Oregon Crowdfunding Law – A Better Way?

I just got off the phone with a lawyer in Oregon’s Department of Finance and Corporate Securities and I am quite enthused with what they are doing with Oregon’s crowdfunding law.    Like Washington, the company using the law must be incorporated in the home state. But the level of agency review is much more limited than in Washington.  Under Oregon DFCS Rule 441-035-0110, the issuer must file a notice with the DFCS at least seven days before beginning an offering or publishing an advertisement.  The Notice must contain information about the company and the offering but the disclosure is not onerous.

Other differences from Washington’s 2023

  • $250,000 maximum (Washington’s is $1,000,000)
  • $2,500 maximum individual investment (wealthy people in Washington can invest up to 10% of their income)
  • Must meet in person with a business technical service provider (nothing like this in Washington)
  • Reports to shareholders do not have to be made publicly available (a big negative of Washington’s law)
  • No escrow requirement (another negative of Washington’s law)
  • Disclosure document must state offering minimum amount, if any.  (I.e., you don’t necessarily need minimum commitment before you close the round.  In Washington, you do.)

Oregon’s law, in contrast to Washington’s, was passed by rulemaking, not by statute, so you know it has the support of the Oregon DFCS.  And unlike Washington, their law is being used. I found at least eight or nine Oregon companies that are using the rule to raise money.  Obviously, this law won’t help Washington companies, but if it is successful in Oregon, perhaps authorities here in Washington will see feet to making changes in our law.

Oregon’s crowdfunding rules and a FAQ prepared by the DFCS can be found here:  http://www.dfcs.oregon.gov/securities/raise_capital.html


SCOR Registration — an alternative to 2023 Crowdfunding?

The well-kept secret is that Washington and many other states have already had in place a way to sell securities very similar to Washington’s recently effective crowdfunding law,  ESHB 2023.   Referred to as the “Small Company Offering Registration” or “SCOR”, this other method of registering a stock offering has  been around since the 1990s, but seldom used.  The DFI reports that they only had 9 SCOR offerings in Washington since 2005 (as of October 2014).  It is not clear why SCOR offerings have not been popular, given that the DFI has gone out of its way to provide helpful information on its website and to help companies complete SCOR offerings even when not represented by legal counsel.

Similarities between SCOR and  ESHB 2023

Washington Internet Offerings – Both types of offering allow you to sell up to $1,000,000 of equity securities per year to Washington residents using the internet.

DFI Review.  Both types of offering require you to prepare an offering memorandum that must be reviewed and approved by the DFI.  The same staff members at the DFI administer both programs.  The form for SCOR offerings, called the U-7, is used by all states using the SCOR process.  The form for  ESHB 2023 was recently finalized and it can be found here.  Both forms ask for much of the same information, but the  ESHB 2023 form is the DFI’s own form and they have tried to make it more user friendly than the U-7.

GAAP Financials.  For both offerings, financial statements are required for the last fiscal year.  They must be prepared in accordance with Generally Accepted Accounting Principles, including preparation of footnotes.   ESHB 2023 also requires that you provide the most recent fiscal quarters for partially completed years.

500 Shareholder Limit.  The 500 non-accredited shareholder limit applies to both offerings in the same way.  (Section 12(g) of the Securities and Exchange Act requires registration under that Act if a company with $10 million or more in assets has more than 2000 shareholders or more than 500 shareholders who are non-accredited investors.)

Minimum Amount and Escrow Agent.  Under both offering methods, you will be required to set a minimum funding amount (minimum dollar amount of subscriptions received) before you can close any subscriptions.   Before you reach the minimum funding amount, all funds must be held by an escrow agent, which you, the issuer, must hire.  Before they approve the offering, the DFI will carefully review your minimum target and require you to raise it if they think it is too low to accomplish your business plan.

Differences between SCOR and  ESHB 2023

Available for non-Washington Companies.  To do a SCOR offering, it is not necessary to be incorporated or have your primary operations in Washington, but offers and sales are limited to Washington residents (unless you do a regional offering – see next topic).  So, for example, a Seattle startup that was incorporated in Delaware could use the SCOR registration without the need to reincorporate in Washington.

Coordinated Regional Offerings.  Under SCOR, there is a process for doing coordinated regional offerings using protocols developed under the auspices of the North American Securities Administrators Association.  Under that process, one state agency takes the primary role of reviewing and passing on the offering memorandum.  Eleven western states participate in the Western Region (California being the notable exception).  If my memory is correct, only one or two coordinated offerings have been tried in Washington.  But in conversations, member of the DFI staff have been positive towards making coordinated regional offerings work. You can read more about coordinated review on the DFI’s website and on the NASAA’s website.

Merit Review; Promotional Share Escrow

A SCOR offering is actually a registered state offering subject to merit review by the DFI.  In contrast, an offering under  ESHB 2023 is technically an exemption from registration.  In some ways it is a distinction without a difference since the DFI must approve the offering memorandum in both methods.  But under SCOR, the DFI is required to conduct a merit review, meaning that it will judge the proposed offering on the merits and apply several statements of policy regarding corporate equity offerings adopted by the NASAA.  The DFI’s standards are available here, and cover  things like the terms of the securities, financial condition, voting rights, and use of proceeds.  The DFI, for example, can require the issuer to have independent directors if there is a history of affiliated transactions (transactions between shareholders or directors and the company, such as loans or leases)

One thing that may trip up startups is the standard for “promotional shares”.  Shares issued to founders, management, or major owners of the corporation would be considered promotional shares, and DFI will determine whether these shares can be considered “fully paid”.  According to the DFI website, this is determined by dividing the amount of consideration paid in past purchases of the shares by 85% of the proposed public offering price in the offering. Tangible property used as payment in past purchases is counted at its fair value, if that is readily and objectively ascertainable.  Most founder stock in a startup would not pass this standard.

