2023 SelectUSA Investor Guide

May 2023

The SelectUSA

Investor

Guide

Find out more about SelectUSA’s

resources on FDI in the United

States

Introduction

As the U.S. federal-level program dedicated to facilitating and promoting high-impact

business investment into the United States, SelectUSA is pleased to welcome you to the

Investor Guide. This is intended to be a first-step resource for companies interested in

making business investments in the United States.

There are many factors to consider when investing in the United States, and we hope this

guide will help answer at least a few of your initial questions on some of the most common

topics we address in our day-to-day work at SelectUSA. To provide guidance on these

topics, qualified service providers who regularly work with investors have drafted the

following chapters of this guide.

Important considerations while reading this guide:

The size of the United States

The United States is made up of 50 states, five territories, and the District of Columbia –

each with their own unique opportunities for investors. While reading this guide, it is

important to appreciate the diverse array of potential investment locations while

recognizing how that variety may differently impact each state and city. While this may

seem daunting, it means that the right U.S. investment landscape is there for your

business.

Our nation is incredibly diverse, with the world’s most attractive consumer market, a

thriving culture of innovation, and one of the most productive workforces in the world.

Companies of all sizes – from start-ups to multinationals – find the ideas, resources, and

market they need to be competitive. As a result, the United States is the world’s number-

one destination for foreign direct investment, and we hope you will select it as the

destination for your next investment as well.

Levels of governance: federal, state, and local

The United States is governed at different levels, from the federal government down to the

state, county, and local levels. Many of the topics discussed in this guide are affected by

national laws and by regulations at the state, county, or city level. It is important to

remember that much of the information in this guide is presented at the national level, but

that specific details may change based on location – especially for some of the most

granular subjects that govern your day-to-day business.

This is just one of the reasons why we suggest that any company engage legal counsel and

conduct further research, as applicable, to ensure compliance with applicable federal and

state regulations and to optimize its business operations in the United States. These topics

are often very technical and challenging, but there are many qualified professionals who

can help your business make the right decisions.

SelectUSA is here to help you!

This guide is intended as a starting point for your business investment in the United States,

and we expect that you will have questions remaining after you finish reading the guide.

SelectUSA is happy to help you continue to pursue your investment with our variety of free

services for firms, which include:

• Information on the competitive and regulatory landscape in the United States,

industry and workforce data, and how to establish and operate a business in the

United States.

• Information on federal business incentives, grants, loans, and other programs.

• Introductions to economic development organizations.

• Ombudsman services to help investors address issues involving federal rules,

regulations, programs, or activities related to existing, pending, and potential

investments.

In addition, SelectUSA’s website

provides a wealth of information on our services, as well as

other information related to foreign direct investment in the United States. It also contains

contact information so we can discuss how we can best help you!

We hope this guide will be a

useful first step to explore

business investment in the

United States.

iii

Acronyms and Initialisms

ACA

Affordable Care Act

ALEC

American Legislative Council

AOS

Adjustment of Status

APM

Alternative Payment Method

BACS

Bankers Automated Clearing

Services

BIS

U.S. Bureau of Industry and

Security

BLS

U.S. Bureau of Labor

Statistics

BPT

Branch Profits Tax

CBP

U.S. Customs and Border

Protection

CDD

Customer Due Diligence

Requirements for Financial

Institutions Rule

CFIUS

Committee on Foreign

Investment in the United

States

DBA

“Doing Business As" name

DFC

U.S. International

Development Finance

Corporation

DMCA

Digital Millennium Copyright

Act

DOC

U.S. Department of

Commerce

DOD U.S. Department of Defense

DOL U.S. Department of Labor

DOT

U.S. Department of

Transportation

DTSA

Defend Trade Secrets Act

ECI

Effectively Connected

Income

EDA

U.S. Economic Development

Administration

EDO

Economic Development

Organization

EEA Economic Espionage Act

EEOC

Equal Employment

Opportunity Commission

EIA

U.S. Energy Information

Administration

ESTA

Electronic System for Travel

Authorization

ETCA

Export Trade Company Act

FAA

U.S. Federal Aviation

Administration

FATCA

Foreign Account Tax

Compliance Act

FDAP

Fixed, Determinable, Annual

or Periodic income

FDI

Foreign Direct Investment

FDIC

U.S. Federal Deposit

Insurance Corporation

FEIN

Federal Employer

Identification Number

FICA

Foreign Account Tax

Compliance Act

FinCEN

U.S. Financial Crimes

Enforcement Network

FIRRMA

Foreign Investment Risk

Review Modernization Act

FMLA

Federal Family Medical Leave

Act

FOCD

“Foreign Owned, Controlled,

or Dominated” test

FTC

U.S. Federal Trade

Commission

FUTA

Federal Unemployment Tax

GINA

Genetic Information

Nondiscrimination Act

GSA

U.S. General Services

Administration

HIPAA

Health Insurance Portability

and Accountability Act

Intellectual Property

IPO

Initial Public Offering

IRC Internal Revenue Code

IRS Internal Revenue Service

ITU

"Intention to Use" application

LCA

Labor Condition Application

LLC

Limited Liability Company

LOA

Leave of Absence

LPR

Lawful Permanent Resident

M&A

Mergers and Acquisitions

MSA Metropolitan Statistical Area

NAFTA

North American Free Trade

Agreement

NRC

U.S. Nuclear Regulatory

Commission

NYSE New York Stock Exchange

OCCIC

Office of the Chief Counsel

for International Commerce

OSP

Online Service Provider

PaaS

Payments-as-a-Service

Permanent Establishment

PERM

Program Electronic Review

Management

POE Port of Entry

R&D Research and Development

SEC

U.S. Securities and Exchange

Commission

SRP

Standard Review Plan

STEM

Science, Technology,

Engineering, and

Mathematics fields

TIF

Tax Increment Financing

USCIS

U.S. Citizenship and

Immigration Services

USD

U.S. Dollars

USMCA

Agreement Between the

United States, Canada, and

Mexico

USPTO

U.S. Patent and Trademark

Office

UTSA

Uniform Trade Secrets Act

VAT

Value-Added Tax

VWP

Visa Waiver Program

Table of Contents

Overall Investment Checklist ......................................................................................... 1

Immigration......................................................................................................................10

Section One: Visa Overview .............................................................................................. 11

Section Two: U.S. Immigration Pathways: Which One is Right for Your Project? .............. 15

Business Structure ..........................................................................................................30

Taxes ..................................................................................................................................44

Workforce..........................................................................................................................56

FDI Restrictions................................................................................................................69

The Committee on Foreign Investment in the United States (CFIUS) .................79

Intellectual Property ......................................................................................................84

A Checklist for Foreign Companies Opening a Bank Account in the United

States .................................................................................................................................98

Site Selection in the United States ........................................................................... 104

Economic Development Incentives .......................................................................... 119

Federal Procurement: an Overview: ........................................................................ 130

Federal Procurement: the Basics:............................................................................. 138

Understanding the U.S. Capital Market Structure for Capital Raising Success

.......................................................................................................................................... 145

Partnering with U.S. Research Organizations for SME Technology Firms....... 157

SelectUSA is here

to help guide you

whenever you

are ready.

