An Update on the Startup Act 2.0

By: Scott R. Bleier
June 6, 2012

In an election year fraught with hot button political issues, the subject of immigration reform has been at the forefront of the minds of both voters and politicians. In an increasingly rare display of bipartisan cooperation, legislation recently introduced in the United States Congress could have a dramatic impact on the start-up landscape by providing incentives and opportunities for highly skilled foreign workers to form and grow businesses in the United States.

In late May, Senators Marco Rubio (R–FL), Chris Coons (D–Del), Jerry Moran (R–KS) and Mark Warner (D–VA) joined together to introduce the Startup Act 2.0 (the “Act”), legislation that would create a new visa for immigrants who graduate from American universities with a master’s degree or doctorate in any of the so-called “STEM” fields — science, technology, engineering or math — and also create a special “entrepreneur’s visa” to empower immigrants willing to invest capital to start businesses and create jobs in the United States. Shortly after the proposal of the legislation in the Senate, a bipartisan group of seven Congressmen joined together to introduce the same bill in the House of Representatives. In summary, the Act has three principal goals.

1. Attract and retain entrepreneurial talent to create jobs in the United States.

Statistics show that thousands of foreign-born students graduate each year from American universities with degrees in fields important to the United States economy. The Act creates more opportunities for these individuals to remain in the United States and contribute to the economy in three ways:

  • Conditional permanent resident status for foreign-born residents with degrees in STEM fields. The Act creates a new class of visa for up to 50,000 foreign students who graduate from an American university with an advanced degree in any of the STEM fields. Visa recipients would be granted conditional permanent resident status contingent upon their remaining actively engaged in a STEM field for five consecutive years. Once this conditional status is lifted, the visa holder would then become a permanent resident with the option to naturalize.
  • Immigrant Entrepreneur Visa. The Act would also create a new visa for up to 75,000 immigrant entrepreneurs who hold a H-1B visa or have completed graduate level work in a STEM field, and who during the one-year period after the new visa is issued register at least one new business entity which employs at least two full-time, non-family member employees, and invests or raises capital investments of at least $100,000. If these requirements are satisfied, the entrepreneur would have three additional years to remain in the United States and operate his or her business. During this three-year period, the entrepreneur must employ at least five, full-time, non-family members for the business entity. At the end of the three years, a recipient may apply to remove the conditional status.
  • Elimination of per-country numerical limitation for employment-based immigrant visas. The Act would also eliminate the per-country numerical limitation for employment-based immigrant visas and adjust the limitations on family-based visa petitions from 7 percent per country to 15 percent without increasing the total number of available immigrant visas.

2. Encourage investment in startups and reward investment capital.

Currently, the majority of the research and development tax credits issued by the United States government are provided to large, established companies while many start-ups are unable to access these credits. The Act intends to address this situation in two ways:

  • Research Credit. The Act creates a limited research and development tax credit specifically for start-ups that have less than $5 million in annual revenues and that are less than five years old. Qualifying start-ups claiming the credit could receive up to the lesser of $250,000 or 20% of W-2 wages.
  • Capital Gains Tax Exemption. In addition, the Act would make permanent the 100% exemption on capital gains taxes for investments held for at least five years in “qualified small businesses,” which are defined as having less than $50 million in total assets.

3. Accelerate the commercialization of academic research.

Finally, the Act uses existing federal funding for research and development to support innovation initiatives at American universities to accelerate and improve the commercialization of taxpayer-funded research. The Act contemplates grants being awarded to universities pursuing specific initiatives to improve commercialization capacity and assisting universities that want to pursue initiatives that allow faculty to directly commercialize the research.

Additional details.

As with all proposed legislation, the Act is not immune from criticism. Notably, the Act limits the availability of the newly created “STEM visa” to foreign, advanced-degree holders in the STEM fields only. Foreigners holding other types of advanced degrees — MBA, JD, MD, architecture, etc. — that are arguably just as likely to form new businesses and spur job growth are ineligible. The Act also requires that STEM visa applicants must have an active student visa meaning that they must apply within one year of graduation; this disqualifies most STEM degree holders who have returned to their home countries post-graduation and now wish to return to the United States to start a new business. In addition, the Act provides that applicants for the newly created “entrepreneur visa” must be lawfully present in the United States and either already hold an H-1B visa or hold a STEM degree from a United States academic institution. This provision would deny visas to foreign applicants without these required credentials that would otherwise be productive entrepreneurs in the United States. By way of example, celebrated innovators such as Peter Thiel (the German-born founder of PayPal with a law degree from Stanford Law School), Janus Friis (the Danish-born founder of Skype, a high school dropout) and Linus Torvlads (the Finnish-born creator of Linux core with a degree in computer science from the University of Helsinki) would not have the opportunity to emigrate to the United States and start businesses under the Act.

Despite these shortfalls, the Act recognizes that the United States has a pronounced deficit of employees with skills relevant to an innovation-based economy and takes strides to address this problem by harnessing the job-creation potential of highly skilled foreign students that have been trained in our country. The Act is currently under review in both houses of Congress and, although its passage will encounter difficulty in this high-stakes election season, the recent passage of the JOBS Act should serve as evidence that Congress can still rally around this type of legislation during an election year. Stay tuned.

For more information, please contact Scott R. Bleier.