as the supervision of the executive team, the implementation of 
policies and the setting of the strategic direction of the firm.
    ESOP has the meaning given the term ``employee stock ownership 
plan'' in section 4975(e)(7) of the Internal Revenue Code of 1986 (26 
U.S.C. 4975(e)(7)).
    Extraordinary circumstances. For purposes of this part, 
extraordinary circumstances are only the following:
    (1) Adding a new equity stakeholder;
    (2) Dissolution of the company;
    (3) Sale of the company;
    (4) The merger of the company; and
    (5) Company declaring bankruptcy.
    Negative control has the same meaning as that set forth in Sec.  
121.103(a)(3) of this chapter.
    Participant means a veteran-owned small business concern that has 
verified status in the Vendor Information Pages database, available at 
https://www.vip.vetbiz.gov/.
    Permanent caregiver, for purposes of this part, is the spouse, or 
an individual, 18 years of age or older, who is legally designated, in 
writing, to undertake responsibility for managing the well-being of the 
service-disabled veteran with a permanent and severe disability, as 
determined by Department of Veterans Affairs' Veterans Benefits 
Administration, to include housing, health and safety. A permanent 
caregiver may, but does not need to, reside in the same household as 
the service-disabled veteran with a permanent and severe disability. In 
the case of a service-disabled veteran with a permanent and severe 
disability lacking legal capacity, the permanent

[[Page 4009]]

caregiver shall be a parent, guardian, or person having legal custody. 
There may be no more than one permanent caregiver per service-disabled 
veteran with a permanent and severe disability.
    (1) A permanent caregiver may be appointed, in a number of ways, 
including:
    (i) By a court of competent jurisdiction;
    (ii) By the Department of Veterans Affairs, National Caregiver 
Support Program, as the Primary Family Caregiver of a Veteran 
participating in the Program of Comprehensive Assistance for Family 
Caregivers (this designation is subject to the Veteran and the 
caregiver meeting other specific criteria as established by law and the 
Secretary and may be revoked if the eligibility criteria do not 
continue to be met); or
    (iii) By a legal designation.
    (2) Any appointment of a permanent caregiver must in all cases be 
accompanied by a written determination from the Department of Veterans 
Affairs that the veteran has a permanent and total service-connected 
disability as set forth in 38 CFR 3.340 for purposes of receiving 
disability compensation or a disability pension. The appointment must 
also delineate why the permanent caregiver is given the appointment, 
must include the consent of the veteran to the appointment and how the 
appointment would contribute to managing the veteran's well-being.
    Small business concern owned and controlled by service-disabled 
veterans (also known as a Service-Disabled Veteran-Owned SBC) means any 
of the following:
    (1) A small business concern--
    (i) Not less than 51 percent of which is owned by one or more 
service-disabled veterans or, in the case of any publicly owned 
business, not less than 51 percent of the stock (not including any 
stock owned by an ESOP) of which is owned by one or more service-
disabled veterans; and
    (ii) The management and daily business operations of which are 
controlled by one or more service-disabled veterans or, in the case of 
a veteran with permanent and severe disability, the spouse or permanent 
caregiver of such veteran;
    (2) A small business concern--
    (i) Not less than 51 percent of which is owned by one or more 
service-disabled veterans with a disability that is rated by the 
Secretary of Veterans Affairs as a permanent and total disability who 
are unable to manage the daily business operations of such concern; or
    (ii) In the case of a publicly owned business, not less than 51 
percent of the stock (not including any stock owned by an ESOP) of 
which is owned by one or more such veterans.
    Service-connected has the meaning given that term in 38 U.S.C. 
101(16).
    Service-disabled veteran is a veteran who possesses either a valid 
disability rating letter issued by the Department of Veterans Affairs, 
establishing a service-connected rating between 0 and 100 percent, or a 
valid disability determination from the Department of Defense or is 
registered in the Beneficiary Identification and Records Locator 
Subsystem maintained by Department of Veterans Affairs' Veterans 
Benefits Administration as a service-disabled veteran. Reservists or 
members of the National Guard disabled from a disease or injury 
incurred or aggravated in line of duty or while in training status also 
qualify.
    Service-disabled veteran with a permanent and severe disability 
means a veteran with a service-connected disability that has been 
determined by the Department of Veterans Affairs, in writing, to have a 
permanent and total service-connected disability as set forth in 38 CFR 
3.340 for purposes of receiving disability compensation or a disability 
pension.
    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.
    Surviving spouse has the meaning given the term in 38 U.S.C. 
101(3).
    Unconditional ownership means ownership that is not subject to 
conditions precedent, conditions subsequent, 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). The pledge or 
encumbrance of stock or other ownership interest as collateral, 
including seller-financed transactions, does not affect the 
unconditional nature of ownership if the terms follow normal commercial 
practices and the owner retains control absent violations of the terms.
    Veteran has the meaning given the term in 38 U.S.C. 101(2). 
Reservists or members of the National Guard called to Federal active 
duty or disabled from a disease or injury incurred or aggravated in 
line of duty or while in training status also qualify as a veteran.
    Veteran owned small business concern means a small business 
concern:
    (1) Not less than 51 percent of which is owned by one or more 
veterans or, in the case of any publicly owned business, not less than 
51 percent of the stock of which is owned by one or more veterans; and
    (2) The management and daily business operations of which are 
controlled by one or more veterans. All of the provisions of Subpart B 
apply for purposes of determining ownership and control.
0
3. Amend Sec.  125.12 by:
0
a. Revising the introductory text;
0
b. Revising the first sentence in paragraph (b);
0
c. Adding a sentence at the end of paragraph (d); and
0
d. Adding paragraphs (g) through (i).
    The revisions and additions read as follows:


