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The International entrepreneur rule is a proposed regulation by the U.S Citizenship and Immigration Services (USCIS) to increase the presence of foreign entrepreneurship in the US. It was one of the components of the President’s Immigration Accountability Executive Actions, announced in November 2014. Under this rule, qualified foreign entrepreneurs would be granted temporary parole to the U.S. in order to build and scale their businesses. Foreign entrepreneurs wishing to enter or remain in the country to build their business operations would need to meet certain criteria that would be reviewed on a case by case basis by the Department of Homeland Security (DHS). Showing potential for job creation as well as adding significant public benefit to the United States are the overarching themes of the requirements set forth in the 155-page proposal. Unlike other initiatives attempted so far during the Obama administration, such as the Startup Visa, this rule does not need to be approved by Congress. The American public was allowed to comment on the proposal for 45 days, and the finalized rule could become official starting in January 2017. The Department of Homeland Security estimates that 2,940 entrepreneurs will be granted parole to the US each year.
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Background – The impact of foreign entrepreneurs in the US economy
León Rodríguez, Director of the U.S Citizenship and Immigration Services stated, “America’s economy has long benefitted from the contributions of immigrant entrepreneurs, from Main Street to Silicon Valley”. Historically, immigrant entrepreneurs have played a pivotal role in developing the US Economy, particularly in the technology sector. In the years of 1998-2006, 14.76% of all patent applications in the United States had at least one immigrant involved as a lone or co-founder, with the majority of these patents having roots in California and New Jersey. In all American technology and engineering businesses created in the US between 1995-2005, one-quarter of them had an immigrant as a key founder. In 2012, immigrant tech-founded companies employed over 550,000 people and generated close to 70 billion dollars in sales. Over 40% of current Fortune 500 companies were established by immigrants or children of immigrants. President Obama’s last State of the Union Address summarized the importance of international entrepreneurs in the US: “America is every immigrant and entrepreneur from Boston to Austin to Silicon Valley, racing to shape a better world. That’s who we are.”
Initial parole requirements
A foreign entrepreneur that wishes to remain or enter the US for the first time to establish their business can submit their parole application to the DHS for review. Applications will be reviewed on a case by case basis. Entrepreneurs that meet the criteria may be granted a stay of two years to run their companies in US soil. This temporary legal stay in the country falls under the same umbrella that is already applied to court witnesses and visiting dignitaries. Foreigners are allowed to enter the US on “urgent humanitarian” needs, or in the case of “significant public benefit”. The requirements for the entrepreneurs which will equate to the potential of significant public benefit are as follows:
- Must own at least 10% of the startup and play a prominent role in the startup’s operations.
- The entrepreneur’s startup must have been formed in the US in the preceding five years before applying
- The startup displays the potential to have accelerated growth and benefit the US economy with the creation of jobs. This potential is indicated by:
Requirements after the two years
Founders granted the initial two years of parole will have the opportunity to extend their stay in the United States for up to three additional years. The company’s progress as judged by its investment, job creation and revenue numbers will be the determining factors which will decide whether the additional parole will be granted or not.
Initial limitations of the proposed rule
Startups run by immigrant entrepreneurs on a parole status will have hurdles to overcome that startups run by legal US residents will never encounter. Five years (two years of initial parole with the full 3 years additional granted), is not a very long period of time in terms of startups. IPO-track startups take typically seven years to exit, with many taking over a decade. The first two years are extremely important and will increase founders’ pressure to achieve high growth in the first two years. This can negatively impact business operations and put these startups at a potential disadvantage to American-founded companies. The investment requirements will also present a potential hurdle for the entrepreneurs. $345,000 is a considerable investment sum. Y Combinator, which is regarded by Fast Company as the most successful startup accelerator in the world, only provides an investment of $120,000 to the companies that it incubates. Thus, a company that is accepted into Y Combinator would have to raise an additional $225,000 dollars from “qualified US investors with established records of successful investments”. As of January 2015, Y Combinator had 13 companies with a combined valuation greater than 50 billion dollars, and the international entrepreneur rule would not provide the necessary help to allow qualified immigrant founders to remain in the US for the program. The rule also seems to place more importance on investment generated than revenue generated. Many companies are able to self-fund through revenue, but would likely fall short on the investment side of the rule. Further exacerbating that, is the notion that currently in the US, the fastest growing firms tend to turn to personal savings and banking loans to finance their operations, and these sources of funding are not mentioned in the rule proposed by the DHS.
On another note, as this rule only grants the founder parole status, leaving the country poses the founder at a risk of not being able to reenter the country. The government officials at the border entry point will be responsible for making that decision.
Reactions from the venture capital industry
The National Venture Capital Association (NVCA), is America’s premier trade association that represents the US Venture Capital industry. The organization, which speaks for venture capitalists across the US, commends the US government for their work on the International Entrepreneur Rule. They were in full support of President Obama administration’s actions, even though an executive order has its limitations. Bobby Franklin, President and CEO of the NVCA, believes that this rule “will create avenues for foreign entrepreneurs to build great companies in the U.S. and is a solid first step toward our ultimate goal of creating a Startup Visa.” However, the venture capitalists have already proposed changes to the rule to the DHS. Some of the changes include a longer initial parole period, the factoring in of serial entrepreneurs (who may start more than one company while on parole), decreasing the necessary ownership stake (15%) due to the dilution of shares after rounds of investment.
Next steps
The rule’s 45 days of public comment have already expired, and many believe that the final rule could be implemented as early as January 2017, before President Obama leaves office.
Notable immigrant entrepreneurs
Sergey Brin, Co-Founder of Google
Liz Claiborne, Founder Liz Claiborne Inc.
Andrew Groove, Co-Founder Intel
Charles Wang, Founder Computer Associates
Jerry Yang, Co-Founder, Yahoo!
Elon Musk, Founder SpaceX, CEO Tesla Motors
Jan Koum, Co-Founder WhatsApp
Arianna Huffington, Co-Founder Huffington Post
Peter Thiel, Co-Founder PayPal
Max Levchin, Co-Founder PayPal