On August 31, 2016 the Department of Homeland Security (DHS) proposed an “International Entrepreneur” (I.E.) rule that would allow qualifying foreign investors to develop and grow their start-up companies in the United States. DHS already has the authority to temporarily parole individuals into the United States without a visa for urgent humanitarian reasons or for a significant public benefit. The proposed rule would invoke this authority and allow foreign investors to enter the country for the purpose of enhancing entrepreneurship, innovation, and job creation. However, the rule comes with its own set of strict qualifying criteria.
To be considered for this type of parole, both the entrepreneur and the start-up must meet certain criteria. This includes the following:
- The entrepreneur must have formed the start-up in the United States within three years of the application for parole;
- The entrepreneur must own at least 15% of the company; and
- The entrepreneur must play an “active and central role” in the company’s operations and future growth. The entrepreneur cannot merely be a silent investor.
- Further, to show a strong and reliable indication of the start-up’s potential for rapid growth and job creation, the entrepreneur must establish that U.S. investors have financed the start-up within one year of the application. Specifically, established U.S. investors such as venture capital firms, angel investors, or start-up accelerators must have invested at least $345,000 into the company. Alternatively, the start-up must have received at least $100,000 in grants or other funding from Federal, State, or local government entities. Or partially satisfying one or both of the above capital investment criteria along with other compelling evidence of growth potential and job creation.
NUMBER OF FOUNDERS AND LENGTH OF PAROLE
Under the proposed rule, a maximum of three entrepreneurs can be granted parole per start-up. Also, the spouse of each paroled entrepreneur would be granted parole and be able to obtain a work permit (EAD) and their minor children (single and under age 21) would be paroled in as well.
For each applicant, DHS may initially grant parole for up to two years, but entrepreneurs could request an additional three years if their start-up is continuing to provide a “significant public benefit” as evidenced by substantial increases in capital investment, revenue, or job creation. The entrepreneur would also have to establish that they continue to possess significant ownership in the start-up and continue to play an active and central role in its operations. Notably, DHS would have the discretion to provide any length of admission, including a shorter or longer period, where appropriate.
As with other employers of foreign workers, the start-up entity would have to verify that its employees are authorized to work in the United States, as is the paroled entrepreneur. The entrepreneur’s employment authorization would be limited to the specific start-up entity listed on the application.
The proposed rule would require that parole be terminated for the entrepreneur if: (1) the period of parole expires; or (2) the entrepreneur ceases employment with the start-up or ceases to own at least 10% of the company.
The public has 45 days to comment on the proposed rule before it is adopted. After the 45-day comment period, DHS may issue revised regulations. Therefore, the final rule is not expected until at least January 2017.
POTENTIAL COURT CHALLENGE
While the proposed International Entrepreneur rule is laudable and would help with job creation, it may get challenged in the courts by those seeking to limit Executive Action.
We saw that the DHS initiative in November 2014 to expand Deferred Action for Childhood Arrivals (DACA) and Parents (DAPA) ultimately got stuck in the court system. The States argued that the initiative would saddle them with additional costs and the final rule was never implemented.
In the case of entrepreneurs, there would not be any adverse impact to the States. The initiative would create jobs in local economies and revenue for State and local governments. Further, Congress has already granted the Executive Branch the authority to parole individuals into the U.S. for urgent humanitarian needs or a significant public benefit. Clearly, job creation is a significant public benefit.
However, the U.S. has a long history of having an E-1/E-2 non-immigrant treaty regime, which allows for foreign national investors to use their investment in a company as a basis to live and work in the U.S. The United States currently has such treaties in place with over 80 countries. Those treaties require ratification by the U.S. Senate before DHS or the U.S. State Department can issue work authorization. For more information regarding visas based on an E-1 or E-2 treaty, see: https://travel.state.gov/content/visas/en/fees/treaty.html.
This new International Entrepreneurs rule would bypass treaty ratification by the U.S. Senate. It also bypasses the State Department, which oversees the issuance of E-1 and E-2 visas to investors at U.S. Embassies and Consulates across the globe. Instead DHS would accept petition filings and then the investor would receive a “Parole Document” in lieu of a visa, and then U.S. Customs and Border Protection (CBP) would parole them into the U.S. using their passport and parole document issued by USCIS.
So it remains to be seen if this new initiative will be spared a court challenge.
POTENTIAL TARGET MARKET FOR THE INITIATIVE AND COMPARISON TO OTHER VISAS
The U.S. does not presently have an E-1/E-2 treaty with China and India. This new International Entrepreneurs initiative will accommodate some Chinese and Indian nationals that have been left out of the non-immigrant investor visa scheme.
Historically, for countries that did not have an E-1/E-2 treaty with the U.S., the L-1 visa has been the main option for coming to the U.S. But the L-1 visa is for intra-company transfers, and it is intended for senior management of large multinational companies. USCIS has frowned upon approving L-1 petitions for smaller companies. Therefore the L-1 visa could not bridge the gap for all potential entrepreneurs seeking nonimmigrant visa status.
Even if an investor holds nationality from an E-1/E-2 treaty country, the proposed rule would accommodate a young entrepreneur who does not have capital but nonetheless has a great new technological idea for the marketplace, to be able to come to the U.S. to live, work, and develop the company.
If the entrepreneur can convince a venture capital firm to allow him to retain at least a 15% ownership stake along with the VC company contributing at least $345,000, then the entrepreneur could develop the company despite not putting their own personal funds into the enterprise. With the traditional E-1/E-2 visa, this cannot be done. The E-1/E-2 visa requires that the entrepreneur invest a minimum of $100,000 of his/her own funds, an amount that a young entrepreneur may not have.
ADDITIONAL COMMENTS REGARDING THE PROPOSED NEW RULE AND OTHER VISAS
- An E-1/E-2 visa requires a treaty, a minimum investment of $100,000 (sometimes more), the nationality of the U.S. entity must be at least 50% the same as the investor seeking the visa, a business plan to hire U.S. workers and the funds must be personally invested by the E-1/E-2 investor.
- The proposed rule would generally require that an established U.S. venture capital firm invest at least $345,000 into the U.S. enterprise. This is substantially more than most initial E-1/E-2 investments. However, the rule states that USCIS will have discretion to consider lower investment amounts from venture capital firms coupled with a strong indicia of job growth.
- Also, the proposed rule only requires the foreign national to own at least 15% of the U.S. entity, thus the nationality of the U.S. entity only needs to be 15% foreign.
- The proposed rule requires that the investment be made in the last 3 years. So this would exclude certain entrepreneurs that made investments prior to 2013.
- The proposed rule is silent as to what would happen after 5 years. It calls for an initial 2 year status and then one extension involving 3 years. In addition, USCIS has proposed a complicated formula for determining if the one-time extension is warranted. This uncertainty could have a chilling effect. In contrast, the E-2 visa is typically good for 3 to 5 years (depending on the country) and renewable without limits as long as the U.S. entity is viable and growing.
- For the pursuit of permanent residency (green card), some investors in the past have tapped into the EB-5 program and invested $500,000 in a targeted employment area or $1 million in an urban area, along with the creation of 10 new full time jobs over a 30 month period. In contrast, the proposed rule has no component to create permanent residency for the investor. The entrepreneur could, however, increase their investment over time to $1 million and help create 10 full time jobs and then invoke the EB-5 program to obtain permanent residency. However it should be noted that retained earnings within the company cannot be included as a qualifying EB-5 investment so the investor seeking the green card would have to use his/her personal net income to re-invest in the U.S. entity.
For questions regarding this proposed rule, please contact Greg Berk or Kymberly Harris.