October 15, 2018

New Rules for Qualifying as Veteran-Owned Small Business Add Confusing Definition for a Qualifying ESOP

The Department of Veterans Affairs (VA) and the Small Business Administration (SBA) have issued joint rules (38 CFR Part 78 and 13 CFR Part 125) that eliminate inconsistencies between the two agencies' definitions of veteran-owned and service-disabled-veteran-owned small businesses. As part of that, the rules incorporate a change from the 2017 Defense Appropriations Act that allowed companies with ESOPs to exclude the ESOP's ownership to determine whether the company is majority-owned by qualifying veterans.

The rule requires that the company be both (1) publicly traded and (2) at least 51% owned by a qualifying veteran or veterans, excluding the ESOP's ownership. ESOP experts have been baffled by this change in the law, and there is no committee report explanation for what it is meant to do. There were also no comments when the rules were proposed. It seems extremely unlikely for a company to both have an ESOP and be majority-owned by qualifying veterans, and in addition be publicly traded.