Overall Investment

Checklist

Key Considerations for Foreign Investors

in the United States

Robert Calafell, National

Credits & Incentives Leader

Matt Dollard, Global

Expansion Advisory Leader

Goran Lukic, Director

OVERALL INVESTMENT CHECKLIST

he United States business market is competitive. It generally allows for a relatively

short period to establish new business operations. However, it is important to be

mindful of the regulatory environment when setting up a company in the United

States. This checklist is designed to provide an efficient and concise summary of the key

issues and considerations when investing in the United States. Your U.S. advisors should be

able to elaborate on many of the issues listed below.

Key Questions for Establishing Your Business in the United States

What is your strategy?

Because the United States market is large, doing your due diligence before entering will

significantly enhance your success. The temptation for many businesses is to execute first,

then plan later. Instead, you should, as the saying goes, plan your work, then work your

plan. In other words, start by creating a plan that includes input from a steering team of

leaders from across your organization. Set to deliver that plan but remain open-minded

and flexible about new opportunities. The ability to adapt to changing or unforeseen

circumstances will help your business prosper.

What are your goals?

Leading practices of successful United States market entrants demand you begin by

defining your business goals and aspirations. Specifically, what financial and non-financial

objectives do you care about? What do you aim to become to your customers? What do

you want your brand to represent? What type of relationships do you want with suppliers

or partners? What do you want the new venture to mean to your employees? Writing down

brief, specific, measurable goals around these topics builds alignment and consensus

among the team, allowing them to communicate clear intentions throughout your

organization.

Where will you focus?

Most businesses are unable to master the enormous, complex U.S. market within their first

year. Therefore, it is crucial to prioritize where the business spends its precious time and

resources. Where are your most profitable current or future customers going to come

from? Which markets represent the greatest opportunity? Where will you segment by

customer, geography, product, or channel? Define this with specificity; do your research

and put realistic figures to it; and then allocate the vast majority of your resources to the

top tier of opportunities.

How will your product or service succeed?

Taking your product or service to a new market requires you to be an open-minded skeptic

about its prospects in a new country. What is your unique selling proposition? Will you

OVERALL INVESTMENT CHECKLIST

compete on speed, agility, service, cost, quality, or innovation? Have you talked to your

current and future customers to understand what they like and do not like about your

product or service? What sources of defensible advantages do you have? Will you need

partnerships with other businesses to succeed? What is your target business model, and

should it differ from your home market, or be localized in some way to succeed? Answering

these questions informs how best to organize your new business operations.

How will you configure business operations to meet your goals?

Once you have decided what your business must look like, evaluate the capabilities it must

have to meet the goals that your steering team developed. If you sell products, where do

you need to transform or develop your supply networks? What technological systems must

be put in place? What type of skill sets will you need? How will you attract, hire, and retain

the talent to grow your business? What must you have in place to meet customer

expectations? Getting to these answers is iterative and is informed by the aforementioned

work of goal setting, determining where you will establish, and what and how you will offer

your product or service.

What is your plan?

In your plan, identify key work streams, break them down into tasks, set start and end

dates, assign owners, and do research to identify the requisite budget. Make a business

case that shows initial cost, payback period, return on investment, and cash flow over time.

Evaluate if you have the right people on your team and if they have the bandwidth to

execute; then build a hiring strategy into

your plan. Your strategic execution plan

does not assume you have learned

everything you need to know during your

earlier discovery work. Instead, your plan is

an iterative set of activities that builds your

knowledge, which, in turn, illuminates what

actions you should take.

Take the time to develop your strategy

before you begin the investor checklist.

OVERALL INVESTMENT CHECKLIST

Key Considerations for Investing in the United States

Investment Planning

Proper planning is critical to the successful establishment of business operations in the

United States. This can include market and customer analysis, trade and tariff issues, as

well as development of expansion and growth financial models and projections. The early

inclusion of advisors can expedite and streamline the expansion.

Your U.S. professional services team can include:

• An international tax professional for the most effective structure for the foreign

parent company/owners

• A U.S. tax professional to analyze U.S. federal and state tax issues

• A corporate lawyer to incorporate the entity and draft legal contracts and

agreements

• An insurance professional to obtain business liability and workers’ compensation

coverage

• A banker for financing and banking needs

• A trade and tariff advisor

• A location selection consultant

• A real estate professional

• A visa attorney

Investment Strategy Development

Developing a data-driven strategy that aligns with the needs of the business and company

stakeholders – and is adaptable to change as the business grows – can focus activity

toward agreed-upon benchmarks, targets, and results. It is also important that the top tier

of the organization be responsible for setting these strategies. Determine the key

questions that must be answered and tactics that must be developed. Consider hiring

advisors to conduct rapid research to develop the strategy. An efficient strategic

development process should not require more than eight to 12 weeks for most startup

projects.

Site Selection

Location will affect many components of your business, not to mention its overall success.

Choosing where to establish should be a multi-faceted process. Consider the following

steps and questions:

• Goal setting: What factors drive your company’s success? Apply those you laid out

in the planning stage. Consider how important it is for you to be close to your

customers.

OVERALL INVESTMENT CHECKLIST

• Labor analysis: How important is gaining access to specific skill sets (labor and

talent), and what is the competition, cost, and availability of the required skill sets?

• Supply chain analysis: How far can you be from your sources of supply?

• Location cost analysis: Narrow a preliminary list to a smaller one and study the

best options in further detail. Build a business case to evaluate the cost models

utilizing the data you have collected on multiple sites, and weigh the financial and

non-financial factors.

• Credits and incentives: Evaluate credits and incentives of your investment options.

Build these into your business and cost model.

• Site visits: Visit a few location options for a first-person analysis of the area and

space.

Tax and Entity Planning

Determine the type of legal entity best suited to your unique situation, and determine the

date of your accounting year-end.

Note: A business corporation is the most common entity type for foreign investors, but

other possibilities exist, such as limited liability companies, partnerships, and

unincorporated branches. The selection of entity type and the accounting year-end

should be made with the advice of your U.S. tax accountant and corporate lawyer, and

as well as your home country advisors.

Select the jurisdiction where you will establish your business entity. A company may

Note: Your business entity will be governed by the laws of the state where it is

established. Choice of jurisdiction should be made with the advice of your tax

professional and corporate lawyer.

Submit paperwork to establish your legal entity. Use an expedited service if needed.

Note: You may pay filing fees and

franchise taxes as applicable in the

state of registration. These may often

total more than $500. You may also

need to name or appoint a registered

agent located in the state in which the

entity is formed.

