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Outsourcing Law & Business Journal – March 2011

March 31, 2011 by Bierce & Kenerson, P.C.

OUTSOURCING LAW & BUSINESS JOURNAL™ : Strategies and rules for adding value and improving legal and regulation compliance through business process management techniques in strategic alliances, joint ventures, shared services and cost-effective, durable and flexible sourcing of services.  www.outsourcing-law.com.  Visit our blog at http://blog.outsourcing-law.com.

Global Entrepreneurship and U.S. Innovation and Job Creation through Employer-Based Immigrant Visas

March 30, 2011 by Bierce & Kenerson, P.C.

The global services economy has caused certain job functions to be performed in foreign countries instead of locally at the headquarters. Global entrepreneurship offers one possible means for developing jobs locally. Not only can Americans establish global services companies with employees in the U.S. and abroad. Foreigners can do the same under existing U.S. immigration laws. Under a proposed law sponsored by Senators Kerry (D-Massachusetts), Lugar (R-Indiana) and Udall (D-Colorado), U.S. job creation would get a boost from a new employer-based visa for alien entrepreneurs who have received significant capital from U.S. investors. The proposal would promote U.S. jobs and would encourage U.S. investors (including “angel” accredited investors and private equity funds) to support global entrepreneurship.  This legislation has not yet been enacted and faces many challenges.

Proposed “Startup Entrepreneur Visas.” This “Startup” entrepreneur visa category would entitle “qualified immigrant entrepreneurs”, who meet several qualifications relating to investment amount, funding sources, job creation and positive cash flow, to receive initial two year visas under three scenarios:

I. Qualified U.S. Investors

II. Unexpired H1-B visa status or minimum graduate education levels

III. Ownership in a substantially profitable foreign company

I.   Qualified U.S. Investors. The “startup” entrepreneur would have to prove the value proposition of a new business by persuading qualified U.S. investors. Such investors can be a qualified venture capitalist, a qualified super angel investor, or a qualified government entity (as determined by the Secretary of Homeland Security). The definitions of qualified U.S. investors are:

• A “qualified super angel investor” would be U.S. citizen individual who is an accredited investor (as defined in 17 CFR 230.501(a)) who has made at least 2 equity investments of not less than $50,000 in each of the previous 3 years.
• A “qualified venture capitalist” would means a U.S.-based entity that is classified as a “venture capital operating company” under 29 CFR 2510.3-101(d) that is comprised of partners, the majority of whom are United States citizens and meets certain operating tests. It must have capital commitments of not less than $10,000,000. It must have been operating for at least 2 years. It must have made at least 2 investments of not less than $500,000 during each of the most recent 2 years.

Minimum Investment by U.S. Investor.   The qualified U.S. investor must have committed to invest not less than $100,000 on behalf of each startup entrepreneur.

Minimum Commercial Activities.    The “Startup” visa entrepreneur would need to meet three key hurdles for obtaining and retaining the visa: For the first two years after the visa is issued, the “startup” visa entrepreneur must conduct business activities that:

• create not fewer than 5 new full-time jobs in the United States employing people other than the immigrant’s spouse, sons, or daughters;
• raise not less than $500,000 in capital investment in furtherance of a commercial entity based in the United States; or
• generate not less than $500,000 in revenue.

II. Educational and Professional Skills. This “Startup” entrepreneur would need to demonstrate high levels of skill and business acumen. The entrepreneur could be the holder of an unexpired H1-B visa. Alternatively, the “startup” entrepreneur would have to have earned a graduate level degree in science, technology, engineering, math, computer science, or other relevant academic discipline from an accredited United States college, university, or other institution of higher education and may already be in the U.S.

Income Level. This “Startup” entrepreneur would need to have a threshold income. The threshold would be an annual income of not less than 250 percent of the Federal poverty level; or the possession of assets equivalent to not less than 2 years of income at 250 percent of the Federal poverty level. Currently, for 2011 for the continental U.S. (not including Hawaii and Alaska), the “Federal poverty level” is an annual income of $10,890 per year for an individual plus approximately $3,820 per person in the same family. Therefore, this translates roughly into minimums of about $30,000 annual income or about $60,000 in assets.

Minimum Investment Level. The “startup” entrepreneur must show that the U.S. investor has invested at least $20,000 and can meet three additional tests measured at the end of two years after the “startup” visa is granted:

During such two years, the entrepreneur’s foreign company must either:

• create not fewer than 3 new full-time jobs in the United States that employ people other than the immigrant’s spouse, sons, or daughters;
• raise not less than $100,000 in capital investment in furtherance of a commercial entity based in the United States; or
• generate not less than $100,000 in revenue.

III. Foreign Company Revenue. This “startup” entrepreneur has a controlling interest in a successful foreign company. A foreign company will be sufficient if it has already generated, during the most recent 12-month period, not less than $100,000 in revenue from sales in the United States. Similar to the type II. “startup” entrepreneur above, this entrepreneur’s foreign company must also demonstrate that two years after the visa was granted, it has created the same number of jobs and level of capital investment or level of revenue.

