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DHS Proposed Rule On Parole For Foreign Start-Up Entrepreneurs: Potential Benefits And Limitations

2016-10-12
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Although immigrants make up just about 13% of the population of the United States, over 50% of billion-dollar startups in the U.Shas at least one immigrant founder, according to a March report from the National Foundation for American Policy (NFAP).  In the year 2014 alone, immigrants were responsible for the creation of more than 25% of all new businesses. In addition, foreign nationals make up more than 20% of the Inc. 500 CEOs. Also, more than 40% of Fortune 500 companies were founded by first and second-generation immigrants. The contribution of immigrants to the U.S economy is one of much significance.

It therefore comes as no surprise that on August 26, 2016, the U.S. Citizenship and Immigration Services (USCIS) proposed the DHS Proposed Rule on Parole for Start-Up Entrepreneurs. If this proposed rule becomes law, it will enable qualified entrepreneurs to be considered for parole (temporary residence in the United States), giving them the opportunity to kick-start and establish their businesses in the United States. If made law, this proposed rule will grant parole to entrepreneurs who otherwise cannot secure a nonimmigrant visa such as the H-1B or E-2 visa.

However, will this proposed solution benefit all small businesses or just a tiny subset? How many entrepreneurs can meet the requirements? It is important to note that, there is the possibility that this final rule may not published until next year and there will very likely be adjustments and changes. Although, the U.S. Citizenship and Immigration Services (USCIS) seeks to fast-track innovation that will benefit the U.S economy with this proposed rule, it is held back by its minimum investment and job creation requirements that potential small business entrepreneurs will fail to fulfil in the initial growing years of the businesses. To cut things short, the proposed rule if finalized in its present form will fail to benefit the majority of founders of emerging businesses.

 

What Are The Required Criteria Needed To Qualify For The 2-Year Grant Of Parole?

Under the present proposed rule, the United States Department of Homeland Security (DHS) will have the authority to grant parole to eligible entrepreneurs of start-up enterprises for a 2-year period. This will enable them to grow their businesses. In addition, a subsequent request for re-parole for up to 3 additional years can be given, if the startup continues to provide public benefit as shown by the substantial increase in capital investment, revenue, or job creation.

Eligible entrepreneurs of startup enterprises:

  1. Should have a significant ownership interest in the startup (at least 15 percent) and have an active and central role to its operations;
  2. Should have formedthe startup as formed in the United States within the past three years; and
  3. The startup has 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;

The entrepreneur is not allowed to calculate personal investment to their startup as a qualifying investment. Also funding from the immediate family is not included as qualifying investment.

  • 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 public benefit and potential for rapid growth and job creation.

Upon being granted parole, the entrepreneur can be accompanied by the spouse and unmarried children below 21 years. Foreign nations outside and within the United States can apply. The Proposed rule does not state whether or not entrepreneurs out of status can apply.

 

Requirement for Obtaining a Re-Authorization of Parole for Three Years

In addition, it will be necessary for businesses to seek to have their parole status extended beyond the initial 2-year period. The DHS proposes the following requirements, which needs to be satisfied by the startup in order to obtain the extension of the parole by up to 3 additional years.

  1. QUALIFYING FUNDING FROM U.S. INVESTORS OR GOVERNMENT ENTITIES -The businessreceived an additional funding of at least $500,000 from qualifying United States investors with established records of successful investments the initial 2-year period.
  2. SUBSTANTIAL REVENUE GENERATION - The business generated$500,000 in revenue and a 20 percent annual revenue growth the initial 2-year period.
  3. JOB CREATION - The business createdten full-time, direct jobs for U.S. workers the initial 2-year period.

Although currently the proposed rule would provide the entrepreneur a 5-year stay in totality (2+3 additional if the startup is meets all the 3 requirements), the DHS will publish the steps needed for entrepreneur to seek lawful permanent residence after the 5-year stay.

 

Who Is Likely To Benefit From The Proposed Rule If It Is Made A Law?

Many international entrepreneurs come to the United States seeking funding and scaling. Having pre-conditions on both scale and funding creates for these entrepreneurs and their startups a chicken-and-egg situation.

Requirement of funding in order to qualify excludes all startup with minimal financial resources from benefiting from the proposed rule. These include many Internet-based startupsand other bootstrapped enterprises (enterprises that do not seek external investment). Dell Computers, Coca Cola Co. (KO), Apple Inc. (AAPL) and many other successful companies started as small bootstrapped startups.

If finalized, the proposed rule would not benefit all bootstrapped startups of foreign entrepreneurs.

Startups that can attract venture capital firms, angel investors or qualify for government grants in the seed financing stage such as R&D startups are likely to benefit from the proposed rule initial 2-year parole. However, the requirements needed to fulfil in order to be eligible for the additional three years can be tough to meet for many emerging businesses within two years. Pre-revenue consumer facing startups will certainly not qualify for the additional three years. The proposed rulewill also exclude strong ventures that not generate revenue within its first few years but has the potential of high user growth, and income generation in the long run.

Even the most talented entrepreneurs may not be able to secure the additional funding needed, as it is impossible to predict when an emerging company will be able to get the capital investment it seeks. There is a large probability that the funding will be available after the two-year timeframe.

It is important to remember these strenuous requirements are not final and they may be changed inthe finalizedlaw.

 

Conclusion

In order for the proposed rule to optimally benefit the U.S. economy, and immigrants looking to kick-start their businesses in the U.S., the stringent requirements have to be loosened up. If not, foreign entrepreneurs will consider more conventional visa options and will only consider parole as a fallback.

The DHS has allowed the public to comment on the proposed rule for 45 days ending on October 17, 2016. The rule will only go into effect after the DHS has reviewed and considered all public comments. There is no established timeframe for the completion of this task.The DHS will then make necessary changes to the proposed rules in response to the concerns and the comment, and move on to the final rule. This means, the concerns of many potential beneficiaries many of which this article discussesmay be addressed. In addition, the DHS can abandon the idea altogether.

 

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