OVERALL INVESTMENT CHECKLIST

• Capitalize the new entity. State law determines the minimum paid-in capital

requirement. A common minimum is $1,000.

• Register with the Internal Revenue Service (IRS) for a Federal Employer Identification

Number (FEIN).

• File with the state government for a certificate of assumed name or doing business

as (DBA) name, if needed.

• Obtain any appropriate state tax and/or local identification numbers.

Discuss federal, state, and local tax issues with your advisor.

• Prepare for U.S. income tax compliance. Operations will likely be subject to U.S.

income tax. Withholding requirements may apply to payments to the foreign parent.

• Assess whether the foreign parent company has had a U.S. income tax presence

(“permanent establishment” in the United States) and if there may be delinquent

U.S. tax and/or U.S. tax reporting that need to be addressed.

• Consider a capital investment strategy.

• Review anticipated intercompany transactions to determine potential withholding

tax and transfer pricing considerations.

• Identify state and local credits and incentives that may be available.

Plan for state and local tax compliance.

Note: Do not overlook state and local taxes. There are important, complex, and

significant variations between each jurisdiction. State and local taxes generally are not

covered under international tax treaties. Common state and local taxes include

property tax, sales/use tax, payroll taxes, and income tax.

• Prepare for employment taxes and contributions. You need to determine the cost

and impact of employment taxes and contributions required by state, local and

federal law.

Human Resource Planning

Employers must comply with state and federal laws and regulations controlling the hiring,

treatment, compensation, and termination of employees. The following considerations and

steps should help you ensure compliance and a productive workforce.

Social Security in the United States does not provide health or similar benefits to

employees. Instead, it is a retirement income and health benefits program for the elderly

and disabled. It is funded by mandatory employer and employee contributions.

OVERALL INVESTMENT CHECKLIST

Consulting with your professional services team will help you understand the potential

impact for your organization of the Affordable Care Act (ACA), the comprehensive health

care reform law that passed in 2010. Understand the necessary proactive steps to comply

with ACA regulations. Also, ensure proper visas are secured for non-U.S. employees. Be

sure to address the family needs of those employees.

Accounting and Financial Reporting

Select an accounting system or provider that is scalable and can grow with your business.

The utilization of virtual solutions can be an economical choice for many.

• Select an accounting system and outsource to a provider, if needed.

• Set up your accounting system and financial reporting.

• Address banking, Bankers Automated Clearing Services (BACS), and credit card

setup.

• Develop invoicing and bill-pay processing procedures.

Determine the nature and frequency of financial reporting to the parent company,

including monthly close and reconciliation processes. (Note: There is no mandatory chart

of accounts in the United States.)

Determine whether the parent company needs an audit or other attest procedures in the

United States. (Note: There is no statutory audit requirement for private companies.)

Facility Considerations

Work with identified real estate and facility providers to secure needed space. Utilization of

a shared space, such as a co-working location, is not an uncommon solution for initial

operations. As operations grow, a lease or more permanent location can be secured.

• Evaluate facility options in conjunction with your real estate advisor.

• Apply for required state or local

business licenses or permits.

• Consult with an insurance advisor

regarding any potential employers’

liability insurance that may be

required.

• Determine the technology and IT

needs for the location once

acquired.

OVERALL INVESTMENT CHECKLIST

Key Checklist for Foreign Investment in the United States

Investment Planning Notes

Create business and expansion strategic plan

Select advisors

Analyze tariff issues

Conduct tax analysis

Develop implementation plan

Tax and Entity Planning Notes

Determine entity type and structure

Determine jurisdiction (state) location

Obtain FEIN and state tax ID – tax registration

Complete federal and international tax planning

Complete state and local tax planning

Calculate employment tax and withholdings

Human Resources Planning Notes

Review social security and other employee benefits

Assess Affordable Care Act and employers’ liability

Secure visas for non-U.S. employees

Accounting and Financial Reporting Notes

Select accounting software/provider

Determine accounting and reporting procedures

Determine financial audit requirements

Facility Considerations Notes

Secure real estate

Obtain required permits / licenses

Establish technology / IT needs

Expansion Strategy Development Notes

Analyze location, labor, and site selection analysis

Evaluate tax credits, incentives, and grants

Conduct operational analysis

OVERALL INVESTMENT CHECKLIST

About RSM

RSM’s foreign direct investment (FDI) team helps bring your worlds together via our

bicultural, bi-technical professionals who are experienced advising foreign-owned

companies understand conducting business in the U.S.

RSM advises companies developing operations in the United States, providing informed

multidisciplinary guidance to FDIs investing and building operations in new markets,

including:

• Planning needs

• Ongoing operations and exit needs

• Remote selling needs

• Initial entry needs

• Navigating and negotiating local and state credits and incentives

• Maximizing complex international for tax and cash flow efficiencies, as well as

domestic tax structuring and compliance

• Outsourcing services including global finance, accounting, and reporting functions

When information about the United States is critical to your success, RSM FDI team possess

the extensive local knowledge and experience to be your guide. RSM professionals leverage

their multilingual language skills, and business and cultural understanding to provide audit,

tax and consulting services to middle market companies focused on international growth

and expansion. Learn more by visiting rsmus.com/international

Disclaimer

This chapter was prepared by Robert Calafell, Matt Dollard, and Goran Lukic with RSM US

LLP. Views expressed in this chapter are the authors’ own, not that of the International

Trade Administration. This chapter does not constitute legal advice. Readers interested in

investing in the United States should consult legal counsel.

Immigration

Section One

Visa Overview

Section Two

U.S. Immigration Pathways: Which is Right

for Your Investment Project?

A.J. Francis

, Interagency Program Manager

Andrew Greenfield

, Partner

IMMIGRATION

Section One: Visa Overview

ost foreign citizens need to obtain a visa in order to visit or work in the United

States. The U.S. Department of State, in conjunction with the Department of

Homeland Security, oversees the U.S. visa process. The purpose of your

intended travel and other facts will determine what type of visa is required under U.S.

immigration law. Below is a description of the visa types available for business and

employment purposes. For information on the U.S. visa process, including updates to visa

policy, please refer to the Department of State’s travel website

A visa does not guarantee entry into the United States but allows a foreign citizen coming

from abroad to travel to a United States

port of entry (generally an airport or land

border) and request permission to enter

the United States. The Department of

Homeland Security, U.S. Customs and

Border Protection (CBP) officials have

authority to permit or deny admission to

the United States, as well as determine how

long a traveler may stay. For more

information about admission to the United States, please refer to the CBP website

Temporary Business Visitor Visas

The B-1 visa is generally for foreign nationals who wish to consult with business associates,

negotiate a contract, settle an estate, or attend an educational, professional, or business

convention or conference. For more information on the B-1 visa and the application

process, please visit the Department of State’s travel website

Temporary Worker Visas (Nonimmigrant)

E-2: Treaty Investors

The E-2 visa is for foreign nationals who have invested or are actively in the process of

investing a substantial amount of capital in a bona fide enterprise in the United States and

are seeking to enter the United States solely to develop and direct the investment

enterprise. This visa is available to citizens

of all countries that maintain the relevant treaty

with the United States or have been accorded such status by the enactment of legislation.