Contrast with EB-5 Visas. This visa category would not increase the number of employer-based visas. As a result, it would create competition for EB-5 visas that required an investment of at least $1.0 million plus at least 10 U.S. employees in the initial phase. The U.S.business created under EB-5 visas might not generate the higher salaries, higher growth and higher degree of global competitiveness that an entrepreneurial “startup” visa might. EB-5 visas often result in formation of local food service and hospitality businesses, while a “startup” visa would be focused on the rapid growth and innovation that VC-funded entrepreneurs are expected to deliver based on a well-defined business plan.

Career Path for H1-B’s. This visa category would encourage foreign managerial or technical workers under H1-B visas to stay in the United States and use that training to generate income and jobs in the United States.

Career Path for U.S.-Educated Graduates. This new visa category would encourage U.S.-trained engineers to stay in the United States.

American Innovation Strategy. This “startup” visa proposal would stimulate innovation in America. Unlike the EB-5 visa, the “startup” visa would let private investors decide whether the foreign entrepreneur has sufficient skills, training and acumen, and a sufficiently robust business plan, to justify the investment of risk capital into the new venture. This test poses a very high hurdle. Qualified U.S. investors normally require a high return on investment (at least based on the business plan) to justify taking the risk of losing the investment.

Impact on Outsourcing. The “startup” visa would encourage foreign entrepreneurs, who have developed foreign service delivery platforms, to establish their personal residence in the United States. A number of U.S. venture capitalists have invested in leading foreign-based service companies such as Genpact and WNS. This “startup” visa would help Americans globalize and encourage innovation at home.

“Startup America”: A Vision for American Entrepreneurs: What Role for Global American Entrepreneurship?

February 11, 2011 by Bierce & Kenerson, P.C.

On January 31, 2011, President Barack Obama’s office released a “Startup America” plan to promote entrepreneurship. The “Startup America” initiative proposes to “celebrate, inspire, and accelerate high-growth entrepreneurship” throughout the nation by coordinating public and private effort to create “innovation ecosystems” that brings together innovative entrepreneurs, corporations, universities, foundations, and other leaders, working in concert with a wide range of federal agencies. The “Startup America” initiative seeks to promote entrepreneurship as the core of an innovation strategy for achieving sustainable growth and quality jobs. It builds on the Job Creation Act of 2010, but does not address many legal issues in the global economy.

Overview. Given the high level of unemployment in America, President Obama is taking a new initiative to promote small businesses for U.S. job growth. The program addresses key issues in:

• capital investment in “high-growth startups,”
• education and mentorship to empower entrepreneurs,
• commercialization of federally-funded research and development in which taxpayers invest about $148 billion per year,
• identification and removal of “unnecessary barriers” to high-growth startups; and
• collaborations between large companies and startups.

Tax Incentives for Small Businesses.

Capital Gains Tax Exemption. “Eligible small businesses” would qualify for permanent elimination of capital gains taxes on their share. Already the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“2010 Job Creation Act”) provides a 100-percent exclusion from tax for capital gains realized on the sale of certain small business stock held for more than five years. Under current law, the amount of gain eligible for the exclusion is limited to the greater of $10 million or ten times the taxpayer’s basis (net investment) in the stock. This tax relief applies to qualified small business stock issued after December 31, 2010, and before January 1, 2012. President Obama’s FY2012 budget proposal would make this provision permanent to increase private sector investment in small businesses.

Eligiblity Rules. The 2010 Job Creation Act limits the tax incentive to C corporations, whose profits are taxed at the corporate level and again, upon distribution of dividends, at the shareholder level (where shareholders pay their proportionate tax share on dividends received) This limitation contradicts decades of efforts to promote small business through S corporations, limited liability companies and limited partnerships, whose owners are taxed on the entity’s income but the entity does pay taxes.

Empowerment Zones. The Job Creation Act of 2010 extended through 2011 the period for designation of “empowerment zones” in the U.S. Jobs created in “empowerment zones” allow certain tax incentives for investment in such zones, including wage credits, accelerated depreciation of business equipment, tax-exempt bond financing, and deferral of capital gains on the sale of business and investment property. The one-year extension would become permanent under the “Startup America” initiative.

Work Opportunity Credit. The Job Creation Act of 2011 extended through 2011 the existing work opportunity credit for employers.

Small Business Administration.

The Obama initiative would use the SBA for additional lending to small businesses. This would be useful but is already available and merely represents an effort to allow some adjustments in existing lending criteria.

Piggybacking on Private Sector Initiatives.

The “Startup America” program would rely on existing non-profit organizations and private businesses to promote mentorship, special educational training in entrepreneurship and private equity investments in new small businesses. This is nothing new, including “partnership” with existing initiatives that the government did not initiate or specially support till now.

Critique.

Dysfunctional Tax Policy. As a matter of tax policy, exemption from capital gains stimulates capital risk investment. New business investment typically includes R&D, capital expenditures and jobs. But most entrepreneurial ventures are small, do not hire large numbers of employees and cannot expand employment because they focus on R&D and product development. Venture capital is essential since, unlike large corporations, small businesses lack cash reserves and the ability to issue bonds in capital markets.