According to the DFI website, there may be an unlimited number of promotional shares in a SCOR offering. However, those in excess of 60% of the shares to be outstanding after the offering must be escrowed for a certain period of time, usually four years, or until the company satisfies other release provisions in the escrow agreement.   In lieu of an escrow, the company may enter into a lock-in agreement that does not involve the expense of a third party escrow agent, and the DFI has a form lock-in agreement  available.

So in other words, the escrowed stock will be similar to vesting restrictions, which most founders are familiar with.  However, unlike unvested stock, which typically vests immediately in the case of a liquidity event, escrowed promotional shares remain in escrow.  While in escrow, payout in the case of a distribution of company assets is according to purchase price paid.  So founders who paid pennies for their restricted stock would not receive a significant distribution until other purchasers received their original purchase price back.  In most cases, this would not be problematic, since it would mimic the results of a typical 1X preferred stock liquidation preference.

Transfer Restrictions.  Securities sold in a SCOR offering are freely transferable (except for transfers designed to thwart the intrastate offering restriction).  HB 2023 offerings are not freely transferable.  Under the Washington rule (WAC 460-99C-170), for the first year they may only be transferred to the issuer, an accredited investor, or family members.  Under federal Rule 147 (the federal exemption HB 2023 relies on), crowdfunded securities  must be held by the purchasers at least nine months, and then any transfers may only be transferred to another resident of Washington.  In either case, transfers will not be likely because there will be no public trading market and most companies will have shareholder covenants imposing restrictions on transfers.

Convertible Debt and Warrants.  Unlike  ESHB 2023 offerings, warrants, debt, and other securities are actually permitted under SCOR offerings.  However, in the case of debt, the issuer must be able to demonstrate an ability to pay back the borrowed money from current earnings.  That is typically not the case with a startup company, so popular convertible debt securities would not be available.

Right to Withdraw.  Though not required by the statute, the DFI created a rule that gives investors the right to cancel their subscription of an ESHB 2023 offering for any reason until the minimum funding amount is reached.  There is no such right in SCOR offerings.  In my comments during the rule making process I objected to the cancellation right since it basically gives investors an option on the company and could make it hard to reach the minimum funding amount.  I recommended that cancellation should only be allowed when there has been a material change in the issuer’s prospects, which they are required to report.  But the DFI, which sees the worst securities law abuses, wasn’t swayed and felt that the cancellation right was important to protect consumers.  In practice, we will see if this becomes a significant problem for issuers.  I am optimistic that it won’t.

Quarterly Information Requirements.   Quarterly information reports are not required under SCOR offerings, unlike  ESHB 2023, which requires you to make executive compensation, identity of 20% shareholders, and a business summary “publicly accessible” on your website on a quarterly basis as long as the crowdfunded securities are outstanding.  In most circumstances, the crowdfunded securities will be outstanding for a long time, usually until the company is sold or there is a major restructuring.  So this may be a material consideration for some companies or founders, who may be fine with sharing such information with their shareholders but do not want to share it with the general public.

So which offering method is best for your Company,  ESHB 2023 or SCOR?

If you happen to be incorporated in Delaware, want to do a regional offering, need to offer warrants or convertible debt, or don’t want to make your compensation or the identity of your 20% shareholders publicly available on an ongoing basis, a SCOR offering may be your best choice.  Given the 500 shareholder restriction, the lack of investment limits in SCOR offerings may not make a significant difference, unless you believe you will have access to investors who are willing to put in more than $100,000 each (in which case maybe neither type of crowdfunding makes sense for your company?)

On the other hand, the more complicated form, the merit review, and  the promotional shares lock-in of SCOR registrations might sway you in favor of ESHB 2023.  As indicated earlier, the same staff members at the DFI administer both offerings, and they are very willing to help.   Though protective of consumers, they manifest a desire to help responsible small businesses raise capital as efficiently as possible.  Even though the U-7 and 2023 forms ask for similar information, my guess is that getting through the 2023 process will be a bit quicker for three reasons: (1) the 2023 form is actually simpler than the U-7, liberally employing a “check-the-box” format, (2) since they created it, the DFI staff understand their own form, and want it to be used and  accepted, we can assume, and (3) there has been a lot of investment in 2023 by many people around the state who have their eyes on it and want it to work.  DFI knows this and has invested significant resources of their own to make it happen.

How long will it take you to complete the registration process?    Experience with SCOR offerings is limited but six months is not unusual.  But my understanding is that none of these companies were represented by legal counsel, and the DFI staff spent a lot of time helping issuers understand the form and revise it.  DFI director William Beatty suggested in an open meeting that an application prepared with the assistance of a seasoned securities lawyer would be much quicker, perhaps in a few weeks.

Washington Crowdfunding is here!

The Washington Department of Financial Institutions promulgated its final rules today (October 2, 2014) for ESHB 2023, known as the “Washington Jobs Act of 2014″.   You can find the final rules and the final crowdfunding application form here.  This means that Washington intrastate crowdfunding is here and ready to go as of November 1, 2014, when the rules will be effective.

The law was actually passed last March, but the law required the stated Department of Financial Institutions the responsibility of promulgating rules to implement the Act.  The DFI got right on the task, has published both draft and proposed rules and accepted comments on them.  Last week Carter testified at the final public rulemaking hearing and followed up with written comments about one troubling rule in particular, which is the requirement to make financial statements, executive compensation, and large shareholder ownership available to the general public after the offering closes.  You can read Carter’s written comments here.  For some of the things you should consider before doing a Washington crowdfunding, see Carter’s post here.

