The U.S. Citizenship and Immigration Services recently published the International Entrepreneur Rule (the “Rule”), which finalizes regulations intended to increase and enhance entrepreneurship, innovation and job creation in the U.S. The Rule becomes effective on July 17, 2017. In a prior blog, we analyzed the Rule when it was first proposed in August 2016. Since then, the Rule has been through a period of public comment. The resulting amendments generally make it easier for foreign entrepreneurs to establish startup companies in the U.S. However, the Rule was spearheaded by President Obama, and its future is reportedly uncertain under the new administration.
The Rule establishes criteria for granting “parole” (temporary permission to be in the U.S.) to certain foreign entrepreneurs to facilitate their ability to oversee and grow their stateside startups. These entrepreneurs must show that their startup has potential to grow rapidly, create jobs and provide a significant public benefit to the United States. Startups will be judged by, among other things, how much venture, angel or accelerator capital and/or government grants they’ve received.
Applicant entrepreneurs must have a substantial ownership interest in the startup entity and an active and central role in its operations. They must show they would substantially further the entity’s ability to engage in R&D or otherwise conduct and grow its U.S. business.
In response to public comments, the final Rule is generally more entrepreneur-friendly than the proposed rule that we described in our original blog. Some key changes are listed below.
- Startup Formation: To apply, startup entities must be “recently” formed. Under the original Rule, this meant that the startup entity must have been formed within three years of the parole application. Under the final Rule, the timeframe is extended to five years. Since the entire potential parole period is five years (discussed below), startups could be 8-10 years old during their re-parole period, a ripe time for exits.
- Definition of Entrepreneur: Under the original Rule, a person was only an eligible entrepreneur if he or she owned at least 15% of the startup at the time of the initial parole application, and 10% at the time of re-parole. Under the final Rule, the ownership thresholds are reduced to 10% and 5% respectively. The change benefits teams of founders who split equity among themselves and accounts for dilution during future financing rounds.
- Minimum Investment Amount: Under the original Rule, entrepreneurs were only eligible if their startup had received at least $345,000 from one or more “qualified investors” (discussed below). These investments had to be received in the 12 months prior to applying. Under the final Rule, the investment threshold is reduced to $250,000, reflecting analysis of median seed investments of firms graduating from accelerator programs. The timeframe is extended to 18 months.
- Qualified Investor Definition: Under the original Rule, an investor was considered “qualified” if it made investments in startups in at least three different years in the preceding five year period of no less than $1 million and if at least two of these investments created at least five qualified jobs or generated at least $500,000 in revenue, with annualized revenue growth of at least 20%. Under the final Rule, the investment threshold is reduced to $600,000, again to reflect median seed investments for firms successfully exiting accelerators. The three year requirement is eliminated, but the investment performance criteria remains the same.
- Re-Parole: Under the original Rule, the initial parole period was two years and entrepreneurs could apply for a re-parole period of up to three years. Under the final Rule, the initial parole period has been extended to 30 months, but the re-parole period has been reduced to 30 months. The net result is that, despite the changes, the entire parole period remains five years. The increase in the initial parole period will give entrepreneurs additional time to qualify for re-parole (receive qualified investments or government funding, increase revenue or achieve job creation).
Generally, the final Rule is responsive to issues raised during public comment, and the changes largely make it easier for foreign entrepreneurs to build their businesses in the U.S. Despite the apparent benefits to the U.S. startup ecosystem, the Rule may be in jeopardy under the new administration. Emerging Companies Insider will stay on top of the story as it develops.