This tax policy is dysfunctional because it fails to grant tax benefits for operations and thus fails to assist investors who would invest (or not) regardless of the capital gains incentives. Small businesses lack working capital, so long-term capital gains exemptions do not fill the gap caused by increased caution and reduced levels of bank lending. As one commentator noted, with no working capital, small businesses just go bankrupt. The legislation would have been more effective if it hadincluded some incentive for increased lending rates for banks (allowing the banks to lend to smaller companies with some levels of viability risk). Further, capital gains tax exemption is not the prime motivator for venture capital or private equity, which both seek high growth in cash flow, market share and slower growth in employment and capital expense costs.

Band-Aid® Solutions. The Job Creation Act of 2010 was a temporary palliative to extend expiring tax incentives, expiring exemptions under Bush-era estate tax reductions and other plans. The Startup America program focuses on making such incentives permanent.

Aside from putting one Band-Aid® on top of another, the Startup America initiative fails to address the core challenges of the global “knowledge economy” built on the WTO’s Uruguay Round agreements in 1993. The initiative lacks inspiration or information about the global services economy, global sourcing, comparative advantage in sourcing of services, and the viability of the American entrepreneur as a competitor in global markets. The vision for “entrepreneurial education” has roots in private enterprise and private initiatives for private enterprise. It does not seek to understand foreign cultures, purchasing habits or languages. It seeks to promote clean-tech and “innovative” jobs, but these sectors are small. There are limits to both the wisdom and financial capacity of the Government to promote local jobs.

But, at least, it’s not as nationalistic as certain countries, which merely convert the Government into the Employer of Last Resort in lieu of the dole.

Global Entrepreneurship. President Obama’s newfound zeal for promoting small business might be more effective if he were to promote “global American entrepreneurship.” A global approach would promote:

• sustainable cash flows from global revenues to support, upon repatriation, American investors;
• increased American wealth from classic global capitalism;
• increased American competitiveness, as to small and large businesses, as entrepreneurs look to global markets for both sourcing of innovative talent and sales of goods and services;
• substitution of American services for foreign services, in cases where foreign BPO service providers have developed robust service delivery models with lower costs per employee.

Global entrepreneurship needs to address key challenges for any modern business:

• the procedures for developing and implementing an entrepreneur’s business plan, including the unique selling proposition that relies upon proximity to the customer, cultural fit, flexibility and speedy adaptability;
• the uses of insourcing and outsourcing in innovation, global entrepreneurship, strategic alliances and capital allocation;
• mobility of people, process, technology and products and services to reach growth markets;
• technological innovation, including process innovation;
• intellectual property rights as the core foundation for a knowledge-management economy, especially in countries that lack either the laws or the culture for protection and vigorous enforcement;
• redundancy, resiliency and robustness of the technological platforms, such as the public cloud;
• branding;
• compliance with complex regulatory mandates;
• internal operational governance including transparency and responsiveness to stakeholders (as broadly defined); and
• risk management.

The editors welcome your thoughts on this controversial topic of law, public policy and international trade in managed services. To contact us, please e-mail: publisher@outsourcing-law.com.

Further reading:
• “Startup America” Initiative: http://www.whitehouse.gov/startup-america-fact-sheet (Federal Government website)
• Private Sector Entrepreneurship Training: www.startupamericapartnership.org (Not-for-profit organization)

February 17, 2011, Global Entrepreneurship and the Evolution of the New Global Enterprise Webinar

January 20, 2011 by Bierce & Kenerson, P.C.

Thursday, February 17, 2011, 11 A.M. – 12:20 P.M.  Eastern Daylight Time U.S.

Speakers:

• William B. Bierce, Esq., Bierce & Kenerson, P.C.
• Ed Nair,  Global Services

Description:

The struggles of the entrepreneur and owner-managed businesses are well known.  The real struggle arises when they try to achieve scale and breadth through globalization.  They face many challenges in developing and managing an overseas sales presence, brand management, technical presence, business organization, intellectual property and operations.  However, the miracles of modern technology, educational diversification, social media and long-distance collaboration now enable some innovative uses of established legal, tax, organizational and operational structures.  In short, it’s time to rethink and extend the classic business models for entrepreneurship.

This webinar delves into the idea of global entrepreneurship in the “new normal” economy. Global excellence is not a concept reserved for large companies like Accenture, Genpact and WNS, but can be implemented across the spectrum of both Fortune 500 companies and owner-managed businesses.

This webinar will address:

• how the knowledge economy is building the international global services market
• specific ownership, operational and governance paradigms for sweat-equity businesses (regardless whether in services, software, goods or franchises)
• international taxation concepts for new and existing ventures looking to globalize
• legal concerns associated with entering global markets
• compliance concerns both in the U.S and overseas
• putting it all together: human resources, unique selling propositions (and intellectual property), operational (and IT) and sales

Who Should Attend:

This webinar is free of cost.  Kindly contact lsanfiorenzo@biercekenerson.com if you would like more information.  To register click here.

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