Washington Crowdfunding – Is it right for your Company?

Crowdfunding is live in Washington state as of November 1, 2014, when the Department of Financial Institutions’ rules become effective for ESHB 2023, the “Washington Jobs Act of 2014″.   You can find the final rules and the final crowdfunding application form here.  

For those who haven’t heard, ESHB 2023 allows an internet offering of up to $1 million to Washington residents.  Issuers (i.e., the company raising the funds) must take steps to ensure that only Washington residents are presented with the actual offering.   Any Washington resident can invest, but the following restrictions apply:

  • For investors with an annual income or net worth of less than $100,000, the greater of either (i) $2,000 or (ii) 5% of the investor’s annual income or net worth (not counting personal residence).
  • For investors with an annual income or net worth of $100,000 or more, 10% of the annual income or net worth of the investor (not counting personal residence), up to $100,000.

If you are interested in pursuing a crowdfunding offering.  Joe Wallin has written an excellent summary of the steps to take now which you can find here.  Joe is the attorney who originally proposed the idea for a Washington Crowdfunding law last year to representative Cyrus Habib, who was instrumental in getting it through the Washington legislature.  These two should be commended for making Crowdfunding a reality in Washington.

There are many ramifications to consider before launching into a Washington crowdfunding campaign, Before you do it, consider the following: 

Investor limits and integration.  Remember that if you use the Washington law you cannot take funds from investors who don’t live in Washington.  The maximum individual investment limits apply to every investor for one year, including wealthy individuals who are limited to $100,000. You might think that you could split up the offering, say for example by doing  a separate accredited investor private offering in another state.  But there is a concept called integration which means basically all of your fundraising for one year will be lumped into the same offering, unless two offerings are sufficiently different (e.g., a different type of security offered) to quality as a separate offering under the rules.  For example, if you sold $500,000of series A Preferred Stock in your crowdfunding campaign, and then a few months later find a wealthy investor or fund that is willing to invest $2 million, you may be prevented from accepting the investment unless the type and price of the security are sufficiently distinguishable.   Another thing to be careful about is any previous offerings of the same class.  Integration works both ways (back and forward).  The applicable time period is six months.  Under WAC 460-99C-200, non-crowdfund offerings that are six months before the crowdfund offering or six months after it will not be considered integrated with the crowdfund offering if no similar securities are offered or sold during those time periods.  WAC 460-99C-200 also lists the other standards for determining whether two offerings are similar enough to be considered integrated.  So, before you launch a crowdfunding campaign, you need to wait at least six months since your last offering of any similar securities, and you need to have a plan for how you will accomplish second and third financing rounds as you grow. 

Ongoing public disclosure.  The rules require you to make executive compensation, identity of 20% shareholders, and a business summary “publically accessible” on your website on a quarterly basis as long as the crowdfunded securities are outstanding.  In most circumstances, the crowdfunded securities will be outstanding for a long time, usually until the company is sold or there is a major restructuring.  So the public disclosure requirements are likely to extend long after the crowdfunded securities are sold.  During the rule formation process, there was disagreement about the meaning of “publicly accessible”.  The same wording is used in the statue, and many of those involved in getting the law passed understood it to mean available to directors and shareholders on the public website, but not necessarily available to every member of the public.  I testified about this at the public hearing and submitted written comments when it became apparent that the DFI was sticking by its interpretation that publically accessible means available to all members of the public.  Given the many original supporters of the law who think quarterly information should be available to investors, but not the general public, there is a good chance that the DFI will change its interpretation or that the law will be amended to clarify this next year.  In the meantime, this is something that you need to take into account when considering whether to use HB2023.  In particular consider 

  • whether as a founder, you are okay with making your compensation and that of your other executives and directors available to the general public;
  • whether you have any concerns about competitors having this information; and
  • whether there is any risk that the requirement to publicly disclose ownership will dissuade a large shareholder from participating in a subsequent equity offering.

GAAP Financials.  To do a crowdfunded offering, you must submit GAAP financials, including any required footnotes.  Depending on your past operations, preparing GAAP financial statements may be somewhat expensive.  Make sure you have discussed this with your accountant so you can plan for the cost.  

Type of Security.  Convertible debt, though typical for many initial financing rounds, is not allowed under the rules.  Basically your choice will be common stock  or preferred stock or the LLC equivalents.

Minimum Amount; Escrow Agent; Right to Cancel.  The rules require you to set a minimum amount of subscriptions that you must have received before you can close the offering.   The minimum amount must be large enough so that the company can execute its business plan if it only raises that amount.  This is a good rule and is typical in most private offerings.  The reason for a minimum amount is that it protects against the situation where the company takes funds from people who commit early but doesn’t raise enough to execute its business plan and fails for that reason.  The early investors get a raw deal in that case.  To make the rule effective you are required to hire an escrow agent to hold funds until the minimum amount is reached.  So you need to calculate the cost of an escrow agent when considering whether to do a crowdfunded offering.  Also, another thing to be aware of is that until the minimum amount is reached, investors have the right to cancel their subscription.  This would be an unusual provision in a private offering but something the DFI added to protect consumers.

Risks of encouraging competitors.  Consider the stage of your company.  Crowdfunding can be great exposure to the public if that’s what you need right now.  On the other hand, for some companies it makes sense to operate in stealth mode while you are developing your product.  If you are at this stage, it might not make sense to make potential competitors aware of your company and its progress.

