On Jan 27 2022

Creative Uses of the International Entrepreneur Parole Program

In January 2017, the Obama administration, in its waning days, introduced the International Entrepreneur Parole (IEP) program, which would allow the Department of Homeland Security to exercise its parole authority and grant a temporary stay period to entrepreneurial foreign nationals who are coming to the United States to develop promising startup businesses that have strong economic and job-creation potential. The proposed rule initially excited many in the startup community, but their elation was short-lived. Due to various political and legal reasons, the IEP program was suspended before its proposed effective date and had been on hiatus until it was eventually reinstated by the Biden administration in June 2021.

In summary, an applicant of the IEP program will be paroled into the United States for an initial period of up to 30 months. During this period, the applicant will be allowed to apply for work authorization and work for their startup business. The spouse and children of the applicant may also be eligible for parole, and the spouse can apply for work authorization in the U.S. To qualify for the initial 30-month parole, the applicant must have substantial ownership (10%) in a startup entity that was created in the United States within the past 5 years and must play an active role in the business. Further, the startup business must have secured at least $250,000 from one or more qualified investors, or at least $100,000 through one or more qualified government awards or grants. To qualify for a 30-month extension, the applicant will have to show that he continues to maintain substantial ownership (5%), play a central role in the business, and that the business has received an additional $500,000 qualified funding, created 5 jobs, or demonstrated rapid growth.

Evidently, the IEP program will mainly benefit those aspiring entrepreneurs in the startup community, and many of my peers have written extensively on this issue. Instead of discussing what we already know about the program, the point of the article is to explore other creative ways that the IEP program can be utilized. In my opinion, the IEP program may also be useful to the following groups:

  1. Sponsors of Special Purpose Acquisition Companies (“SPACs”)

Special Purpose Acquisitions Companies (“SPACs”) are publicly listed companies specifically formed to raise capital in an initial public offering (“IPO”) with the purpose of using the raised capital to acquire one or more unspecified businesses to be identified after the IPO. The main difference between a SPAC transaction and a reverse merger is that a SPAC is a “clean shell” that is set up by the SPAC founders with an acquisition strategy in place at the onset. After the IPO, the founders of the SPAC will start an extensive target search period to identify one or more businesses to acquire. If successful, the transaction will close, and the SPAC will merge with the target company. SPAC model has seen its popularity soar in the past few years. In 2020, 248 SPACs were created with over $80 billion invested. That record was easily surpassed by a jaw-dropping 613 SPAC IPOs in 2021.

For purposes of the IEP program, a SPAC is basically a startup company on a much larger scale – it is a newly formed public company with hundreds of millions of dollars invested. SPAC founders are essentially entrepreneurs who are contributing their years of business expertise to the SPAC business to attract outside capital investments. A sponsor of a typical SPAC would easily satisfy the eligibility criteria for the IEP program: the SPAC is a U.S. business that was established within the past five years; the SPAC founder commonly holds 20% of the shares after the IPO and plays a central role in the business operation, which is to conduct acquisition target search on behalf of the investors; and it shouldn’t be difficult to identify one or more qualified investors in a public company of this size. The initial 30-month parole period will be enough to cover the entire lifespan of the SPAC before the acquisition, which typically does not exceed 24 months.

Some SPAC sponsors may choose to stay in the target company in an executive capacity after the acquisition, which opens the door for the 30-month extension of the parole after the SPAC transaction is closed. This may become more complicated as we may need to rely on post-IPO funding such as PIPE (if there is any) to qualify for the additional funding requirement, and it is not always possible for a founder to maintain the necessary 5% ownership after the acquisition.

The bottom line is that the IEP program is a perfect fit for foreign SPAC sponsors who are looking for an immigration solution that would allow them to freely live and work in the US with their spouses and children while completing the SPAC process. After the SPAC transaction is completed, it is also possible to get an extension under the IEP program provided that certain conditions are met. Further, once the deal is closed, if they wish to pursue permanent residency in the U.S., the successful completion of a SPAC transaction may provide solid grounds for a green card petition based on extraordinary ability.

  1. Current E-2 Investors

The IEP program is often described as an alternative to the E-2 visa, but this does not only apply to prospective E-2 investors. For some entrepreneurs who are currently in E-2 status, there may be some benefits in converting their E-2 case into an IEP case. To maintain the E-2 status, the E-2 investor needs to keep his shares above 50%. This may become a hurdle when (1) the E-2 investor is trying to sell some of the shares that would put him below the 50% threshold; or (2) the E-2 business is trying to raise money from outside investors which would dilute the founder’s shares below 50%. Because the IEP rule defines a “startup” entity as a U.S. business formed within the past 5 years of the filing of the IEP, many existing E-2 businesses in their first initial E-2 period will likely qualify.

However, it is important to balance the business goals against the immigration goals when deciding to convert an E-2 case. The E-2 visa is a nonimmigrant visa that can be “renewed” indefinitely, whereas the IEP program only grants a parole that can be extended once, for a maximum of five years in total. A parolee is generally not able to adjust status to permanent residency or change to a nonimmigrant status without departing the United States.

  1. A Joint Venture between a U.S. Company and a Foreign Company

When a U.S. company and a foreign company decide to form a joint venture (“JV”) in the U.S., the L-1 visa is usually the best option to allow managers or executives from the foreign company to manage the U.S. entity. However, the L-1 visa requires that there is a “qualifying relationship” between the U.S.-based JV and the foreign business, which typically means that the foreign business must own at least 50% of the JV. This may not be palatable for various business reasons (for example, if the U.S. partner wishes to own the majority share) or legal reasons (CFIUS, taxes, etc.). In some cases, the new JV may not be big enough in the beginning to support a “manager” or “executive” role under the L-1 regulations.

An alternative solution is to have the executives from the foreign company apply under the IEP program. To achieve this, two prerequisites must be met. First, each IEP entrepreneur must own at least 10% of the shares, which can be diluted down to a minimum of 5% during the initial 30-month period. Second, there still needs to be a qualified investment. Hopefully, the U.S. partner to the JV can qualify as an investor under the IEP rule if it has done other JVs in the past.

By using the IEP program creatively, we can help many more foreign entrepreneurs bring their business ideas to the U.S. and create more jobs for the U.S. economy, which is ultimately in line with what this program intends to do.

 

The material contained in this article does not constitute direct legal advice and is for informational purposes only.  An attorney-client relationship is not presumed or intended by receipt or review of this presentation.  The information provided should never replace informed counsel when specific immigration-related guidance is needed.

Reprinted with permission from the January 27, 2022 edition of The Legal Intelligencer© 2022 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 – reprints@alm.com.