Additional information on the E-2 visa can be found on the U.S. Citizenship and

Immigration Services (USCIS) website.

IMMIGRATION

L-1A and L-1B: Intracompany Transferees

The L visa category is a temporary work visa for employees transferred from abroad to a

branch, parent, affiliate, or subsidiary in the United States. The L-1A visa is for

intracompany transferees who will work in a managerial or executive position in the United

States. The L-1B visa is for intracompany transferees who will work in a position that

requires specialized knowledge in the United States. Additional details on the requirements

for L-1A and L-1B

visas as well as information on blanket petitions may be found on the

USCIS website.

H-1B: Specialty Occupations

The H-1B visa for specialty occupations applies to applicants who may perform the

services of a specialty occupation. Their position is considered a specialty occupation when

it meets at least one of the following criteria:

1. A position that requires a minimum of a bachelor’s degree or equivalent degree;

2. The degree requirement for the job is common to the industry or the job is so

complex that it can be performed only by an individual with a degree;

3. The employer requires a degree or equivalent for the position; or

4. The nature of the duties for the position are so specialized or complex that the

knowledge required to perform the duties is usually associated with the

attainment of a bachelor’s or higher degree.

The holder of an H-1B is permitted to work within the United States for a maximum of

three years, with a possible extension of up to six years. Spouses and children (unmarried

and under 21 years old) may be eligible to accompany the H-1B holder if they are found

eligible for an H-4 visa

Each fiscal year, the United States grants a maximum of 65,000 H-1B visas. However,

applicants employed at an institution of higher education, a nonprofit research

organization, or a government research organization are not subject to this limit.

Additionally, the first 20,000 petitions filed on behalf of beneficiaries with a master’s degree

are exempt from this limit.

For additional details on the application process of the H-1B visa, please visit the

USCIS H-

1B webpage.

O-1: Individuals with Extraordinary Ability or Achievement

The O-1 is a temporary work visa for individuals who possess an extraordinary ability. The

O-1A is for individuals with extraordinary ability in the sciences, education, business, or

athletics. The O-1B is for individuals with extraordinary ability in the arts, motion picture, or

IMMIGRATION

television industries. Under an O visa, the applicant may reside in the United States for a

maximum of three years, with an opportunity to extend one additional year.

To be eligible for an O-1 visa, the applicant must be coming to the United States on a

temporary basis and must demonstrate their extraordinary ability through sustained

national or international acclaim. More specifically, for the fields of science, education,

business, and athletics, the applicant must show that they have a level of expertise

indicating that they are part of a small percentage who has risen to the very top of the field

of endeavor. In the arts, motion picture, and TV industries, the applicant must demonstrate

distinction in their field. Distinction means a high level of achievement in the field of the

arts evidenced by a degree of skill and recognition substantially above that ordinarily

encountered to the extent that a person described as prominent is renowned, leading, or

well-known in the field of arts.

The O-2 visa is available for individuals who will accompany O-1 visa holders in order to

assist them in their work. The O-2 worker must have critical skills and experience with the

O-1 carrier that cannot be readily performed by a U.S. worker. Additionally, he or she must

be petitioned for in conjunction with the O-1 alien to whom he or she provides support and

is not entitled to work separate and apart from the O-1 alien. The O-3 visa is available for

individuals who are the spouse or children of carriers of the O-1 or O-2 visas.

For more information on the O visa category, please visit the USCIS webpage on O visas

Permanent Worker Visas (Employment-Based Immigration)

The EB visa category is for employment-based immigration. The United States issues

approximately 140,000 EB visas each year, split into five different types. The EB-1 visa

is for

applicants who either possess an extraordinary ability, are an outstanding professor or

researcher, or are a multinational executive. The EB-2 visa is for applicants who possess an

advanced degree or its equivalent or who possess an exceptional ability. The EB-3 visa is

designated for applicants who are skilled workers or professionals. The EB-4 is for specified

sets of immigrants, including religious workers, Afghan and Iraqi translators, broadcasters,

and others. The

EB-5 visa is reserved for candidates who intend on investing a minimum

amount of capital that will create a minimum number of jobs in the United States.

For further information on any employment-based visa programs, including additional

requirements, stipulations for spouses and children, or necessary forms, please visit the

USCIS webpage

for EB visas.

IMMIGRATION

About SelectUSA

SelectUSA is a U.S. government-wide program housed in the International Trade

Administration at the United States Department of Commerce. Our mission is to facilitate

job-creating business investment into the United States and raise awareness of the critical

role that economic development plays in the U.S. economy.

Disclaimer

This chapter was prepared by A.J. Francis with SelectUSA. Views expressed in this chapter

are the author’s own, not that of the International Trade Administration. This chapter does

not constitute legal advice. Readers interested in investing in the United States should

consult legal counsel.

IMMIGRATION

Section Two: U.S. Immigration Pathways: Which One is Right for

Your Investment Project?

n an environment of fluid markets, changing policies, and a global pandemic altering

cross-border travel, understanding the immigration options available to investors and

their workforces is an essential – but sometimes overlooked – aspect of investing in the

United States. Investors need to make sure that their employees have the correct U.S.

visa(s) and an immigration advisor to ensure the visas are secured as timely and seamlessly

as possible. This chapter details the

immigration options available to business

investors and their prospective U.S.

employees, including information on visa

requirements, timeframes, and

considerations for families.

The table at the end of this chapter

summarizes key aspects of each of the

visa categories discussed and includes

additional hyperlinks to relevant

government websites.

Temporary Visitors

The B-1 (business visitor) visa allows individuals to enter the United States temporarily to

conduct certain types of business activities on behalf of a foreign entity or investor. Under

a B-1 visa, the individual may establish an investment and plan for relocation, including

incorporating a business, meeting with business and financial advisors and contracting for

their services, opening accounts, securing premises, and searching for housing and

schools.

The B-1 visa does not, however, permit employment on behalf of a U.S. business. Thus, if

the foreign investor wants to direct, manage, or perform services in the United States for

the new U.S. business, then he or she must first obtain a U.S. work permit. This is true even

if the investor will be paid for his services by a foreign company.

Once obtained, the B-1 visa will be valid for as little as one month to as long as 10 years

depending on the nationality of the visa holder

. Some B-1 visas may be used for only one

entry into the United States while others may be used for multiple entries, again based on

nationality. Officers at the U.S. border decide how long a business visitor may stay for each

visit. The officer may grant a stay for the time necessary to conduct the business, but not

more than six months. If the business visitor requires additional time in the United States

to complete his or her business activities, then it is possible to request an extension of stay

IMMIGRATION

from the government, but extension requests will only be granted if the government is

convinced that the visitor will not engage in unauthorized employment.