Managing Shareholders.   A typical privately financed startup would have less than 30 shareholders.  A crowdfunded company may have hundreds, which significantly increases the organizational work and paper flow.   Your company needs to have a method for restricting its offering online to Washington residents only, an efficient way to exchange residency information, signatures, and other information from investors, processes for coordinating the exchange of all of that information and investment funds with the escrow agent.  You need an efficient way to provide quarterly informational updates meeting notices to shareholders, and receive back shareholder votes.   Most of the models for handling these tasks will be taken from public company precedents.  If you are going to be an early mover on crowdfunding, expect to spend some extra time and money breaking new ground.

500 Shareholder Limit.  Under Section 12(g) of the federal Securities and Exchange Act of 1934, a company must register with the SEC if it has more than $10,000,000 in assets and a class of securities held by more than 2000 shareholders or more than 500 non-accredited shareholders.  Most shareholders in a crowdfunded campaign will probably be non-accredited investors.  So while the whole idea behind crowdfunding is to raise small amounts from many people (thereby spreading the risk in a certain way) the effect of Section 12(g) is to put downward pressure on the number of shareholders and upward pressure on the minimum investment that you can accept.  To put some numbers on it, you can raise $1 million if 500 investors invest $2,000, each, the maximum amount for those earning less than $100,000 a year.   So a company that wants to accept smaller subscriptions would be limiting itself to raising $500,000 if minimum investments are $1,000, $250,000 if minimum investments are $500, etc.  This of course doesn’t leave any breathing room for subsequent  financing and stock option and warrant exercises, all of which could throw the company over the threshold, triggering expensive SEC reporting requirements.  The take away is that you should not be expecting to do a fund raising where you take donations of $100, $50, or less.  Depending on on your target raise, $500 or $1,000 minimum investments will probably be your practical limit.

So how can you manage the 500 shareholder issue?  Here are some suggestions:

  • Set a minimum investment amount that will make it hard to go over the shareholder limit.
  • Carefully monitor subscriptions and include in your offering documents a right to close the offering if the number of subscriptions goes over a certain level.
  • Obtain shareholder agreements to notify of accredited investor status, and track it.
  • Consider including in your articles of incorporation a company right to redeem shares for a certain price if the number of shares and/or the value of the company’s assets goes over a certain level. 
  • Consider provisions in your employee stock option plan that allow the Board of Directors to delay exercise until just prior to a liquidity event if the company is at risk of going over the threshold.

New regulatory landscape; DFI Oversight.  This is new for Washington.  No one knows exactly how it is going to work in practice.  Whereas most private placements have no practical oversight from regulatory authorities, Washington crowdfunded offerings will be reviewed and must be approved by the DFI.  You company will be subject to the DFI’s ongoing oversight as long as crowdfunded securities are outstanding.   You are submitting your company to this oversight when you launch a crowdfunding campaign.  The DFI has a responsibility to protect consumers, and as the rule enactment process demonstrated, they don’t always draw the line where advocates for issuers might have them.   But the DFI has gone out of its way to help small unsophisticated companies accomplish SCOR offerings, which are similar to offerings under ESHB 2023, and we can expect them to do the same here.  We also know that DFI has shown remarkable professionalism in the speed at which they have promulgated draft rules, accepted, summarized and responded to comments, and published the final rules, all well within the deadline set forth by the statute.  All of this represents a lot of work and they should be commended for their job.  So I think that responsible companies with solid business opportunities will find the DFI to be a good partner.  But be prepared to be flexible when they ask you to make changes to your disclosure. 

Consider Other Methods to Raise Equity.  Lastly, before you launch a 2023 offering, consider whether other options are better for your company, such as a private placement to angel investors in the traditional way, through a new 506(c) offering that allows internet advertising to accredited investors, or a Washington or regional SCOR offering that also allows internet advertising to accredited or non-accredited investors.  See my post comparing SCOR offerings to 2023 offerings.

The Exploratory Phase – When should you incorporate?

“When should we incorporate?”  It’s a question we startup attorneys hear all the time.   Everyone knows that you want to run your startup business through a corporation or LLC to have the limited liability protections afforded by those entities.   But before any business gets going there is always an exploratory phase.  During this period business plans are developed and tested, market research may be conducted, and software code might be written.

Many times it turns out the idea isn’t worth pursuing, so it doesn’t always make sense to incur the time and expense of incorporating, not to mention having to get a tax ID, a business license, and incurring reporting obligations with federal, state and local governments. On the other hand, problems result if you wait too long.  Software, the business plan, contact lists, perhaps trademarks – all of these things are or should be assets of the business.  If you don’t have agreements among your collaborators, there can be confusion or disagreement about the ownership of these assets when the business gets going.  Frequently collaborators haven’t decided yet or they don’t take time to work out the percentage ownership of the business.  Often emails or other writings are exchanged that may be ambiguous or contradictory.  I’ve seen at least one case where an early collaborator who did very little made a successful claim against the company when it had an exit a few years later.  She received a healthy, and unearned, portion of the company sale price.

Another very serious issue is your potential personal liability if you collaborate with others during the exploration phase.  In an adequately capitalized corporation or LLC, an entrepreneur’s risk is normally limited to the amount of his or her investment.  A creditor suing the company could not reach, for example, the entrepreneur’s personal assets such as car, home, or bank accounts.  That liability limitation does not apply for partnerships.  Partners are personally liable for the debts of the partnership.  See RCW 25.05.120.  And individual partners have the authority, absent an agreement otherwise, to incur debt and other obligations for the partnership.

Now take those two rules of law and couple it with a third principle – by just working on the project together you may have formed a de facto partnership.  The explicit rule for Washington can be found at RCW 25.05.055:

“The association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.”

