Title of Regulation: 7VAC13-20. Regulations to Govern the Certification of Small, Women-Owned, and Minority-Owned Businesses (amending 7VAC13-20-100, 7VAC13-20-210, 7VAC13-20-220).

Statutory Authority: § 2.2-1606 of the Code of Virginia.

Effective Date: April 6, 2017.

Agency Contact: Reba O'Connor, Regulatory Coordinator, Department of Small Business and Supplier Diversity, 101 North 14th Street, 11th Floor, Richmond, VA 23219, telephone (804) 593-2005, or email reba.oconnor@sbsd.virginia.gov.

Summary:

The amendments add a description and explanation of the ownership requirements that must be satisfied before a wholly owned subsidiary may be certified as a small, women-owned, or minority-owned (SWaM) business; clarify the process for revocation of a SWaM certification; and clarify the reapplication process after denial of an initial SWaM certification.

7VAC13-20-100. Ownership.

A. The ownership by women, minority, or individual owners (in the case of a small business) must be real, substantial, and continuing going beyond the pro forma ownership of the business.

B. Records of the applicant's business arrangements must demonstrate that the women, minority, or individual owners who the applicant claims to have ownership interests in the applicant's business share in all risks and profits in proportion to their ownership interests.

C. Women, minority, or individual owners who the applicant claims to have an ownership interest in the applicant's business ("qualifying individuals") as evidenced by securities must hold the securities directly or in a trust as described in subsection I of this section, except that a parent or holding company may be utilized only as described in subsection K of this section.

D. Contribution of capital or expertise.

1. Contribution of capital, expertise, or both by women, minority, or individual owners to acquire their ownership interest shall be real and substantial and be in proportion to the interests acquired.

2. Insufficient contributions shall include promises to contribute capital or expertise in the future; a note or notes payable to the business or its owners who are not themselves women, minority, or individual owners; or the mere participation as an employee.

E. In a sole proprietorship, the woman, minority, or individual applying for certification must own 100% of the business and its assets.

F. Corporations.

1. In a corporate form of organization, women, minority, or individual owners must own at least 51% of each class of voting stock outstanding and 51% of the aggregate of all stock outstanding.

2. Any voting agreements among the shareholders must not dilute the beneficial ownership, the rights, or the influence of the women, minority, or individual owners of the stock or classes of stock of the corporation.

3. Women, minority, or individual owners shall possess the right to all customary incidents of ownership (e.g., ability to transfer stock, title possession, enter binding agreements, etc.).

G. Partnerships.

1. General partnership. In a general partnership, women, minority, or individual owners must own at least 51% of the partnership interests.

2. Limited partnership.

a. In a limited partnership, the women, minority, or individual owners who are general partners must own at least 51% of the general partnership interest and exert at least 51% of the control among general partners. The women, minority, or individual owners who are general partners must receive at least 51% of the profits and benefits, including tax credits, deductions, and postponements distributed or allocable to the general partner.

b. In addition, the women, minority, or individual owners who are limited partners must own at least 51% of the limited partnership interests and receive at least 51% of the profits and benefits, including tax credits, deductions, and postponements distributed or allocable to the limited partners.

H. Limited liability companies.

1. In a limited liability company, women, minority, or individual owners must own at least 51% of membership interests and have at least 51% of the management and control among the members.

2. The women, minority, or individual owners must also participate in all risks and profits of the organization at a rate commensurate with their membership interests.

I. Trusts. In order to be counted as owned by women, minority, or individual owners, securities held in a trust must meet the following requirements, as applicable:

1. Irrevocable trusts. The beneficial owner of securities held in an irrevocable trust is a woman, a minority individual, or an individual natural person who is not a minor and all the trustees are women, minority individuals, or individuals natural persons, provided that a financial institution may act as trustee.

2. Revocable trusts. The beneficial owner of securities held in a revocable trust is a woman, a minority individual, or an individual natural person who is not a minor; all the grantors are women, minority individuals, or individuals natural persons; and all the trustees are women, minority individuals, or individuals natural persons, provided that a financial institution may act as trustee.

3. Employee stock ownership plans (ESOPs). Securities owned by women, minority individuals, or individuals natural persons who are participants in an employee stock ownership plan qualified under 26 USC § 401, Internal Revenue Code, 1986, as amended, and held in a trust where all or at least 51% or more of the trustees are women, minority individuals, or individuals natural persons, provided that a financial institution may act as trustee.

4. Other requirements. Businesses whose securities are owned in whole or part in a trust are not thereby exempt from the other requirements of this chapter.

J. Joint venture. In a joint venture, the women, minority, or individual owners must own at least 51% of the business venture, exert at least 51% of the control of the venture, and have made at least 51% of the total investment.

K. Subsidiaries. As provided in subsection C of this section, an eligible small, women-owned, or minority-owned business must be owned directly by the qualifying individuals. Except as provided in this subsection, a firm that is not at least 51% owned directly by the qualifying individuals, but instead is owned by another firm, cannot be certified as a small, women-owned, or minority-owned business.

