By Norman Sam
Immigration is a hardship on many levels. It is a journey of great distances - physically, emotionally, socially and culturally. The history of our civilization is filled with stories of the heroic efforts of immigrants who have tested the limits of human will, determination, and patience in search of a better life in a new country. We are all immigrants. Many of us are original immigrants who made the difficult decision to migrate. Many more of us are the beneficiaries of the decisions of our parents, our grandparents, and our ancestors to migrate. Regardless, all immigrants share a common optimism that the new country will offer a chance for a better life, a life that is defined by educational and economic opportunities, improved environmental quality, political stability, and wealth preservation. Immigrants acknowledge that their success or failure is based on hard work, sacrifice, and merit. However they also expect equal opportunity, the rule of law, and good faith fair dealings.
Unfortunately for many immigrants, in February 2014 the Canadian federal government suddenly announced that it would be terminating its highly popular Immigrant Investor Program (IIP), effectively stranding over 65,000 immigrants. In March 2014, the Canadian Immigration Minister Chris Alexander cited the reasons for the sudden termination as: 1) Unmet program objectives; 2) Poor outcomes relative to other economic immigration programs; 3) The investments were essentially risk-free loans; and 4) The backlog of applicants became unmanageable. In April 2014, Minister Alexander announced that a new Immigrant Investor Venture Capital (IIVC) pilot program would be introduced in the autumn. The IIVC program would be broadly based around the idea of using foreign investor capital to create high-paying Canadian jobs within the startup side of the Canadian venture capital spectrum.
Upon reflection, it may be argued that the IIP was too risk-free. In short, the guidelines required immigrant investor applicants with a proven net worth in excess of CDN$1,600,000 to extend an interest-free loan of CDN$800,000 to a provincial government for a period of 5 years. In actuality, many of the immigrant investors seeking to preserve their cash, successfully leveraged this loan and thus only paid a fraction of the required $800,000 as a lump sum up-front payment. Consequently the Canadian IIP became the most popular investor immigrant program among competing economic immigration programs offered by the other major English speaking countries. The EB-5 program’s “at-risk” requirement may seem burdensome to some, but it is also perhaps one of the reasons that the American investment immigration program has outlived its Canadian counterpart and continues to grow.
Conversely, it may now be argued that the replacement IIVC program is too risky for some investors. In this program, Minister Alexander has stated that it would entail a genuine at-risk investment (not loan) exceeding CDN$1,600,000 into a venture capital fund for a duration greater than the previous 5 year duration.
In recent years, high profile startups such as Dropbox, Evernote, WhatsApp, Xiaomi, Pinterest, and Snapchat have created the perception that technology startups are generally doing well. The valuations for these startups, which are privately held (e.g. no reporting requirements) and in many cases earn little-to-no income, are based purely on the early stage external investments from venture capital firms and other established technology companies. For example if a technology startup with no revenues or income achieves a following of 1 million users, secures a $10 million investment from an established venture capital firm or technology company for a 5 percent stake, the startup is now valued at $200 million. This valuation of private startups is highly speculative, and is reminiscent of the euphoric exuberance surrounding the valuations that artificially inflated the technology startups during the infamous “Dot Com Bubble” of the 1990s.
The specific details of the IIVC have been sparse, yet it is precisely the disclosure of these details that will determine the program’s viability and popularity. What are the portfolio’s investment criteria and investment mix? Will the immigrant investors become the angel, seed-stage or later stage investors? Will the immigrant investors have equal downside risk and upside potential based on their pro-rata contribution? Will the fund be modeled after startup incubators/accelerators? What are the exit strategies and how will liquidity be determined?
Indeed in a May 2013 Financial Post article entitled, “Glut of startup accelerators failing to produce the next Hootsuite or Shopify” the journalist reported on the dismal reality behind the Canadian startup accelerator sector. The pioneering work of established startup accelerators Y Combinator and TechStars, with their headline-grabbing billion dollar valuations, have captured the imagination of venture capitalists worldwide and spawned the birth of a plethora of copycat accelerators. Even within the world’s two most successful accelerators, less than 10 percent of TechStar’s portfolio of 200 companies and 8 percent of Y Combinator’s companies have monetized or been acquired. With such an environment, it is unclear whether the program will be able to attract Chinese investors that are notoriously risk-averse when it comes to protecting their investment capital.
One can certainly understand the Canadian government’s motivation to create high paying technology sector jobs for Canadians using risk capital provided by wealthy foreigners seeking Canadian immigration. This is seen by some as an example of political opportunism where the risk is entirely borne by the non-voting immigrant investor rather than voting Canadian entrepreneurs and their respective voting Canadian high paid technology workers.
So what are the options for an immigrant who has been stranded by the defunct Canadian IIP? I see four: 1) Litigate the matter; 2) Take a wait-and-see approach toward the replacement IIVC program; 3) Apply for the limited number of openings in the Quebec Investor Program (QIP); or 4) Consider immigration to another country. On the litigation front, Toronto lawyer Tim Leahy representing 2 complainants, brought forth a class action lawsuit against the Canadian government’s termination of the IIP. A lower court ruled in favor of the government’s action, although as of this writing there is an appeal of this decision. Regarding the wait-and-see approach, immigrants will likely have to wait for the completion of the IIVC pilot before the final details, including the risk-reward trade-off are formally announced. The third option, to immigrate under the QIP could be problematic for many as this program only allows 1,750 investors with strict Quebec residency and French language requirements. In other words, immigrant investors must live in the province of Quebec and demonstrate an intermediate-advanced proficiency in the French language. For the fourth option, we have narrowed the choices to the other preferred English speaking immigration destinations. In short, the United Kingdom, Australia, and New Zealand require as much as $7 million USD without offering up-front permanent residency. By comparison, the U.S. EB-5 visa programs requiring an investment of $ 1 million or $500,000 (if TEA designated) and the creation of at least 10 full time jobs, offers the “best value” among the aforementioned programs (including the Canadian IIVC program). International immigrant investors have corroborated this perception of value when it was confirmed by the U.S. State Department in August 2014 that the fiscal 2014 quota of 10,000 EB-5 visas had been fulfilled for the first time since the program’s inception in 1990 (the new fiscal year 2015 started on October 1, 2014). Undoubtedly, many of the immigrant investors who had been queuing in the Canadian IIP had hedged their bet by considering the U.S. EB-5 visa program. There is certainly much to like about the U.S. EB-5 visa program as compared with the Canadian options. Here are the top reasons:
Lower investment requirement ($500,000 USD vs. $1.6 million CDN)
Security of investment type (the United States offers many real estate based investments vs. technology, biotechnology start ups in Canada).
U.S. Congress, the USCIS and the SEC have expressed their support for the EB-5 visa program and the need for transparency and streamlining the process.
The plethora of Ivy League and top tier colleges and universities in the United States.
The greater number of cosmopolitan urban centers available in the United States for immigrants to settle, including a wider selection of climate preferences.
For the prepared and cautious investor, U.S. economic immigration via the EB-5 visa program offers outstanding value. However, as the U.S. economy continues to strengthen, the number of prime opportunities for obtaining EB-5 visas in TEA designated areas will diminish. So long as the Canadian IIVC program remains in moratorium, we predict that the U.S. EB-5 visa program will become oversubscribed again. USCIS started the next EB-5 visa fiscal year on October 1, 2014. The time to act is now. The U.S. is truly the land of economic and educational opportunities, where lifestyle, quality of life, freedom, and happiness are harmoniously inter-connected.