So, if you are not careful, you might think you are just helping out a friend on his business idea and later discover you formed a de facto partnership and are personally liable for a debt that one of your partners took on in behalf of the business.    

So the takeaway is don’t wait too long to incorporate.  You should definitely  incorporate before:

  • earning any revenues
  • entering into any material contracts
  • hiring any employees
  • receiving any funding

During the exploratory phase, if after considering the above factors you feel it is still early to incorporate, take precautions to maintain ownership of your business and assets.  Make sure that anyone who works creates or works with any of your intellectual property signs an intellectual property assignment agreement.  This includes volunteers and contractors, as well as all collaborators/partners.   If you decide to hold off on incorporating, it is a really good idea to put in place a simple agreement between you and your collaborators.  At a minimum this agreement should have the following elements:

  • statement of the partners’ percentage ownership
  • contributions of individuals, including time, money, and assets (e.g., software, equipment)
  • limitation on authority of partners to sign contracts or incur debt without approval of other partners
  • assignment of all related intellectual property
  • agreement as to what happens to IP and other assets if the partnership dissolves

You can find a simple template agreement  on my resource page that covers these elements.   It is no substitute for legal counsel and you use it at your own risk.  So please, before you or your collaborators have risked significant time or money, consult an attorney.  

Invest Visa/Entrepreneur Visa Chart (Startup Visa, EB6, X-visa)

The newly proposed Invest Visa, formerly known as the Startup Visa, creates two new visa categories: X-visa and EB6 visa.  Here is a visual aid to understanding it better. In my opinion, this is an important and commendable addition to the bill.  See today’s Wall Street Journal article on the topic. http://blogs.wsj.com/venturecapital/2013/06/05/why-vcs-and-foreign-founders-want-the-entrepreneur-visa/

Here is a chart I created to help summarize the provisions. So many people have asked me about this that the chart should give a good easy overview of the new visas.  I still believe some amendments are necessary.  More to come on that in the next few weeks, stay tuned! We would love to hear from you if you have thoughts about the Invest Visa.  In addition, if you want to support these provisions, then please email me at [email protected]  We would love to hear from you.

Invest Visa Flowchart created by Tahmina Watson

Invest Visa Flowchart created by Tahmina Watson

Startup Visa Provisions under Comprehensive Immigration Reform Bill 2013!

he comprehensive immigration reform bill 2013 finally provides the long and anxiously awaited Startup Visa Act provisions.  Titled – Investing in New Venture, Entrepreneurial Startups and Technologies, the provisions include a non-immigrant visa category and an immigrant visa category.

qualified entrepreneur can apply for this visa.  A qualified entrepreneur means:

  1. Has significant ownership in a US business
  2. Is employed in a senior executive position
  3. Submits a business plan to the USCIS, and
  4. Had a substantial role in the founding or early stage growth and development of such US business entity.

Invest Non-Immigrant Visa:

  • Initial admission for 3 years
  • May be renewed for an additional 3 years, if during the most recent 3 year period alien did the following:
    • Created at least 3 full-time jobs AND received $250,000 qualified investment.


  • Created at least 3full-time jobs AND during the 2 year period ending on the date extension applied for generated at least $200,000 annual revenue.
  • May obtain a renewal for up to 2 one-year periods for a waiver from the above if the alien has made substantial progress and that such renewal is economically beneficial to the US.

Invest Immigrant Visa: There are 2 types:


  • Must be qualified entrepreneur
  • Maintained valid non-immigrant status in the US for at least 2 years.
  • During the 3-year period ending on the date extension filed alien has
    • Significant ownership in a US business entity that has created at least 5 full-time jobs AND has received $500,000 qualified investment in the alien’s business.


  • Has significant ownership in US business that created at least 5 full-time jobs AND generated at least $750,000 annual revenue during the last 2 year period. AND, no more than 2 other aliens have  received non-immigrant invest visa status on the basis of alien’s ownership of such business.


  • Must be qualified entrepreneur
  • Maintained valid non-immigrant status in the US for at least 3 years prior to filing for such status.
  • Holds an advanced STEM degree, AND
  • During the 3-year period ending on the date the alien files petition under this section:
    • Alien has significant ownership in US business that created at least4 full-time jobs. AND received qualified investment of at least $500,000


  • Alien has significant ownership in US business that created at least 3 full-time jobs. AND during the 2-year period ending on such dategenerated at least $500,000.

At first reading, these provisions seem reasonable to me and I think will greatly benefit the US economy.  It does not restrict the type of business entity will have.  There is no percentage of ownership of business. 

As I read more and understand more, I will update this article. In the interim, the above provisions sum up a great addition to immigration reform.

*Copyright 2013 by Watson Immigration Law. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


How to negotiate your first office lease.

By Katrin Gist  K

Reaching the point where your business is ready to move from your home office into more traditional office space, or moving your office to a larger space is an exciting time.  Your business is growing and your new space represents a new chapter in your company’s development.  Although the office space market has been recovering in the last few years, tenants still have significant leverage, and there are several strategies you should consider when searching for office space and negotiating your lease:

1.    Determine your requirements before office shopping.

Before shopping for office space, you should decide what kind of working area you want, the number of offices, arrangements for your employees, seating types, and amenities you will need (lunch/break rooms, conference facilities, etc.).  You should also consider whether your business needs traditional office space or “creative” space.” Creative space generally offers a more open work environment, can improve employee communication, and often has a more modern feel.  Employee cubicles are a cost-effective option, but if your business provides services involving significant customer interaction, privacy requirements might determine the space design.

2.    Expansion option.

One of the common characteristics of start-up companies is the potential for rapid growth.  The last thing you want is to have executed an office lease for a set amount of space and time, and then to experience rapid growth without the potential to expand within your building or get out of your lease. There are several buildings and landlords out there that will allow the kind of flexibility that you might need.