Sec.  125.12  Who does SBA consider to own an SDVO SBC?

    Generally, a concern must be at least 51% unconditionally and 
directly owned by one or more service-disabled veterans. More 
specifically:
* * * * *
    (b) * * * In the case of a concern which is a partnership, at least 
51% of aggregate voting interest must be unconditionally owned by one 
or more service-disabled veterans. * * *
* * * * *
    (d) * * * In the case of a publicly owned business, not less than 
51 percent of the stock (not including any stock owned by an ESOP) must 
be unconditionally owned by one or more veterans.
* * * * *
    (g) Dividends and distributions. One or more service-disabled 
veterans must be entitled to receive:
    (1) At least 51 percent of the annual distribution of profits paid 
to the owners of a corporation, partnership, or limited liability 
company concern;
    (2) 100 percent of the value of each share of stock owned by them 
in the event that the stock or member interest is sold; and
    (3) At least 51 percent of the retained earnings of the concern and 
100 percent of the unencumbered value of each share of stock or member 
interest owned in the event of dissolution of the corporation, 
partnership, or limited liability company.
    (4) An eligible individual's ability to share in the profits of the 
concern must be commensurate with the extent of his/her ownership 
interest in that concern.
    (h) Community property. Ownership will be determined without regard 
to community property laws.
    (i) Surviving spouse. (1) A small business concern owned and 
controlled

[[Page 4010]]

by one or more service-disabled veterans immediately prior to the death 
of a service-disabled veteran who was the owner of the concern, the 
death of whom causes the concern to be less than 51 percent owned by 
one or more service-disabled veterans, will continue to qualify as a 
small business concern owned and controlled by service-disabled 
veterans during the time period if:
    (i) The surviving spouse of the deceased veteran acquires such 
veteran's ownership interest in such concern;
    (ii) Such veteran had a service-connected disability (as defined in 
38 U.S.C. 101(16)) rated as 100 percent disabling under the laws 
administered by the Secretary of Veterans Affairs or such veteran died 
as a result of a service-connected disability; and
    (iii) For a participant, immediately prior to the death of such 
veteran, and during the period described in paragraph (i)(2) of this 
section, the small business concern is included in the database 
described in 38 U.S.C. 8127(f).
    (2) The time period described in paragraph (i)(1)(iii) of this 
section is the time period beginning on the date of the veteran's death 
and ending on the earlier of--
    (i) The date on which the surviving spouse remarries;
    (ii) The date on which the surviving spouse relinquishes an 
ownership interest in the small business concern; or
    (iii) The date that is 10 years after the date of the death of the 
veteran.
0
4. Amend Sec.  125.13 by revising paragraph (e) and adding paragraphs 
(f) through (n) to read as follows:


Sec.  125.13   Who does SBA consider to control an SDVO SBC?

