We are less than a month into 2017 and we have already witnessed excitement and innovation within the blockchain and Ethereum industries. With the transition of the presidency, many are caught up in an anxious state of the unknown, and banking and financial sectors are examining what the political change and potential new regulatory approach will mean for them. While the future remains unknown, there is still good news for those involved in the startups.
On January 17, 2017, the Department of Homeland Security (DHS) published its final rule to implement a discretionary parole authority to increase, promote, and encourage entrepreneurship, innovation, and job creation in the United States. Originally published by the White House in August of 2016, the International Entrepreneur Rule allows foreign entrepreneurs a “parole status” to allow them to stay and work on quickly building a product in the US. This parole status “adds new regulatory provisions guiding the use of parole on a case-by-case basis with respect to entrepreneurs of start-up entities who can demonstrate through evidence of substantial and demonstrated potential for rapid business growth and job creation that they would provide a significant public benefit to the United States.”
In order to qualify for this “startup visa,” entrepreneurs must own a portion of a US startup and demonstrate the company’s growth potential, hold investments from qualified American investors, and show significant public benefit to the United States.
The original requirements as written in 2016 are:
-Entrepreneurs had to own 15 percent of a US startup and have an active and central role in that startup’s operations
-Startups had to have been formed within the past three years in the US
-Startups had to demonstrate a potential for rapid business growth and job creation as evidenced by:
Receiving significant investment of capital (at least $345,000) from certain qualified US investors with established records of successful investments
Receiving significant awards or grants (at least $100,000) from certain federal, state or local government entities; or
Partially satisfying one or both of the above criteria in addition to other reliable and compelling evidence of the startup entity’s substantial potential for rapid growth and job creation
Under the original proposed rules, entrepreneurs were granted an initial stay of up to two years to oversee and grow their startup entity in the US. A request for re-parole for an additional three years would only be considered if the entrepreneur and startup continued to provide a significant public benefit, as evidenced by substantial increases in capital investment, revenue, or job creation. Because visas like the H1B only apply to skilled employees and not startup founders, the IER was seen as a workaround for foreign entrepreneurs after congress failed to pass meaningful immigration reform. After the initial proposal in August 2016, the DHS spent the subsequent 5 months collecting feedback from the public, as a modus to better inform the final rule on the proposal.
The data collected by the DHS elicited the changes that would grant foreign entrepreneurs flexibility for obtaining a startup visa, making it a little easier for founders to comply and maintain temporary citizenship within the US. Instead of a two-year visa followed by a paroled three-year period, the new rules allow entrepreneurs to apply for an initial parole of 2.5 years, followed by an extension period of an additional 2.5 years. This amendment will relieve some pressure for founders with citizenship in other countries, allowing them more time to build and grow their startups - many within the blockchain space. Other positive changes include a reduction of the financial investment that startups are required to obtain, from $345,000 (USD) to $250,000 (USD). The official ruling also provides entrepreneurs more time to secure funding – 18 months instead of the original one-year timeline.
The final ruling also lowers the ownership stake from 15 percent to 10 percent, in order to qualify for the initial parole period. Founders who are seeking to reapply for the additional 2.5 years only need five percent ownership to meet the criteria. Although the IER final rule was published on January 17, 2017, the official date it will go into effect has been set for July 17, 2017.
Per the official 52-page document,
“DHS believes that this final rule will encourage foreign entrepreneurs to create and develop start-up entities with high growth potential in the United States, which are expected to facilitate research and development in the country, create jobs for U.S. workers, and otherwise benefit the U.S. economy through increased business activity, innovation, and dynamism.”
In May 2016, the Securities and Exchange Commission (SEC) officiated Title III of The Jumpstart our Business Startups Act (JOBS Act), which eased security regulations on the funding of startups and other small businesses in the United States. Essentially, this Act made it possible for everyday citizens to invest in crowdfunding as “securities,” something previously not permitted. Most of the emerging blockchain platforms today utilize Initial Coin Offerings (ICOs) to raise capital for their startups, which although distinct, share many of the properties of the crowdfunding model. While there has been much success with ICOs, such as Golem’s raised funds of more than $8.6 million (USD) in 29 minutes for its Golem Network Token (GNT), many investors are discovering that this model, although decentralized, lacks the security protocols to protect investors and their assets.
Currently, ICO’s exist within a gray area of legality because the US government and financial regulators have yet to recognize cryptocurrencies as legal tender. The many successes of this type of investment system can often be overshadowed by reports of failed ICOs and scams seeking to deceive investors. Many proponents of ICOs see them as the way of the future, in regard to venture capitalism for the blockchain industry. However, as the space becomes more prevalent, regulators may not prove this to be the case.
With Title III granting US citizens the right to invest in startups that use crowdfunding as their investment model, blockchain companies now have an additional legal option to raise funds. Rather than using ICOs, blockchain startups could utilize crowdfunding portals to raise funds in a way that complies with US securities laws. This could be a vital early step to secure funds before blockchain startups are ready to launch. The implementation of SEC-regulated crowdfunding could be used for a company’s seed level, or in conjunction with the decentralized ICO paradigm, to create a hybrid model. As interoperability between blockchain systems and mainstream adoption increases, ICOs may find themselves having to change their structure to appease lawmakers who seek to provide investors with a minimum amount of protection. As it stands, investors in ICOs or “token sales,” possess only a small amount of information on the coin issuer’s reputation and business models. Because of this, there is still adequate potential for bad actors to defraud investors of ICOs. Even if the element of possible deception is removed, ICOs could still fail. For example, Inchain, who failed to reach their target goal, ended up refunding their investors. Although Inchain did the right thing, they did this on their own – with no prompt from law enforcement or regulations requiring them to do so. Even if a defrauded investor were to attempt to seek legal recourse for their stolen tokens, the challenges of suing a decentralized company are numerous and the precedent for such a case does not yet exist. Lawyers seeking to take action on the part of their clients would also face challenges surrounding the jurisdiction of the entity in question, as well as having to address the problem of how a government agency can recoup assets in the form of cryptocurrency.
Because of the lack of regulation and the decentralized nature of ICOs, these fundraising models can be classified as “buyer beware” markets. While supporters of ICOs may relish in the regulation-free structure because they want to avoid central authority at all cost, many law professionals believe that ICOs should self-regulate as a way to create informed investors, and as a method to boost security and confidence.
An Unknown Yet Optimistic Future
With the IER and Title III officially in the law books, startups within the blockchain industry now have additional support in regard to immigration and equity crowdfunding. Because many developers working within the Ethereum network are outsourced, the relaxed regulations pertaining to startup visas may incentivize foreign entrepreneurs to immigrate to the US legally and have sufficient time to successfully build blockchain-based startups. This surge in this growth will benefit the blockchain ecosystem and the US economy.