On August 26, 2016, the U.S. Department of Homeland Security (DHS) released advance notice of proposed rulemaking designed to encourage and facilitate entrepreneurship within the United States. The notice was published in the August 31, 2016 Federal Register and is subject to a 45-day comment period that will end on October 17, 2016.

This proposed rule represents long-awaited movement on President Obama’s November 2014 executive action directing DHS to create a so-called “startup visa.” The available work visa options most commonly used by entrepreneurs each pose significant drawbacks. For recent graduates of U.S. schools, F-1 Optical Practical Training status only permits work authorization for 12 months, with the possibility of a 24-month extension if the student has a degree in a STEM-based field (in science-, technology-, engineering-, or mathematics). The most common work visa, the H-1B, suffers from a supply and demand issue, with only a limited amount of visas available annually through a random lottery process. Other options include the L-1 visa (which requires employment at an office or branch of the same company abroad for at least a year before transferring to the United States, and is therefore not suited for entrepreneurs investing in a startup), the E-2 visa (which requires that the applicant be a national of a country with which the United States maintains a treaty of commerce and navigation), or the O-1 visa for aliens with extraordinary abilities or achievements (which poses increasingly strict standards and is most appropriate for those who have already progressed well into their careers, as opposed to entrepreneurs).

The “Startup Visa”

Absent congressional action—the only process available to actually create a new visa option tailored to entrepreneurs—the Obama administration has instructed DHS to take advantage of its current ability to grant “parole” to individuals. Some may be disappointed to learn that the term “startup visa” is a bit of a misnomer, as parole is not an “admission” in nonimmigrant or immigrant visa status, but merely temporary permission to live and/or work in the United States. Parole does not provide an avenue for permanent residency (i.e., a green card) unless the applicant is otherwise eligible, but it does allow for parolees to apply for separate work authorization visas (such as the H-1B) or immigrant status in parallel. However, without the authority to create a new type of visa that actually confers immigration status in the United States (which would include the ability to apply for a green card), the only option left for the Obama administration is to use limited legal loopholes available to clear an available path for startup entrepreneurs.

Under existing law, DHS is given the discretionary authority to grant parole on a case-by-case basis for “significant public benefit.” The term “significant public benefit” is undefined, but is generally used for aliens who enter to take part in legal proceedings. The ability to interpret “significant public benefit” at its discretion has allowed DHS to propose implementing regulations surrounding the idea that enabling and encouraging startup entrepreneurship provides a significant public benefit by increasing business growth in the U.S. The Obama administration’s goal is to encourage foreign-based entrepreneurs to invest in startups with potential in the United States (as opposed to abroad), create jobs in the United States, generate capital investments, and benefit the U.S. economy overall.

How to Qualify

As noted above, under the proposed rule, applications would be considered on a case-by-case basis and subject to discretionary approval by the United States Citizenship and Immigration Services (USCIS). USCIS would review a new proposed immigration form (I-941) and receive a $1,200 government filing fee, along with documentation supporting the required criteria discussed below. Applicants would be able to apply from within the United States or abroad, and would be required to appear for a biometrics appointment.

Approval of the first initial period of stay may be granted for up to two years and will be based on the following criteria:

  • The recent formation of a “Startup Entity. An entity will be considered a startup if it was formed within the three years immediately preceding the filing of the application.
  • The applicant must be an “Entrepreneur,” meaning that he or she possesses at least 15 percent ownership in the startup at the time of the application and maintains at least 10 percent ownership through the duration of parole.
  • The startup must have substantial and demonstrated potential for rapid business growth and job creation as evidenced by:
    • receiving significant investment of capital (at least $345,000) from certain qualified U.S. investors with established records of successful investments;
    • receiving significant awards or grants (at least $100,000) from certain federal, state, or local government entities; or
    • partially satisfying one or both of the above criteria in addition to other reliable and compelling evidence of the startup entity’s substantial potential for rapid growth and job creation.

Extensions of up to three years may be granted if:

  • The applicant continues to be an entrepreneur (possesses at least a 10 percent ownership in the startup).
  • It is established that during the initial approval period, the startup has:
    • received at least $500,000 in qualifying investments, qualified government grants or awards, or a combination of these indicators of success;
    • created at least 10 qualified jobs with the startup entity; or
    • reached at least $500,000 in annual revenue and averaged 20 percent in annual revenue growth.

Recipients of such parole will be authorized for employment “incident to status,” meaning that a separate application for work authorization would not be needed; however, such authorization would be limited to the startup entity that the recipient has applied under. This would be a first for parolees, who have traditionally been required to apply for Employment Authorization Documents (EAD) with USCIS. The proposed rule would enable entrepreneurs to begin working with start-ups immediately, enabling businesses to grow more rapidly and successfully. This would be hindered by the EAD application process, which can take several months. Spouses and children of these entrepreneurs may also be granted parole to live in the United States, and spouses would be eligible to submit separate EAD applications.

Limitations on Approval

While approval of applications would be subject to the nebulous parameters of USCIS’s discretion, the proposed regulations do outline some expected limitations on approval. First, as a condition of parole, applicants would be expected to maintain a household income of at least 400 percent of the federal poverty line. This threshold is intended to ensure that applicants continue to make “significant economic and related contributions to the United States.”

Additionally, applicants will be limited to three entrepreneurs per startup entity, with each applicant required to meet the above criteria individually. The rule proposes that such limitation would be consistent with ensuring that each entrepreneur's parole would provide a significant public benefit. While such a limit dis-incentivizes the dilution of equity in a startup entity as a means to fraudulently acquire parole for individuals who are not bona fide entrepreneurs, it may also have a prejudicial effect against genuine startups based on the collaboration of more than three individuals.

Finally, parole does not confer the ability to change or adjust status from within the United States. While applicants are able to apply for parallel work visas (such as the H-1B) or other immigrant status during their parole, they will generally be required to leave the United States and apply for a visa at an embassy or consulate abroad before being readmitted.

One impact of the criteria for approval is that they appear to favor startups focused on revenue generation more than those providing significant public benefits that are not monetary in nature. While “significant public benefit” could certainly encompass startups focused on providing a service rather than generating revenue, it is unclear how qualifying criteria could be defined to make the adjudication applications for such startups predictable.

Conclusion

In the absence of congressional movement on immigration reform, the Obama administration continues to implement strategic piecemeal solutions to circumnavigate this inaction. Many investors may view the proposed rule as a viable way to create startup businesses in the United States, despite the various challenges involved. While not a perfect solution, the proposed regulations stand to provide a viable alternative to traditional work visa options for certain types of international entrepreneurship in the United States.

DHS will accept comments on the proposed regulation for a minimum of 45 days. The proposed rule does not take effect until a date to be designated when USCIS publishes the final rule in the Federal Register. Ogletree Deakins will continue to follow and report on developments with the proposed rule as it continues through the regulatory process.