* * * * *
    (e) Control over a corporation. One or more service-disabled 
veterans (or in the case of a veteran with permanent and severe 
disability, the spouse or permanent caregiver of such veteran) must 
control the Board of Directors of the concern.
    (1) SBA will deem service-disabled veteran individuals to control 
the Board of Directors where:
    (i) A single service-disabled veteran individual owns 100% of all 
voting stock of an applicant or concern;
    (ii) A single service-disabled veteran individual owns at least 51% 
of all voting stock of an applicant or concern, the individual is on 
the Board of Directors and no super majority voting requirements exist 
for shareholders to approve corporation actions. Where super majority 
voting requirements are provided for in the concern's articles of 
incorporation, its by-laws, or by state law, the service-disabled 
veteran individual must own at least the percent of the voting stock 
needed to overcome any such super majority voting requirements; or
    (iii) More than one service-disabled veteran shareholder seeks to 
qualify the concern (i.e., no one individual owns 51%), each such 
individual is on the Board of Directors, together they own at least 51% 
of all voting stock of the concern, no super majority voting 
requirements exist, and the service-disabled veteran shareholders can 
demonstrate that they have made enforceable arrangements to permit one 
of them to vote the stock of all as a block without a shareholder 
meeting. Where the concern has super majority voting requirements, the 
service-disabled veteran shareholders must own at least that percentage 
of voting stock needed to overcome any such super majority ownership 
requirements. In the case of super majority ownership requirements, the 
service-disabled veteran shareholders can demonstrate that they have 
made enforceable arrangements to permit one of them to vote the stock 
of all as a block without a shareholder meeting.
    (2) Where an applicant or concern does not meet the requirements 
set forth in paragraph (e)(1) of this section, the service-disabled 
veteran individual(s) upon whom eligibility is based must control the 
Board of Directors through actual numbers of voting directors or, where 
permitted by state law, through weighted voting (e.g., in a concern 
having a two-person Board of Directors where one individual on the 
Board is service-disabled veteran and one is not, the service-disabled 
veteran vote must be weighted--worth more than one vote--in order for 
the concern to be eligible). Where a concern seeks to comply with this 
paragraph:
    (i) Provisions for the establishment of a quorum cannot permit non-
service-disabled veteran Directors to control the Board of Directors, 
directly or indirectly;
    (ii) Any Executive Committee of Directors must be controlled by 
service-disabled veteran directors unless the Executive Committee can 
only make recommendations to and cannot independently exercise the 
authority of the Board of Directors.
    (3) Non-voting, advisory, or honorary Directors may be appointed 
without affecting service-disabled veteran individuals' control of the 
Board of Directors.
    (4) Arrangements regarding the structure and voting rights of the 
Board of Directors must comply with applicable state law.
    (f) Super majority requirements. One or more service-disabled 
veterans must meet all super majority voting requirements. An applicant 
must inform the Department of Veterans Affairs, when applicable, of any 
super majority voting requirements provided for in its articles of 
incorporation, its by-laws, by state law, or otherwise. Similarly, 
after being verified, a participant must inform the Department of 
Veterans Affairs of changes regarding super majority voting 
requirements.
    (g) Licenses. A firm must obtain and keep current any and all 
required permits, licenses, and charters, required to operate the 
business.
    (h) Unexercised rights. A service-disabled veteran owner's 
unexercised right to cause a change in the control or management of the 
applicant concern does not in itself constitute control and management, 
regardless of how quickly or easily the right could be exercised.
    (i) Control by non-service-disabled veterans. Non-service-disabled 
veteran individuals or entities may not control the firm. Non-service-
disabled veteran individuals or entities may be found to control or 
have the power to control a firm in any of the following circumstances, 
which are illustrative only and not inclusive:
    (1) Be a former employer or a principal of a former employer, 
unless it is determined that the relationship between the former 
employer or principal and the eligible individual or concern does not 
give the former employer actual control over the concern and such 
relationship is in the best interests of the concern
    (2) In circumstances where non-service-disabled veterans receive 
compensation from the firm in any form as directors, officers or 
employees, including dividends, that exceeds the compensation to be 
received by the highest officer (usually CEO or President). The highest 
ranking officer may elect to take a lower amount than the total 
compensation and distribution of profits that are received by a non-
veteran only upon demonstrating that it helps the concern.
    (3) In circumstances where the concern is co-located with another 
firm in the same or similar line of business, and that firm or an 
owner, director, officer, or manager, or a direct relative of an owner, 
director, officer, or manager of that firm owns an equity interest in 
the firm.
    (4) In circumstances where the concern shares employees, resources, 
equipment, or any type of services, whether by oral or written 
agreement