An alternative to the B-1 visa is the Visa Waiver Program (VWP), under which citizens of

designated countries

can apply to enter the United States as business visitors for 90 days

or less without the need to obtain a visa from a U.S. consulate. VWP travelers are required

to obtain an online pre-approval from the Department of Homeland Security’s Electronic

System for Travel Authorization (ESTA) at least 72 hours before departing for the United

States. Those who enter the United States under the VWP may only engage in activities that

are permissible for those who enter with a B-1 visa. The law does not permit VWP travelers

to extend their stay beyond 90 days.

Family members of the investor may also apply for B-1 visas or travel under the VWP,

provided they, like the investor, will not be employed in the United States and intend to

return to their home country after a temporary visit. The B-1 visa and VWP may not be

used for the purpose of attending school in the United States.

Treaty Traders and Investors

The E-1 (Treaty Trader) and E-2 (Treaty Investor) visa categories allow individuals to enter

the United States to work for a U.S. business that is majority owned by citizens of a

country

with which the United States has a commercial treaty. The E visa applicant must be a citizen

of the treaty country who will direct and manage the U.S. business or provide essential

skills. Generally, “E-1 treaties” require the U.S. business to engage in substantial trade with

the other treaty signatory. “E-2 treaties” require a substantial investment in the U.S.

business. The United States has treaty relationships with many major economies. There is

no such treaty with India or China.

Qualifying U.S. businesses must apply for and be deemed eligible by a U.S. consulate in

order to support E visa applications. This process can be complex. Once the business is

deemed eligible, qualified citizens of the treaty country may apply for E visas at a U.S.

consulate. These may be the principal investor(s) in the U.S. business or other citizens of

the treaty country whose skills and experience are required by the U.S. business.

There is no maximum number of years an individual may be employed in the United States

as an E treaty trader or investor, so long as they continue to provide management or

essential skills services to the U.S. treaty business and the business remains at least 50

percent owned by citizens of the treaty country. Spouses and unmarried children under

age 21 may accompany the principal E visa holder and attend school. Spouses of principal E

visa holders may seek employment in the United States for any employer without the need

for separate sponsorship.

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Note: there is no requirement that the E visa applicant be employed outside the United

States by a foreign parent or affiliated company prior to his or her U.S. assignment. This is

an important distinction from the L-1 visa category discussed below.

Intracompany Transferees

The L-1 visa category is for foreign nationals who will be assigned to work in the United

States for an organization that is related to their home country employer. Employees who

have worked outside the United States for at least one continuous year in an executive,

managerial, or specialized knowledge capacity for a parent, branch, subsidiary, or other

affiliate of the U.S. employer may be eligible for L-1 classification. The employer must seek

to transfer the employee to the United States to assume an executive, managerial, or

specialized knowledge position, although it does not need to be the same position the

employee held abroad. Newly established U.S. businesses may sponsor foreign employees

for L-1 visas, but work authorization is initially granted for one year, and the employer must

subsequently renew sponsorship with evidence of business viability.

Ordinarily, the employer must obtain U.S. Citizenship and Immigration Services (USCIS)

approval for each prospective L-1 transferee before the transferee can apply for an L-1 visa

at a U.S. consulate. However, there is a streamlined process, known as the L-1 “blanket

program,” that does not require USCIS processing and permits the U.S. consulate to handle

the entire adjudication process. The blanket program is available for multinational

organizations who frequently transfer employees to the United States. To qualify for the

blanket program, the U.S. employer must have been doing business in the United States

for at least one year and meet at least one of the following criteria: 1) at least ten L-1

approvals from USCIS in the prior year; 2) U.S. sales of at least $25 million; or 3) at least

1,000 U.S. employees. USCIS processing for individual L-1 filings and/or initial approval for

the corporate blanket program can take several months unless the employer pays for 15-

day Premium Processing. Once the initial corporate blanket petition is approved by USCIS,

most individual L-1 visa requests may be made entirely at the consulate, as stated above.

L-1 work authorization is available for up to seven years if the U.S. role is executive or

managerial (L-1A) or up to five years if the U.S. role requires specialized knowledge (L-1B).

L-1A executives or managers who also served as executives or managers for their foreign

affiliated employers before transferring to the United States may be eligible to apply for

U.S. permanent residency (the “green card”) without the need for the U.S. labor market test

that is typically a prerequisite for green card applications.

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Spouses and unmarried children under age

21 may accompany the principal L-1 visa

holder and attend school in the United

States. Spouses of principal L-1 foreign

nationals may seek employment in the

United States for any employer without the

need for separate sponsorship.

Note: unlike the E-1 and E-2 visa categories

discussed above, the L-1 visa is available to

those of any nationality so long as they have been employed abroad by an affiliated

company for at least one year in a qualifying capacity.

Specialty Occupation Professionals

The H-1B visa category is available to persons who will be employed in “specialty

occupations.” Specialty occupations are defined by USCIS as occupations for which a

bachelor’s degree or equivalent in a specific academic field of study is required to perform

the job. The H-1B candidate must in turn possess at least a bachelor’s degree, or equivalent

education and/or experience, in the specified field of study.

The H-1B visa is one of the most sought-after U.S. employment visas, but it presents two

key challenges for employers. Unlike other temporary U.S. work visas, the H-1B visa

category is subject to an annual quota of 65,000, plus an additional 20,000 quota numbers

for those holding a U.S. advanced degree. Each year, the demand for H-1B visas far

exceeds the quota. This restricts the H-1B option for most of the year. Quota exemptions

are available for certain nonprofits and existing H-1B visa holders, who may change

employers during their H-1B tenure in the United States, subject to successful sponsorship

by a subsequent employer sponsor.

The H-1B visa program is also regulated by the U.S. Department of Labor (DOL), which

requires employers to obtain approval of a “Labor Condition Application” (LCA) before filing

an H-1B petition with USCIS. Among other things, the LCA requires employers to attest they

will pay the H-1B worker competitive wages and provide notice to local U.S. employees of

the H-1B sponsorship. DOL may investigate employers’ compliance with LCA attestations

and violators may be subject to significant monetary penalties and debarment from the H-

1B and other immigration programs.

The employer must have USCIS approval before the H-1B candidate can apply for an H-1B

visa at a U.S. consulate. USCIS processing is several months unless the employer pays for

15-day Premium Processing.

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H-1B employment authorization is available for up to six years and may be granted in up to

three-year increments. Extensions beyond six years may be permitted where the worker is

sponsored job

must also meet

requirements for

sponsorship

category, based

on education,

experience, and

skills.

Indefinite. Yes. Spouses

and

unmarried

children

under age 21

may apply for

residency and

also live and

work in the

United States

indefinitely.

U.S. Department of

Labor approves labor

market test, unless

waived. File

immigrant petition

proper green card

category based on

education,

experience, and skills.