1. If the qualifying individuals own and control a firm through a parent or holding company established for tax, capitalization, or other legitimate business purposes, and the parent or holding company in turn owns and controls an operating subsidiary, the subsidiary shall be certified if it otherwise meets all requirements. In this situation, the qualifying individual owners and controllers of the parent or holding company are deemed to control the subsidiary through the parent or holding company.

2. A subsidiary may be certified only if there is cumulatively 51% ownership of the subsidiary by the qualifying individuals. The following examples illustrate how this cumulative ownership provision works:

a. Example 1: Qualifying individuals own 100% of a holding company that has a wholly owned subsidiary. The subsidiary shall be certified if it meets all other requirements.

b. Example 2: Qualifying individuals own 100% of the holding company that owns 51% of a subsidiary. The subsidiary shall be certified if all other requirements are met.

c. Example 3: Qualifying individuals own 80% of the holding company that in turn owns 70% of a subsidiary. In this case, the cumulative ownership of the subsidiary by qualifying individuals is 56% (80% of the 70%). This is more than 51%, so the subsidiary shall be certified if all other requirements are met.

d. Example 4: This example is the same as Example 2 or 3, but someone other than the qualifying individual owners of the parent or holding company controls the subsidiary. Even though the subsidiary is owned by qualifying individuals, through the holding or parent company, the subsidiary may not be certified because it fails to meet control requirements.

e. Example 5: Qualifying individuals own 60% of the holding company that in turn owns 51% of a subsidiary. In this case, the cumulative ownership of the subsidiary by qualifying individuals is about 31%. This is less than 51%, so the subsidiary will not be certified.

f. Example 6: In the case of small business certification, the holding company, in addition to the subsidiary seeking certification, owns several other companies. The combined gross receipts or number of employees of the holding company, its affiliates, and its subsidiaries are greater than the size standard for the subsidiary seeking certification. Under the rules concerning an eligible small business, the subsidiary fails to meet the size standard and cannot be certified.

7VAC13-20-210. Revocation procedure.

A. Initiation of the revocation process.

1. The department may, at the request of any state agency or at its own discretion, examine any certified business to verify that it continues to meet the applicable eligibility requirements for certification as a small, women-owned, or minority-owned business.

2. Any individual or firm that believes that a business certified by the department does not qualify under the standards of eligibility for certification may request that the department undertake a review to verify that the certified business continues to meet the eligibility requirements for certification. Such requests must be written and signed and must contain specific identification of the affected business and the basis for the belief that the business does not meet the eligibility standards. After reviewing the request, the department shall determine whether to conduct a review of the business. The department's decision may not be appealed by the party seeking such verification. Written requests for verification of continued eligibility of a certified business for certification should be sent to the Virginia Department of Small Business and Supplier Diversity at its principal place of business.

B. Review procedure.

1. If the department determines to conduct a review of a business's certification, the department shall notify the business in writing that the department is reviewing its certification, explaining the basis for its decision to conduct a review.

2. The department may request records or other documentation from the business, may conduct an onsite visit of the business facilities, and may question other parties during its review.

3. The department may impose a time limit of not less than 15 days in which the business must respond to a request for records or other documentation. A reasonable extension may be given by the department for good cause shown by the business. Requests for time extensions should be made in writing to the department and should specify the length of time for which the extension is being requested and the reason for the request. If the business fails to provide the information in the time requested, the department shall issue a notice of intent to revoke the certification.

4. Upon completion of the review, a written report shall be prepared, which shall include:

a. A statement of the facts leading to the review;

b. A description of the process followed in the review;

c. The findings of the review; and

d. A conclusion that contains a recommendation for disposition of the matter.

C. Revocation process.

1. If during the review procedure a business is found to be ineligible for certification and is issued a notice of intent to revoke its certification, the business shall have the right to an informal fact-finding proceeding as provided in 7VAC13-20-230.

2. A business's certification will remain effective until the issuance of a letter of revocation.

3. If the business does not request an appeal within 10 days of the notice of intent to revoke, as provided in 7VAC13-20-230, a letter of revocation will be issued at the end of such 10-day period.

4. A business whose certification has been revoked may reapply for certification in the same category 12 months after the date of revocation.

7VAC13-20-220. Reapplication.

A. A business whose application for certification has been denied may reapply for the same category of certification 12 months after the date on which the business receives the notice of denial if no appeal is filed or 12 months after the appeal is exhausted. An applicant denied certification as a women-owned or minority-owned business may reapply for certification as a small business may apply for certification in any other category without delay if otherwise eligible.

B. The applicant may request a waiver of the 12-month reapplication period from the department director by submitting a written request for reconsideration and providing a reasonable basis for the waiver. The director or his designee, in his discretion, shall render a final decision regarding the request for reconsideration and waiver within 30 days, which determination shall not constitute a case decision subject to appeal.