Treaty Investor regulations allow certain foreign nationals to receive E-2 visas that would allow them to operate their own enterprises and live in the US. The beauty of E-2 visas is that they are the closest to permanent residence a non-immigrant visa can be because E-2 visas are renewed perpetually so long as the investment enterprise is operational. The vast majority of investments come from citizens of Canada, Mexico, Holland, Britain, Japan, and China. Many Canadian Citizens enter the US to operate small businesses as Franchisees of chain restaurants and other businesses.
Obtaining an investor visa through a business franchise carries certain legal obstacles worthy of special attention. That is because most franchisors have rigid investment programs which do not necessarily coincide with treaty investor E-2 visa requirements. For instance, franchisors may require foreign franchisees not only to invest their own monies to fund the purchase of the business franchised, but to also leverage the remaining cost of the franchise itself by taking out loans that are secured by the assets of the franchised business itself. In most instances, the loan taken out is secured by the fixtures, furniture, and equipment making up the investment enterprise. Unfortunately such financial arrangements runs afoul of Treaty Investor E-2 visa program regulations as any loan that is secured by the assets of the enterprise is considered as “non-qualifying” business investment; non qualifying investment funds may not be considered in the foreign investor’s qualifications for the treaty investor E-2 visa applied for.
This article is intended to explain how our law firm implemented innovative legal strategies to satisfy the essence of complex investor immigration laws and fulfill the requirements of sometime rigid franchise requirements to bring about business opportunities and valid visas for foreign investors.
The Franchisor’s Disaster Story
Several years ago, I was contacted by a major franchisor in Columbus, Ohio who had been recruiting investors for its newly introduced lines of fast food stores in Ohio, Michigan, New York and the New England States. This particular franchisor had built its business model to bring Canadian investors to operate this new line of fast food stores. Prior to my involvement as immigration attorney, this franchisor had submitted, through its own legal department treaty investor visas before the US Consulate in Toronto only to get denied. The US Consulate in Toronto had told the franchisor that the manner in which their program was set up in loaning the foreign franchisee funds to secure the investment which was secured by the assets of the investment itself did not satisfy US immigration laws in that it failed the “substantiality test.” They called me in a panic wondering what to do. As you can see, their entire business model upon which they built their program was toppling down. After carefully examining their business model, I could not but agree with the US Consulate, that the requisite “substantiality test” for treaty investor visas was in fact not met.
What is the Substantiality Test?
In order to resolve the issue of treaty investor visas in the context of franchisee business opportunities, it is important to first understand the “substantiality test” required by E-2 visa rules. In addition, it is important to know how structure franchise investments and any resulting indebtedness in a manner that meet E-2 visa requirements.
Treaty Investor E-2 visa regulations require the US investment to be substantial. Substantiality is a ratio of the amount of actual funds invested into the enterprise and the cost it takes to establish the business itself. For example, suppose the business enterprise is a restaurant. And based on independent appraisal, it takes $100,000 to invest into all the components of such business required to operate this business in all of its locational and other characteristics. Now suppose the foreign investor will place $80,000 initially at risk into such enterprise and provides proof to such to the US Consulate when applying for the E-2 visa. In this example, this business is deemed 80% substantial and will pass the regulatory criteria for E-2 visa issuance. The substantiality test is met when the percentage of required investment into the business enterprise meet certain levels. The interesting fact is that treaty investor E-2 regulations do not specify acceptable substantiality ratios, however proposed regulations which never passed enunciated certain thresholds which became de facto rules. The table below illustrates such ratios.
E-2 visa regulations state that any loans secured by the assets of the business enterprise will not be counted as qualifying investments. Consider an example where a restaurant franchisor allowed the foreign investor to spend $50,000 towards a franchise store with a value of $200,000. The franchisor will loan the franchisee $150,000 and it will take a security interest as collateral in the FFE (fixtures, furniture, and equipment) as collateral. In this example, since the loan is secured by the assets of the enterprise, the only amount that maybe counted towards the substantiality test is $50,000. This will result in a 25% ratio which is unacceptable for treaty investor E-2 visa criteria and this application will be denied.
In order for indebtedness to count as qualifying business investment, the loan can either be secured by other assets of the foreign investor or be not secured at all (the latter is called signature loans). The higher the value of the business enterprise, the lower the required substantiality ratio is. For instance, an investment of $3,000,000 or more only requires the showing of 25% initial investment by the foreign investor or $750,000. The remaining investment can be a loan secured by the assets of the enterprise. The lower the value of the business enterprise, the less likely the investor will be able to secure the loan by the assets of the enterprise.
In the Franchise story that I recited earlier the indebtedness was secured by the assets of the enterprise which caused the investment’s substantiality ratio to fall short of acceptable levels. By restructuring the franchise investment program I was able to obtain approval for about 60 franchise stores throughout the Midwest, New York and New England.
It must be stressed that working with experienced legal counsel is crucial for a successful treaty investor E-2 application. Attorney Gus M. Shihab has represented numerous business investors and real estate developers for nearly 17 years. He has an unparalleled reputation in getting approval for treaty investor visas for a variety of foreign investors. He is a licensed professional civil engineer who understands the ins and outs of real estate developments as well as engineering and legal issues involved in establishing a business enterprise. Call the Law Firm of Shihab & Associates, Co., LPA at 1-877-479-4872