Employee and

dependents can then

file to complete the

U.S. residency

process. One- to two-

year processing.

Depending on country

of birth and

sponsorship category,

annual quota may

delay case by several

years.

Labor market test

is waived for

persons of

extraordinary

ability, outstanding

professors and

researchers,

certain

multinational

managers and

executives, and

those working in

the national

interest. The EB-5

investor program

also does not

require a labor

market test. See

below.

U.S.

residency

(the “green

card”): the EB

5 Investor

Program

Live

and work

in the U.S.

indefinitely.

Failure to

maintain

primary

residence in the

United States.

Violation of tax

and other laws

applicable to

U.S. residents.

Investment of

personal funds

a new

commercial

enterprise or

troubled

business.

Required

investment is

US$1.05 million,

or US$800,000

where the

business is in a

designated

rural

or high

unemployment

area, or the

investment is

made in a

qualifying

federal, state, or

local

infrastructure

project.

Residency

granted

conditionally

for 2 years,

then

indefinitely

once certain

criteria are

met.

Yes. Spouses

and

unmarried

children

under age 21

may apply for

residency and

also live and

work in the

United States

conditionally

and then

indefinitely.

File petition with

USCIS to establish

eligibility and

apply for

residency status,

which is granted

conditionally for

two years. If the

investment

creates or

preserves 10 jobs

for U.S. workers

within two years,

the investor may

apply for

indefinite

residency, subject

to an annual

quota.

Some EB-5

investments can

made through

government-

approved Regional

Centers that

sponsor EB-5

capital investment

projects.

* Due to COVID-19, wait times at many U.S. consulates around the world may be longer than usual as the

consulates face increasing demand for visas. It is crucial that visa applicants check consular websites routinely

for earlier appointment slots that might become available and to learn a particular consulate’s policy with

regard to requesting an expedited/emergency appointment.

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Glossary

Adjustment of Status (AOS): An option for the final stage of the permanent residence

process. The AOS application, Form I-485, can be filed with USCIS if the priority date is

current and certain other requirements are met.

B-1 Business Visitor: Visa category for business visitors to the United States. The B-1 visa

does not confer the ability to work and B-1 visa holders cannot receive compensation from

a U.S. source or work on a project where services are being billed to a client. Business

visitors from certain countries can enter the United States without a B-1 visa stamp under

the Visa Waiver Program (VWP); these individuals are admitted for a maximum of 90 days

and are not eligible for extensions of their status except in extremely limited

circumstances. B-1 visitors who have visa stamps in their passports can be admitted for up

to six months and are eligible for extensions of their status.

B-2 Tourist Visitor: Visa category for tourists visiting the United States. Tourists from some

countries are able to enter the U.S. without a B-2 visa stamp under the Visa Waiver

Program (VWP); these individuals are admitted for a maximum of 90 days and are not

eligible for extensions of their status except in extremely limited circumstances. B-2 visitors

who have visa stamps in their passports can be admitted for up to six months and are

eligible for extensions of their status.

Department of Labor (DOL): U.S. federal agency that includes the Office of Foreign Labor

Certification, which oversees prevailing wage determinations, Labor Condition Applications

(LCAs), and labor certifications/PERM.

Green Card: The informal name for the Permanent Resident Card, which is evidence that

an individual has been granted status to live and work in the United States indefinitely.

H-1B: Visa category for temporary workers engaged in an occupation which requires the

theoretical and practical application of a body of highly specialized knowledge and the

attainment of a bachelor's or higher degree in the specific field for entry into the

occupation. Maximum period of stay is six years, with certain exceptions.

H-4: Visa category for spouses and unmarried children under 21 years of age who are

accompanying H-1B visa holders. H-4s are not eligible for work authorization except in

limited circumstances.

I-129 Form: Form I-129, Petition for a Nonimmigrant Worker, is the government form filed

by the employer with USCIS to request E, H, L, O, or TN visa classification on behalf of a

foreign national.

I-140 Form: Form I-140, Immigrant Petition for Alien Worker, is a government form filed by

an employer with USCIS in U.S. permanent residency cases. The filing of this form is the

IMMIGRATION

second stage of the permanent residence process for employment-based cases requiring

PERM and the first stage where PERM is not required.

I-485 Form: Form I-485, Application to Register Permanent Residence or Adjust Status, is

the government form filed with USCIS by a foreign national who is in the United States and

seeks to finalize the permanent residence process.

L-1: Visa category for an Intracompany Transferee. The employee must have worked

outside the United States for at least one year for a parent, subsidiary, affiliate, or branch

office of the U.S. employer in a specialized knowledge (L-1B), or executive or managerial (L-

1A) capacity. Individual L-1 petitions are submitted to USCIS in the United States for

adjudication and approval before the visa stamp can be issued. This is in contrast to the

Blanket L procedure where the application is submitted directly to the U.S. Consulate

abroad. Maximum period of stay is five years (L-1B) or seven years (L-1A).

L-2: Visa category for spouses and unmarried children under 21 years of age who are

accompanying L-1 visa holders. L-2 spouses may apply for work authorization.

Labor Certification: A certification by the U.S. Department of Labor (DOL) that there is no

able, willing, qualified, and available American worker (generally, this means a U.S. citizen

or lawful permanent resident) available for a particular position, in a particular geographic

area, at a prevailing wage. The labor certification relates to a particular position, not an

employee. In order to obtain an approved labor certification, the employer must show that

it tested the local job market and made a good faith effort to recruit for the position, and

that employment of a foreign national employee does not adversely affect the wages or

working conditions of similarly employed U.S. workers.

Labor Condition Application (LCA): The LCA is a prerequisite to filing an E-3, H-1B or H-

1B1 petition. In the LCA, the employer attests to certain wage, working conditions, and

notice obligations. The LCA must be approved by the U.S. Department of Labor (DOL).

Lawful Permanent Resident (LPR): A person who has been granted authorization to live

and work in the United States on an indefinite basis. Also known as an immigrant, green

card holder, or permanent resident.

O-1: Visa category for a Person of Extraordinary Ability. U.S. employers may sponsor

foreign nationals for O-1 employment for an initial period of three years, and then in one-

year increments.

Passport: Travel and identity document issued to foreign nationals by their country of

citizenship. Must be unexpired in order to enter the United States. The U.S. Consulate will

place nonimmigrant visa stamps in the foreign national's passport. The passport must be

valid for at least 6 months at the time of entry.

IMMIGRATION

Program Electronic Review Management (PERM): The attestation and audit system

under which employers obtain permanent labor certification for certain employment-

based immigrant cases. Under PERM, employers conduct recruitment and advertising

before filing a labor certification application. Applications are submitted electronically or by

mail and are subject to audit by Certifying Officers of the Department of Labor.

Permanent Residence: A legal status that permits an individual to live and work in the

United States indefinitely. When this legal status is granted, the government issues a

Permanent Resident Card, often referred to informally as a “green card.”