 3.    Lease Term.

When you are starting your business, you may not want to commit to a very long lease term. This could significantly decrease your options for office space since many landlords will only sign multi-year leases.  There are, however, still plenty of landlords who specialize in providing short-term space. One downside is that you might not get as much negotiating leverage in the lease terms, or get the kind of tenant improvements (office customization) covered by the landlord in the lease rate that you hoped for due to the short term.  But, the benefit is that you are not locked into a multi-year lease term when the future (growth or otherwise) is uncertain.  On the other hand, if you are in a position where your company has already experienced growth and has exemplified staying power, you might be ready for a more long-term commitment.  And, the longer the lease term, the more negotiating leverage there is for the tenant.

4.    Ask for concessions.

Don’t take the asking price or proposed lease at face value.  There is generally always room for negotiating the price per square foot and other lease terms. One strategy for getting a lower effective rate per square foot is to ask for some period of time worth of free rent.  This allows you to effectively be paying a lower price per square foot, while allowing the landlord to tell others that they leasing at the higher rate per square foot.  In this market it is not uncommon for a tenant to obtain several months’ worth of “free” rent for multi-year lease terms.

As mentioned above, obtaining tenant improvements can be tricky for start-ups that need shorter term space.  However, if it makes sense for you to commit to a longer term, a landlord should be willing to provide you a certain allowance for build-out/space customization as part of the deal.  This “TI” is valued as a price per square foot, and might range from a few dollars per square foot to well over fifty dollars per square foot for longer term leases.

5.    Learn your market.

It is important for tenants to be educated.  You should view several options before you make a decision in order to get the best deal and find the space that is optimal for you. The best way to achieve this is to work with a commercial real estate professional.  Small business owners often feel that they can find space and negotiate a lease on their own, but there are several nuances, such as escalator clauses, renewals, free rent, tenant improvement allowances, expansions and possible termination rights, that can be favorable to you if you know how to ask and what market comps are in your area.  Since a tenant’s broker is paid by the landlord and not the tenant, tenants have a great opportunity to take advantage of being represented by their own commercial real estate professional and obtain the best possible deal.

Katrin Gist is a commercial real estate broker with CBRE – Brokerage Services.  Katrin can be reached at 206-947-1399 or [email protected] for assistance with your office space.

Why We Need Start-Up Visa Laws for Immigrant Entrepreneurs

 The below article was originally published on Watson Immigration Law Blog. The article drew attention from Yahoo! News, The San Francisco Chronicle, The Boston Globe and many other press outlets. 

Why We Need Start-Up Visa Laws for Immigrant Entrepreneurs

–          Tahmina Watson, immigration attorney

With the recent election, America’s voters have placed renewed trust in President Obama, and immigration remains a hot topic.  In the days following the election, there was already chitter-chatter about comprehensive immigration reform in 2013. Wouldn’t that be great! I will look forward to this dream finally becoming a reality.  In the meantime, I hope the effort to accommodate immigrant entrepreneurs will continue.

This is not a complex issue; in fact, it can be distilled to a single cogent point: there is global competition for immigrant entrepreneurs. Every country wants the next Facebook, Google or Microsoft founder. The United States is in this bid for top talent too, except that the US is very slow in acting, and as a result, companies in the US are failing to recruit and maintain many talented people. 

Students from all over the world come to the US to be educated at the best schools, but they are not allowed to remain in the US—either because there is no suitable visa or not enough of the existing visas. As a solution to this specific problem, the  Science, Technology, Engineering and Math (STEM) Jobs Act introduced on September 18, 2012 by Rep. Lamar Smith created a new visa category for foreign PhD and Masters-level graduates in the STEM fields. Regrettably, the bill failed miserably at the time. However, the bill was approved by the House on November 30despite strong opposition from the Obama administration and now there may be hope it could pass through the Senate. Time will tell.

Perhaps even more frustrating is the fact that the path to a green card is excruciatingly difficult and slow, even for someone lucky enough to have obtained a work visa.  The past year has seen some erratic movement in visa availability. Visa availability is based on the Visa Bulletin, a monthly report issued by the Department of State and divided into ‘all countries,’ ‘India,’ ‘China,’ ‘Mexico’ and ‘Philippines.’ It is also divided into preference categories based on educational level. For example, categories include employment-based (EB) first preference (someone who has extraordinary qualifications such as winning a Nobel prize), second preference (someone with an advanced degree), third preference (someone with a bachelor’s degree) and so on. Also, the number of visas available varies according to the number issued in the previous month. Unfortunately, this can result in a decades-long wait. To reduce such waiting times, The Fairness to High-Skilled Immigrants Act introduced on September 22, 2011 by Rep. Chaffetz , sought to eliminate the per-country numerical limitations for employment–based immigrants and change the per-country numerical limitations for family-based immigrants. The bill failed.

Take, for instance, what happened in July 2012. The Visa Bulletin reported a three-year retrogression in the EB second preference category for ‘all countries.’ This particular category traditionally has not had any wait. Visas only became ‘current’ or ‘available’ in November 2012. This blow came soon after an announcement that there were simply no visas available for people with advanced degrees from India and China. The system is clearly in need for an overhaul; it does not provide viable options for entrepreneurs.

