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 is not enough.
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:
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.