In May, we began a series discussing some of the issues faced by foreign entrepreneurs when starting businesses in the United States.  In that post, we discussed the importance of evaluating available visa options before taking more significant and costly steps toward a new venture.  We also discussed the various nonimmigrant (temporary) visas available to entrepreneurs.  This is the second post in the series—a discussion of the immigrant (permanent) visas available to foreign entrepreneurs.  By saying immigrant visas are permanent, we mean that the end result is permanent residence—i.e. a green card.  This is not to be confused with citizenship, which may be attained after three to five years of permanent residency.

There are two categories of immigrant visas:  family-based (not relevant to our discussion) and employment-based.  The number of immigrant visas (like some nonimmigrant visas) available each year are limited.  Because of this, there is frequently a backlog and extensive wait times after an application is filed before a visa becomes available.  The Department of State puts out a schedule each month showing the filing date of applications currently eligible to receive visas.  Certain visa categories, such as the EB-1 discussed below, are most often current, as these categories have the smallest pool of applications simply due to their stringent eligibility criteria.  The further down the list you go to the visa categories requiring less skill and lower standards, the more backlogged the categories are because the pool of applicants is much larger.  Additionally, the numbers are limited by country, so nationals of certain countries with traditionally high rates of immigration (typically China, India, Mexico and the Philippines) will have much longer wait times than nationals of other countries.

The following are the immigrant visas most commonly utilized by foreign entrepreneurs:

EB-5 Investor Visa:

EB-5 Example:  Qian, a citizen of China, wants to start a software company in California with two of her U.S. citizen colleagues.  The company is expected to have 5 full-time employees in the first year (other than Qian) and another 5 in the second year.  Qian plans to invest $1,000,000, and will hold a majority of the voting stock of the corporation.  Qian and her colleagues will all serve on the board of directors, and Qian will be the President.  $500,000 of Qian’s investment will come from the proceeds of the recent sale of Qian’s business in China, and Qian plans to take out a loan, secured by a property she owns in California, to fund the other $500,000.  Although capital will be needed for the initial expenses to set up the company, Qian’s investment will be used specifically to develop and market the company’s software products.

The EB-5 visa classification is for investors and employment creation. There are essentially two ways to obtain a green card through the EB-5 program:

  1. Entrepreneurial Program/Direct Investment:

An investor is eligible for the EB-5 under the entrepreneurial program if she invests at least $1 million in a commercial enterprise, and the investment creates at least 10 full-time jobs in the U.S.  The minimum investment can be decreased if the investment is in what is called a Targeted Employment Area (“TEA”).  A TEA is an area that has high unemployment rates and meets certain other regulatory criteria.   An EB-5 investor may invest in a commercial enterprise by either starting a new business or acquiring an existing business in the U.S.

One of the key requirements under a direct investment EB-5 is that the investor be actively involved in the business through the exercise of managerial control of the day-to-day operations or through policy formulation.  Essentially this means the investment cannot be merely passive.   Generally speaking, in a corporation, the investor typically must be an officer or a board member.  In a limited liability company, however, the investor’s role will be dependent on the structure of the LLC—e.g. the manager of a manager-managed LLC, or a managing member of a member-managed LLC.   Interestingly, the immigration regulations state that limited partners, though typically viewed as a more passive investment, may also qualify, so long as the limited partner has all of the rights, powers and duties normally granted to limited partners under the Uniform Limited Partnership Act.  It should also be noted that calling the investor a “manager,” for example, while stripping away her management authority will not work.  The regulations do not set hard and fast rules about what title the EB-5 investor must have, and so the appropriate level of control must be well-developed in the entity’s corporate documents.

  1. Regional Center Program:

The other way to obtain an immigrant visa under the EB-5 category is to invest through a Regional Center.  A Regional Center is an investment opportunity that has essentially been pre-approved by the U.S. Citizenship and Immigration Services.  Currently, there are just under 850 designated Regional Centers in the U.S.  Investment in a Regional Center requires a minimum investment of only $500,000.  As with the entrepreneurial program, there is a job creation requirement, but that requirement may be filled by both indirect and direct job creation.  Additionally, the Regional Center program allows investors to take a more passive investment approach.

For both direct investment and regional center programs, the regulations impose significant requirements on the source and use of the capital used to make the investment.  For example, the capital must be placed “at risk.”  This means that investments structured as debt, even those with equity components, such as convertible notes, typically do not qualify.   The “at risk” requirement also means that the capital must be used for job creation and profit-generating activity—e.g. capital used for partnership expenses and reserves do not qualify.  Further, the investor must establish she is the legal owner of the capital and the assets were acquired directly or indirectly by lawful means.   Debt can be a problem here as well, as capital acquired through indebtedness does not qualify unless it is secured by the assets of the investor.

In the example above, Qian is likely eligible under the direct investment EB-5 program.  As the majority shareholder, director and president, Qian possesses a sufficient level of day-to-day control.  Further, the amount of her investment meets the $1,000,000 threshold.  The capital investment also meets the “at risk” requirement because it will be a cash investment in the enterprise that will be used for profit-generating activity such as product development and marketing.  Even though half of the investment will come through a loan, this type of loan is one of the few types permitted because it is secured by Qian’s California home.  Qian owns the capital, however, she will have to prove through extensive documentation that it came from lawful sources.  She may even need to go as far as to demonstrate that the proceeds from the sale of her Chinese company and the funds used to purchase the house in California were obtained through lawful means.