Various versions of the Start-Up Act provide visas and green cards specifically for entrepreneurs. In 2010, Senators John Kerry and Dick Lugar introduced the original Start-Up Act. In 2011, a variation of the bill was introduced by Sen. Jerry Moran to no avail.  And in May 2012, Senators Mark Warner, Marco Rubio, Chris Coons and Moran introduced the Start-Up Act 2.0. But none of these has been enacted as law. For anyone wondering why we need new law, here is a summary of the existing options for the self-employed entrepreneur:

EB5 Immigrant Investor visa:

The current investor visa program established in 1990, allows for immediate permanent residence for those who: (1) invest $1 million in any business in any part of the US and generate 10 jobs; or (2) invest $500,000 in a targeted employment area or a regional center and generate 10 new full-time jobs.  The law defines a targeted employment area as either rural or in a location of high unemployment. 

The bootstrapped, hardworking, talented and creative entrepreneur generally does not have the amount of money required here. This visa is for the investor who is not interested in being the next Facebook founder, who wants to ‘dump’ money in a safe and successful project that will allow him or her to fulfill the requirements to obtain a green card.

The E-2 Treaty Investor visa:

Citizens of countries with which the US maintains a treaty of commerce and navigation can apply for the E-2 visa.  This is a great visa for someone with the financial ability to open a business in the US.  Yet it has its limitations. The amount of money required for a successful visa is around $100,000.00 minimum, even though the law simply requires a ‘substantial’ investment. More importantly, the visa only enables one to own and run the business, so it is not a path to permanent residency.  As long as you have the business, you are permitted to live and work in the US.  The second problem is that not all countries maintain the required treaties with the US. So, the majority of graduates and high-skilled workers coming from India and mainland China are not eligible for the visa. I see many clients who are otherwise eligible but cannot benefit from this visa.

H-1B Specialty Occupation:

In August 2011, the US Citizenship and Immigration Services (USCIS) announced a policy shift in approving business owners to apply for H-1B visas with proof of an employer-employee relationship \ between the owner and the company. The new policy has been a success and many entrepreneurs have benefited.   

However, there are still problems with the policy.  H-1B visas have many stringent requirements, including proof that the owner will be paid the prevailing wage as a salary. The typical start-up company does not always have the funds for this. In addition, USCIS has challenged practically every aspect of such petitions. This has resulted in denials even for obviously approvable cases.

L-1 intracompany transferee:

This is a well utilized visa allowing certain personnel to transfer from a foreign branch to the US as long as they have worked for the foreign branch for at least one year in the past three. However, recently almost all L visas for new companies have faced incredible scrutiny and unreasonable denials.

This visa simply does not fit the circumstances of most entrepreneurs. An applicant must have worked in an overseas branch of the company for at least one of the last three years, whereas most entrepreneurs who want to open a business in the US are either present as a student or on other visa and not transferring from a foreign branch to the US.

O-1 visa:

Dubbed the ‘genius’ visa, the O-1 visa is reserved for those who can prove that they are at the top echelon of their profession and are indeed ‘extraordinary’. Some of the requirements include proving that the applicant has acquired national or international acclaim, that they have been written about in the media, that they have judged people in their expertise, they made significant contribution in their field, etc.

However, the evidentiary documentation to prove such a high burden is extremely difficult. In addition, not all entrepreneurs would be able to fulfill such requirements because starting a new company does not necessarily require one to be a ‘genius’.

National Interest Waiver for entrepreneurs: 

When the above H-1B policy change was announced, the USCIS also announced that they would allow entrepreneurs to apply for green cards under the existing National Interest Waiver (NIW) law. NIW is typically utilized by medical researchers who can prove that their research will benefit the nation (for example, finding a cure for cancer). The new policy suggests that if an entrepreneur can demonstrate that her business will benefit the economy on a national level, she will be approved for permanent residency. 

In theory, it makes sense to utilize existing laws while new laws are being debated. The approach is commendable. However, as yet there are no success stories. In a recent inquiry made with USCIS, I was informed that there is no way to identify such cases.

Nevertheless, the biggest problem in these petitions is a more fundamental issue: whether the entrepreneur can prove that his or her venture will have nationwide benefits. In my opinion, a typical start-up company may generate jobs locally, but may not be able to meet the waiver’s requirement that the benefit be national in scope.

There is an additional problem. NIW falls under the EB2 preference which typically has a several year waiting period for citizens of India and China.  Many of my clients are from India and they are often already in the visa waiting game as described above in EB2 or EB3 preference categories.  Applying for NIW does not assist them obtaining a green card faster.

Entrepreneurs in Residence (EIR):

To its credit, the USCIS has been working on an initiative called Entrepreneurs in Residence (EIR), launched in February 2012. The initiative seeks to evaluate current laws and regulations so that the Service can create policy updates for existing visas in accordance with the modern and practical business world. For example, the program will assess whether there is a way in which one can apply for an H-1B visa and perhaps show stocks and equity in the business instead of cash in the bank for wages.

While I commend and welcome the EIR initiative as an interim solution, the system is not quick. On November 28, 2012, the USCIS launched ‘Entrepreneur Pathways’, an online resource guiding immigrant entrepreneurs about various visa options. The White House blogged about the intention to have fair adjudications on such petitions as did the USCIS on its blog. However, as yet there is no legal guidance on how existing laws will be interpreted to help meet stringent visa requirements. Hopefully, legal guidance is imminent.

* * *

Each of the above visas has its place in the immigration system.  The existing visas work well for certain cases. However, they are not suitable for the average immigrant who wants to start a new business venture, who seeks to grow the business and create new jobs. All the visas above assume that a huge amount of money is required to create a new business. Perhaps traditionally that was the case. But in the modern world of snazzy technology and broadband internet, one does not need much money to start a successful business. Facebook and Google are examples of such success, started by founders during college and graduate school, respectively.  Immigration policies must reflect that too.