Port of Entry (POE): The port of entry is the air, land, or sea port through which the foreign

national travels to the United States.

Priority Date: The date a U.S. employer files a PERM application with DOL on behalf of a

foreign national. Where a PERM application is not required, then the date Form I-140 is

filed with USCIS. This date secures a place in the queue for the foreign national under the

green card quota system.

United States Citizenship and Immigration Services (USCIS): USCIS is the agency that

processes applications and petitions for immigration benefits. Formerly known as the

Bureau of Citizenship and Immigration Services (BCIS) and the Immigration and

Naturalization Service (INS).

Visa Stamp: This is the stamp embossed in a foreign national's passport by a U.S.

consulate abroad, which indicates the foreign national's specific visa category. In order to

enter the U.S., most foreign nationals must have a currently valid visa stamp in their

passport (except Canadian citizens and persons entering in B-1/B-2 status under the visa

waiver program). A foreign national who presents a visa stamp to the inspector at the port-

of-entry may be admitted in that visa category and be issued an entry/departure record,

Form I-94, showing the immigration status and length of time allowed to stay in the U.S.

Visa Waiver Program (VWP): The VWP permits citizens of designated countries to apply

for admission to the United States for 90 days or less as nonimmigrant visitors for business

or tourism without first obtaining a B-1 or B-2 visa stamp from a U.S. Consulate. Visits are

generally short-term and, with very limited exceptions, cannot involve employment in the

U.S. or the undertaking of an academic study program.

IMMIGRATION

About Fragomen

Fragomen is a leading firm dedicated to immigration services worldwide. The firm has

more than 4,900 professionals and staff—including over 675 lawyers and equivalent

professionals—in 55+ offices located in the Americas, Asia Pacific and EMEA. Each location

is established either as a law firm or an immigration consultancy, in accordance with

applicable local laws and regulations. In total, Fragomen offers support in more than 170

countries.

Fragomen’s professionals are respected thought leaders in the immigration field, as

recognized year after year by Chambers, Best Lawyers and Who’s Who. They contribute to

conferences and seminars around the world, and author books and other publications that

are relied on as standard references by other immigration professionals. Many of

Fragomen’s professionals have prior experience working in government agencies and in-

house corporate immigration departments, allowing Fragomen to advance strategies for

world-class immigration program management.

Fragomen is structured to support all aspects of global immigration, including strategic

planning, efficiency, quality management, compliance, government relations, reporting,

and case management and processing. These capabilities allow the firm to represent a

broad range of companies, organizations, and individuals, working in partnership with

clients to facilitate the transfer of employees worldwide. For detailed information about

Fragomen, please visit www.fragomen.com

Disclaimer

This chapter was prepared by Andrew Greenfield with Fragomen, Del Rey, Bernsen &

Loewy, LLP. Views expressed in this chapter are the author’s own, not that of the

International Trade Administration. This chapter does not constitute legal advice. Readers

interested in investing in the United States should consult legal counsel.

Business Structure

An Overview of Common Business

Structures for Foreign Investors

Anna Jinhua Wang

Jeffrey J. White

J. Michael Wirvin

Michael J. Kearney

BUSINESS STRUCTURE

hoosing the right type of business

structure is a critical first step for

foreign persons planning to conduct

business in the United States. There are

several types of entities available, each with

its own unique benefits and limitations. The

“right” choice depends on a foreign person’s

specific interests and needs. There is no

“one-size fits-all” structure. The purpose of

this chapter is to provide a high-level

comparison of some common business structures used by foreign persons to conduct their

U.S. operations and what impact that structure might have on the company’s business and

financing opportunities.

I. General Considerations

(1) Citizenship/Residency Requirements

The procedure for a foreign person (be that a foreign entity or foreign individual) to

establish and form a business entity in the United States is essentially the same as it is for a

U.S. person. U.S. citizenship, permanent residency (also known as a green card), or a work

visa are not required in order for foreign persons to be owners of a U.S. business entity,

nor are they required in order for a foreign individual to serve on the board of directors of

a corporation in the United States. However, it should be noted that simply being an

owner, stockholder, board member, or employee of a U.S. business entity does not in itself

permit a foreign individual to work in the United States. There are very specific immigration

and customs requirements that apply to non-U.S. citizens who wish to work and earn

income in the United States. These requirements are not covered in this chapter (please

refer to the Immigration Chapter for more information), but they should be investigated

fully in connection with any plan by a foreign person to establish a U.S. business operation.

(2) Formation Timing and Disclosure Requirements

Once the appropriate type of entity has been determined, it must be formed. The

appropriate jurisdiction of formation is a factor that must be carefully considered. There

are 50 states, one federal district, and five territories in the United States. Each has its own

rules and regulations regarding business entity formation. The approach of most states has

been to make the incorporation or formation process as simple and streamlined as

possible. In many cases, an entity can be formed in just a few days, and sometimes even

the same day, depending on its complexity and the jurisdiction in which it is being

established.

BUSINESS STRUCTURE

The information required by most states to be disclosed publicly by a company in its

formation documents is quite limited and will generally include: (i) the name of the

company, (ii) the names and addresses of its officers and directors, (iii) the location of the

company’s registered office, and (iv) in some cases, a summary of the total number and

classes of shares (or units) issued. Unlike many foreign jurisdictions, where detailed

stockholder information is required to be filed and maintained in companies houses or

other public registries, details of stockholdings are not generally required to be disclosed

publicly by private (non-public) companies in the United States. It should be noted,

however, that, apart from the relatively minimal disclosure requirements of most states as

they relate to the formation and maintenance of a business entity in that state, foreign

owners of U.S. businesses may be subject to other state or federal disclosure and filing

requirements depending on the classification of business they operate; the types of

products they manufacture, distribute, or sell; and the percentage of the U.S. entity that is

owned or controlled by foreign persons. This is particularly applicable to businesses

operating in the agricultural, banking, communications, defense, energy, and

transportation industries.

(3) Cost of Formation

(a) Filing Fees (State of Formation). The fees charged by a jurisdiction for the filing and

acceptance of a business entity formed in that jurisdiction generally range from a few

hundred to a few thousand dollars, depending on the jurisdiction and the type of

business structure being formed. In addition, all states require entities formed or

qualified in that state to file an annual report (or its equivalent) each year to update the

information on record for that entity and to maintain the entity in good standing. A

relatively small annual fee (generally between $100 and $500) is charged for this annual

update. Some states calculate this annual fee for corporations based on the number of

shares that have been authorized to be issued by the company. For companies that

have authorized large numbers of shares, this calculation can result in significant

annual fees. Thus, it is important for companies formed in these jurisdictions to take

this into consideration when determining share structure and capitalization.

