The Top Five Things Disadvantaged Business Enterprises (DBE) Should Know When Taking On Investors

By: Danielle Dietrich

As many business owners recognize, growing your business is expensive. Disadvantaged Business Enterprise (DBE) owners need to keep the USDOT regulations in mind when raising funds from investors, including private equity firms. Investments always come with strings attached. But before accepting those funds, DBEs must keep the following things in mind if keeping the DBE certification is vital to the business:

1. No matter what, the Socially and Economically Disadvantaged Owner(s) (“SEDO”) must keep at least 51% of the ownership in the company.
2. The investment documents may not alter the SEDO’s absolute and complete control in the business as required by Section 26.71(c) of the regulations. The agreement may not require (with limited exceptions) that the SEDO obtain consent from the non-SEDO owner to execute the operations of the company.
3. The Bylaws or Operating Agreement of the company may require non-SEDO consent for extraordinary actions. Section 26.71(c)(4) lists the following as examples of extraordinary actions: sale of the company or substantially all its assets, mergers, and a sudden wholesale change in the type of business. Frequently investors seek to include provisions requiring their approval for purchases over a certain threshold. Under the regulations, such a provision would prevent a SEDO from controlling the business and could cause the company to lose certification.
4. Any material changes to the information provided with the application (such as new owners or changes in percentage ownership) must be reported within 30 days pursuant to Section 36.83(i). Failing to make a timely report of the change could endanger the certification.
5. Once an investor is on board as an owner, if they contribute additional funds, the SEDO must also contribute funds commensurate with their ownership interest in order to maintain their investment, pursuant to Section 26.69(b)(3).

DBEs interested in finding private investors should be aware that the USDOT has established a new Connections MarketPlace (CMP) platform with a database of DBEs, Small Disadvantaged Businesses, and private investors to help connect small businesses with private investors. DBEs (including ACDBEs) can sign up for the marketplace here.

If you have questions about how to structure an investment in a DBE, please contact Danielle Dietrich, Esq. at ddietrich@potomaclaw.com or 412-449-9141.

This blog is posted with the understanding that the author, publisher, and distributor of this blog and/or any linked publication are not rendering legal, accounting, or other professional advice or opinions on specific facts or matters and, accordingly, assume no liability whatsoever in connection with its use. By viewing Potomac Law Group’s blog posts, the reader (‘you”) understands that there is no attorney-client relationship between you and Potomac Law Group. The blog should not be used as a substitute for obtaining legal advice from an attorney, and you are urged to consult your own legal counsel on any specific legal questions you may have.

Pursuant to applicable rules of professional conduct, portions of this blog may constitute Attorney Advertising.