Therefore new laws are essential in holding onto the talented people who can create jobs and boost our economy. A version of the Start-Up Act is likely to do just that. It is a win-win solution for both the immigrant and the US. I urge Congress to take this issue seriously and pass new laws as soon as possible to help the US to maximize the competitive advantage engendered by the hard work and new know-how in the hands of highly capable foreign entrepreneurs. Growth of the US economy will depend on it.

Tahmina Watson is an immigration attorney and founder of Watson Immigration Law in Seattle Washington. Her practice has a strong focus on immigrant entrepreneurs and start-up companies. She can be contacted at [email protected]. You can visit www.watsonimmigrationlaw.com to learn about Tahmina and her practice.

What is the difference between an Employee Proprietary Information Agreement and a Confidentiality and Inventions Assignment Agreement?

Trick question.  They are the same thing.  These agreements that protect the companies confidential information and ownership of intellectual property go by several names.  Here are a few names for the same type of agreement:

  • Employee Confidentiality and Inventions Assignment Agreement
  • Proprietary Information Agreement
  • Employee Intellectual Property Assignment Agreement
  • Protection of Company Interests Agreement.

Startup companies should require all employees and contractors to sign a proprietary information agreement that, at a minimum:

  • puts the worker under covenant to keep the employer’s proprietary information confidential and use it only in furtherance of the company’s interests
  • provides that all intellectual property created during the employment is “work-for-hire”
  • assigns to the company all inventions created under the employment relationship.

Other provisions frequently found in worker proprietary information agreements include

  •  a covenant not to solicit company employees and consultants upon termination,
  • recitation of the at-will nature of the relationship,
  • a covenant to return of company materials upon termination,  
  • recitation of company ownership of (and lack of privacy) in emails and other digital communications,

Problems with the Preexisting Inventions List

Most of these agreements have a provision that requires the worker to list personal inventions that shouldn’t come within the scope of the assignment of inventions.  Some of these agreements overreach, in my view, and put an unfair burden on the employee to list all of their inventions, even if they were before the employment with the current employer or unrelated to the current employer’s business.   There is inevitable tension here, because many workers do in fact pick up ideas from the work they are doing. 

Here are three examples:

Example A:  I represent that all matters which I have created or otherwise developed prior to my Relationship with the Company or my signing this Agreement, which may lawfully be excluded from my obligations to the Company under this Agreement, are listed in Schedule 2(a) attached hereto.  If no items are listed in Schedule 2(a), I represent that there are no such matters to be excluded.

Example B:  I am not obligated to assign any Company Invention that qualifies fully under the provisions of the Revised Code of Washington Section 49.44.140 (“RCW 49.44.140”), which is included below.  In addition, I will advise the Company promptly in writing of any Inventions that I believe meet the criteria in RCW 49.44.140 and are not otherwise disclosed on Exhibit A.

Example C: I have attached hereto, as Exhibit A, a complete list describing with particularity all Inventions (as defined below) that, as of the Effective Date, belong solely to me or belong to me jointly with others, and that relate in any way to any of the Company’s proposed businesses, products or research and development, and which are not assigned to the Company hereunder; or, if no such list is attached, I represent that there are no such Inventions at the time of signing this Agreement.

All of these examples have been used by major law firms.  Examples A and B, while protective of the Company, overreach in my view.  Example A probably isn’t enforceable.  It overreaches because everything the Employee has ever created in the past — everything the employee has written, illustrated, coded, snapped with a camera – everything would have to be listed to be eligible to be excluded.  Clearly the employee is not going to list everything they have created in the past, so Example A requires the employee to make a false representation: “If no items are listed in Schedule 2(a), I represent that there are no such matters to be excluded.”

Example B is better, but still problematic.  (For reference see RCW 49.44.140 below.)  Example B has the employee promising to list any Inventions that meet the criteria for exclusion.  All of the employee’s writings, drawings, photos, etc.  not related to the Company’s business and created on the employees own time fit the exception.  (Inventions is always defined broadly to pick up any copyrightable work.)  So Example B has the employee promising to do something they will not realistically do.

Example C is best in my view.  It is fair to the employee and sufficiently protective of the Company.  It requires the employee to list only creative works that related to the Company’s business, products or research.  It’s fair to ask the employee to identify those works and to represent that there are none if not listed. 

Both Companies offering up these documents and employees asked to sign them should review the pre-existing inventions listing requirement carefully for fairness and the employee’s realistic ability to do what is asked or required.

RCW 49.44.140 of the Revised Code of Washington is as follows:

(1)        A provision in an employment agreement which provides that an employee shall assign or offer to assign any of the employee’s rights in an invention to the employer does not apply to an invention for which no equipment, supplies, facilities, or trade secret information of the employer was used and which was developed entirely on the employee’s own time, unless (a) the invention relates (i) directly to the business of the employer, or (ii) to the employer’s actual or demonstrably anticipated research or development, or (b) the invention results from any work performed by the employee for the employer. Any provision which purports to apply to such an invention is to that extent against the public policy of this state and is to that extent void and unenforceable.

(2)        An employer shall not require a provision made void and unenforceable by subsection (1) of this section as a condition of employment or continuing employment.

(3)        If an employment agreement entered into after September 1, 1979, contains a provision requiring the employee to assign any of the employee’s rights in any invention to the employer, the employer must also, at the time the agreement is made, provide a written notification to the employee that the agreement does not apply to an invention for which no equipment, supplies, facility, or trade secret information of the employer was used and which was developed entirely on the employee’s own time, unless (a) the invention relates (i) directly to the business of the employer, or (ii) to the employer’s actual or demonstrably anticipated research or development, or (b) the invention results from any work performed by the employee for the employer.