[[Page 4011]]

with another firm in the same or similar line of business, and that 
firm or an owner, director, officer, or manager, or a direct relative 
of an owner, director, officer, or manager of that firm owns an equity 
interest in the concern.
    (5) A non-service-disabled veteran individual or entity, having an 
equity interest in the concern, provides critical financial or bonding 
support.
    (6) In circumstances where a critical license is held by a non-
service-disabled individual, or other entity, the non-service-disabled 
individual or entity may be found to control the firm. A critical 
license is considered any license that would normally be required of 
firms operating in the same field or industry, regardless of whether a 
specific license is required on a specific contract.
    (7) Business relationships exist with non-service-disabled veteran 
individuals or entities which cause such dependence that the applicant 
or concern cannot exercise independent business judgment without great 
economic risk.
    (j) Critical financing. A non-service-disabled veteran individual 
or entity may be found to control the concern through loan arrangements 
with the concern or the service-disabled veteran(s). Providing a loan 
or a loan guaranty on commercially reasonable terms does not, by 
itself, give a non-service-disabled veteran individual or entity the 
power to control a firm, but when taken into consideration with other 
factors may be used to find that a non-service-disabled firm or 
individual controls the concern.
    (k) Normal business hours. There is a rebuttable presumption that a 
service-disabled veteran does not control the firm when the service-
disabled veteran is not able to work for the firm during the normal 
working hours that businesses in that industry normally work. This may 
include, but is not limited to, other full-time or part-time 
employment, being a full-time or part-time student, or any other 
activity or obligation that prevents the service-disabled veteran from 
actively working for the firm during normal business operating hours.
    (l) Close proximity. There is rebuttable presumption that a 
service-disabled veteran does not control the firm if that individual 
is not located within a reasonable commute to firm's headquarters and/
or job-sites locations, regardless of the firm's industry. The service-
disabled veteran's ability to answer emails, communicate by telephone, 
or to communicate at a distance by other technological means, while 
delegating the responsibility of managing the concern to others is not 
by itself a reasonable rebuttal.
    (m) Exception for ``extraordinary circumstances.'' SBA will not 
find that a lack of control exists where a service-disabled veteran 
does not have the unilateral power and authority to make decisions in 
``extraordinary circumstances.'' The only circumstances in which this 
exception applies are those articulated in the definition.
    (n) Exception for reservists recalled to active duty. 
Notwithstanding the provisions of this section requiring a service-
disabled veteran to control the daily business operations and long-term 
strategic planning of a concern, where a service-disabled veteran 
individual upon whom eligibility is based is a reserve component member 
in the United States military who has been recalled to active duty, the 
concern may elect to designate in writing one or more individuals to 
control the concern on behalf of the service-disabled veteran during 
the period of active duty. The concern will not be considered 
ineligible based on the absence of the service-disabled veteran during 
the period of active duty. The concern must keep records evidencing the 
active duty and the written designation of control, and provide those 
documents to VA, and if requested to SBA.
0
5. Amend Sec.  125.22 by revising paragraph (a) to read as follows:


Sec.  125.22  When may a contracting officer set-aside a procurement 
for SDVO SBCs?

    (a) The contracting officer first must review a requirement to 
determine whether it is excluded from SDVO contracting pursuant to 
Sec.  125.21.
* * * * *
0
6. Amend Sec.  125.23 by revising paragraphs (a) and (b) to read as 
follows:


Sec.  125.23  When may a contracting officer award sole source 
contracts to SDVO SBCs?

* * * * *
    (a) None of the provisions of Sec.  125.21 or Sec.  125.22 apply;
    (b) The anticipated award price of the contract (including options) 
will not exceed $6,500,000 in the case of a contract assigned a NAICS 
code for manufacturing, or $4,000,000 in the case of any other contract 
opportunity;
* * * * *

    Dated: January 18, 2018.
Linda E. McMahon,
Administrator.
[FR Doc. 2018-01392 Filed 1-26-18; 8:45 am]
 BILLING CODE 8025-01-P