Do Owners Have to “Buy In” to Their Company in Order to Get Disadvantaged Business Enterprise (DBE) Certification?
In order to obtain Disadvantaged Business Enterprise (DBE) certification, the socially and economically disadvantaged owner is required to have “a significant financial investment in the firm.” 49 C.F.R. §26.69(f)(2). This often becomes a problem when a non-controlling owner of the company provides the capital to start the company.
The regulations require that the socially and economically disadvantaged owner must show evidence of their contribution of capital or expertise to the company. 49 C.F.R. §26.69(c)(1). Even if an individual obtains their membership via expertise, they still must show a significant financial investment in the firm. Mere contribution of expertise and “sweat equity” is not enough- and this can be a tough pill for some owners to swallow.
The U.S. Department of Transportation (USDOT) hears appeals of DBE denials. Here are a few recent examples of companies that could not obtain DBE certification because the socially and economically disadvantaged owner did not contribute any money:
- The socially and economically disadvantaged owner did not contribute capital to the formation of the firm, but rather provided an “in-kind contribution of knowledge, expertise, industry, experience, sales leads and labor.” The non-disadvantaged owner contributed the capital for startup. The absence of a financial contribution from the disadvantaged owner led the USDOT to conclude that he did not have a significant financial investment in the firm and upheld the denial. In re: Superior Skilled Trades, LLC U.S. D.O.T. No. 19-1039.
- The owner’s mother, not the owner, contributed money to start the company. Company took on the obligation to repay the loan to the mother, not the daughter owner. The owner did not part with anything of value to acquire ownership and had no personal obligation. As a result, the USDOT upheld the denial. In re: Horton Steel LLC, No. 20-0017.
- A non-disadvantaged man transferred majority ownership in a company to his wife. She did not pay anything for the shares or otherwise contribute financially to the company. The USDOT upheld the denial. In re: Application Innovations, LLC, No. 20-0004.
If you are forming a company where the majority of ownership is controlled by a socially and economically disadvantaged individual, it is important to ensure that the disadvantaged owner has a significant financial investment in the firm. The same situation applies when you are transferring shares of an already existing company. An experienced attorney can help you determine how to best structure and document this transaction to avoid these problems.