Kai Makani Consulting Denied SDVOSB Status Over Control Issues

Introduction

The case of Kai Makani Consulting, LLC v. U.S. Small Business Administration raised significant legal questions about Service-Disabled Veteran-Owned Small Business (SDVOSB) certification. The SBA denied the company’s application, and the Office of Hearings and Appeals (OHA) affirmed the decision, citing deficiencies in the company’s operating agreement and a lack of control by service-disabled veterans.

Background of the Case

Kai Makani Consulting, LLC, headquartered in Virginia, applied for SDVOSB certification in July 2024. The company identified two service-disabled veterans, Damian Blossey and Dale Hiroshi Shigekane, as President and Vice President, each owning 30% of the company. The remaining 40% ownership was held by Christopher Espiritu and Raymond Reyes, neither of whom were veterans.

The company’s operating agreement required unanimous consent among all members for significant decisions, such as electing officers, amending the agreement, or incurring substantial loans. These provisions prompted the SBA to question whether service-disabled veterans exercised full control over the company’s operations, as mandated by 13 C.F.R. § 128.203.

SBA’s Decision

The SBA reviewed Kai Makani Consulting’s application and identified several key deficiencies. The SBA requested revisions to the operating agreement by August 22, 2024, to address these issues. The company did not submit a revised agreement or respond to the SBA’s concerns, leading to the application’s denial.

The SBA’s primary findings included:

1. The operating agreement failed to define officer roles or specify how authority was delegated.
2. The unanimity requirements enabled non-veteran members to block critical decisions, undermining veteran control.
3. The company did not amend its governance structure to comply with SBA requirements.

According to SBA regulations, service-disabled veterans must control all supermajority voting requirements related to management and daily operations. The SBA concluded that Kai Makani Consulting failed to meet these standards.

Appeal to the OHA

Kai Makani Consulting appealed the denial on September 4, 2024, arguing that the combined 60% ownership by service-disabled veterans, along with their executive roles, demonstrated adequate control. The company also expressed a willingness to update its operating agreement but did not provide specific amendments or a timeline for compliance.

The OHA upheld the SBA’s decision, stating that the company’s unanimity provisions exceeded what SBA regulations permit and effectively granted veto power to non-veteran members. The OHA also noted that Kai Makani Consulting did not adequately address or resolve the SBA’s concerns prior to the denial.

Court’s Findings and Conclusion

The OHA determined that the SBA’s decision was supported by the evidence and affirmed the denial based on the following findings:

1. The operating agreement did not ensure that service-disabled veterans controlled the company’s decision-making.
2. The company failed to provide sufficient amendments or specific solutions to address the SBA’s concerns.
3. Case precedent, such as VSBC Appeal of Snowfensive, LLC, supported the conclusion that unanimity provisions restricting veteran control disqualify businesses from SDVOSB certification.

The OHA concluded that Kai Makani Consulting did not meet the regulatory requirements for SDVOSB certification and denied the appeal. This ruling served as the final agency action under 15 U.S.C. § 657f(f)(6)(A).

How Whitcomb, Selinsky Can Help

If your business requires assistance with SDVOSB certification or navigating SBA regulations, the team at Whitcomb, Selinsky is here to help. Contact us today for expert legal guidance.