EB-1C Executive/Manager of Multinational Company:

EB-1C (Executive) Example:  Andrew, a UK national, has spent the past 10 years working for a company in London that provides technology services to companies all over the world.  One year ago, the UK company opened a subsidiary in the U.S. to provide a particular line of IT services to U.S. clients.  Andrew entered the U.S. on an L-1 visa at that time to work as the president of the U.S. operation.  The U.S. office has been successful, and Andrew now desires to obtain a green card so he can operate the U.S. subsidiary permanently.   

The EB-1C visa is for executives and managers of multinational companies (EB-1C).  The executive or manager of a multinational company requirements are very similar to those of the L-1, discussed in our last post.  In the startup context, this category is typically most appropriate where a foreign company is establishing (or, as in our example, has established) a U.S. branch or subsidiary, and the particular individual will work as an executive or manager of the U.S. operation.

To be classified as a multinational executive or manager, the applicant must have been employed abroad in such capacity for at least one year in the three years preceding his entry into the U.S.  Additionally, the applicant must be coming to the U.S. to continue to work for a qualifying, related entity of the foreign employer, such as a branch or subsidiary.   Similar to the L-1, there are specific guidelines as to what constitutes a “manager” or “executive.”  A “manager” means that the applicant personally (1) manages the organization; (2) supervises and controls the work of other supervisory, professional or managerial employees, or manages an essential function within the organization; (3) has authority to hire and fire or recommend personnel actions, or functions at a senior level;  and (4) exercises discretion over day-to-day operations of the activity or function.  An “executive” is one who (1) directs the management of the organization or a component or function; (2) establishes goals and policies; (3) exercises wide latitude in discretionary decision making; and (4) receives only general supervision or direction from higher level executives, board of directors or shareholders.

In the example above, assuming Andrew can demonstrate that his position as president meets the regulatory definition of “executive,” he would be a good candidate for the EB-1C visa classification.

EB-1A Extraordinary Ability and EB-2 Advanced Degrees and Exceptional Ability:

EB-1A (Extraordinary Ability) Example:  Anya is a citizen of India and world renowned doctor.  Anya has spent her life dedicated to the research and treatment of a certain life threatening disease.  She has received many internationally recognized awards for her work, has worked for several of the leading international medical research organizations  and has authored many articles which have been published in renowned medical journals in the U.S. and around the world.  Anya recently developed a unique treatment program that has had a very high success rate in recent studies.  Anya wants to set up a company in the U.S. to further develop the treatment program and train U.S. doctors to administer the treatment.

The EB-1A visa is for individuals of “extraordinary ability.”  The visa is intended for the cream of the crop, as extraordinary ability individuals must demonstrate “sustained national or international acclaim in the sciences, arts, education, business, or athletics.”  Unless the EB-1A applicant has received a major, internationally recognized award such as the Nobel prize, she must demonstrate, through extensive documentation, that she meets at least three of the following ten criteria:  (1) receipt of lesser nationally or internationally recognized prizes or awards for excellence; (2) membership in associations in the field which demand outstanding achievement of their members; (3) published material about the applicant in professional or major trade publications or other major media, (4) the applicant has been asked to judge the work of others, either individually or on a panel, (5) the applicant has original contributions of major significance to her field; (6) authorship of scholarly articles in professional or major trade publications or other major media; (7) the applicant’s work has been displayed at artistic exhibitions or showcases; (8) performance of a leading or critical role in distinguished organizations; (9) the applicant commands a high salary or other significantly high remuneration in relation to others in the field; and (10) commercial successes in the performing arts.

The EB-2 is available to members of the professions holding advanced degrees and nationals with exceptional ability in the arts, sciences, or business, who will substantially benefit the U.S.  “Exceptional ability” is similar to the “extraordinary ability” requirement in the EB-1A category, though there are differences.  First, the standard, although still high, is slightly lower than that of EB-1A.  Second, unlike the EB-1A, an approved Labor Certification must be obtained in order to pursue permanent residence under the EB-2 category.  The Labor Certification is essentially a preliminary recruitment process and application demonstrating to the satisfaction of the Department of Labor that there are no U.S. workers available for the job.  There are some exceptions to the Labor Certification requirement, but for a startup whose founders seek residence in the U.S. to run their own operation, the process can seem frivolous.

In our example above, Anya’s work in the medical field likely qualifies her for the EB-1A (or even the EB-2) visa as she is able to meet several of the criteria discussed above (awards, authorship of scholarly articles, contributions of major significance, critical role for distinguished organizations, etc.).  It should be noted that Anya intends to come to the U.S. to continue her work in the medical field, developing and implementing the treatment program she has developed.  This is significant, as a person with extraordinary ability is not eligible for the EB-1A if she does not plan to continue the work in her field.  Were she to apply under the EB-2 category, she may be eligible for one of the exceptions to the Labor Certification requirement – the National Interest Waiver.  As the name suggests, the National Interest Waiver is a waiver of the Labor Certification requirement for individuals whose work is in the national interest.  Innovative development in the medical field is a common example of National Interest Waiver type work.

As a final point, as with the nonimmigrant visas, the importance of a quality business plan cannot be stressed enough.  This document is critical to demonstrate the plans for and projected success of the startup in such a way that the immigration service can see the regulatory criteria is met.

Now that we’ve fleshed out some of the most common visa options relevant to startups, stay tuned for future posts discussing some of the other issues faced by foreign entrepreneurs.