(b) Filing Fees (Other States). When calculating formation and maintenance costs for

U.S. entities, it is also important to consider not only the jurisdiction where the entity

will be incorporated, but also whether it will be carrying on business in other

jurisdictions. For a company registering its business in one state while maintaining its

actual business operations in other states, this company would be required to file as a

“foreign” entity in those other states (“foreign” meaning it is not originally formed in

those other states). Each such other state will charge the company an application fee

and annual reporting fees (usually a few hundred dollars per year). The specific

definition of “carrying on business” differs between jurisdictions, but generally, entities

BUSINESS STRUCTURE

will be deemed to be carrying on business in a state if they have an office in the state,

hold assets in the state, employ significant numbers or types of employees in the state,

or engage in the construction of structures in the state.

registered agent in any state in which they conduct business. The role of the registered

agent is to accept service of legal process, such as lawsuits or other legal documents, on

behalf of the company in that state. If the company has a physical address or office in a

state, in most cases it is permitted to use that address as its resident agent address in

the state. If a company does not have a physical address in a state where it is registered

to do business, it will need to appoint a third-party to act as its registered agent in that

state. There are a number of regional and national corporate services companies that

act in this capacity. The cost ranges between $100 and $350 per year for this service in

most cases.

II. Types of Business Structures

(1) Corporation

A corporation is an entirely separate and distinct business entity from its owners, whose

ownership is represented by shares of stock in the corporation (hence they are also known

as “stockholders” or “shareholders”). A corporation may have a sole shareholder, a few, or a

large number of shareholders. Corporations may issue different classes of shares and

designate different series of shares within a class, thereby allowing a corporation to grant

different rights to different shareholders.

Corporations are created and regulated by the corporate laws of their state of

incorporation as well as corporate laws (both statutory and common-law) in any other

jurisdictions in which they are qualified to conduct business.

The day-to-day activities of a corporation are managed by officers who are appointed by

the board of directors, the members of which are elected by shareholders to oversee their

interests as owners of the corporation. In essence, the shareholders own the corporation;

the board of directors is elected to oversee the operation of the corporation for the

shareholders; and the officers are the operators of the corporation. Both the officers and

the directors of a corporation have a fiduciary duty to act in the best interests of the

shareholders.

BUSINESS STRUCTURE

One of the main advantages of

incorporation is that personal assets of the

shareholders, directors, and officers are

protected from creditors of the corporation

if certain corporate formalities are

observed, such as keeping corporate funds

separate from personal funds, holding

regular meetings of directors and

shareholders, keeping minutes of the

meetings, and maintaining detailed financial

records. Additionally, if the corporation is a subsidiary of a foreign parent, creating a U.S.

corporation can act as a shield for the assets of the foreign parent company and mitigate

to some extent the rights of creditors of the U.S. company to bring actions against the

parent.

(a) Formation

Corporations are formed through the filing of a Certificate of Incorporation or Articles

of Incorporation (commonly called the “charter”), depending on the state, with the

appropriate state authority.

The incorporator is the person responsible for establishing the corporation and filing

the charter with the appropriate state authority. The incorporator also will appoint the

initial board of directors and adopt the bylaws (which are the governing rules by which

the corporation operates) by a written consent, executed after the corporation has

been formed. Once done, the incorporator will relinquish his or her duties as the

incorporator. The board of directors then ratifies the actions of the incorporator,

appoints officers, approves the issuance of shares to the shareholders, and approves

other matters necessary for the initial stages of the corporation (such as opening a

bank account).

(b) U.S. Federal Income Tax Implications

Foreign investors

need to consider whether the nature of their activities or

investments in the United States is such that they could be treated as engaged in a U.S.

This summary does not contain a comprehensive discussion of all U.S. federal income tax consequences that may be

relevant to a foreign investor in view of that investor's particular circumstances, nor does it address any state, local, estate,

foreign or other tax consequences of an investment in the United States by foreign investors. Foreign investors are urged to

consult with their own tax counsel as to the U.S. federal income tax consequences to such investor as a result of an

investment in the United States.

Individuals who are neither U.S. citizens nor residents of the United States for tax purposes (nonresident aliens) and entities

treated as foreign corporations for U.S. tax purposes.

BUSINESS STRUCTURE

trade or business for purposes of U.S. federal income taxation. Foreign investors are

taxable on a net basis on any income that is “effectively connected” with the conduct of

a U.S. trade or business (effectively connected income, or ECI).

Foreign investors may opt to invest in a U.S. corporation to “block” or avoid realizing

ECI. The blocker corporation incurs and pays U.S. federal income tax on its operating

income (ECI) and thus blocks such income from reaching the foreign investor. The

corporation pays U.S. federal income tax on a net basis (21 percent maximum

corporate tax rate for tax years beginning after December 31, 2017 pursuant to the

enactment of the Tax Cuts and Jobs Act of 2017). Any net after-tax proceeds distributed

by the corporation to the foreign investor generally will not be treated as ECI, but rather

will be U.S. source dividend income subject to withholding tax. The foreign investor

generally will not have to file income tax returns with the U.S. Internal Revenue Service

(IRS) with respect to its investment in the corporation.

Provided that a foreign investor (individual or corporation) undertakes no activities in

the United States that would cause the investor to be engaged in the conduct of a U.S.

trade or business, the U.S. federal income tax liability of such foreign investor generally

will be limited to tax (payable through withholding) at a flat rate of 30 percent (or lower

tax treaty rate) on certain gross income from U.S. sources, such as dividends and

interest.

This type of income is non-ECI and is commonly referred to as “FDAP” (fixed,

determinable, annual or periodic) income. The foreign investor may be eligible for

benefits (an exemption from, or a reduced rate of withholding) for certain FDAP items

under an income tax treaty in effect between the United States and the investor’s

country of residence.

Accordingly, foreign corporations and individuals that are shareholders in a U.S.

corporation are subject to a flat tax rate on U.S. source dividends received from the

corporation. If the U.S. payor corporation withholds and remits the proper amounts to

the IRS, foreign investors

that are individuals or corporations will not be required to

file U.S. federal income tax returns or pay additional U.S. federal income taxes solely as

a result of their investment in the U.S. corporation.

The tax issues associated with investments by foreign investors in U.S. real property interests are beyond the scope of this

article.

This article does not address withholding tax relating to foreign accounts under Sections 1471 through 1474 (FATCA) of the

Internal Revenue Code of 1986, as amended. FATCA generally imposes a withholding tax of 30 percent on certain gross

amounts of income not effectively connected with a U.S. trade or business paid to certain “foreign financial institutions” and

certain other U.S.-owned “non-financial foreign entities,” unless various information reporting requirements are satisfied.

Foreign investors treated as trusts for U.S. federal income tax purposes are subject to special rules.

BUSINESS STRUCTURE

Certain types of income are specifically exempted from the 30 percent tax and thus

withholding is not required on payments of such income to foreign investors. The 30

percent tax does not apply to U.S. source capital gains (whether long- or short-term) or

to interest paid to a foreign investor on its deposits with U.S. banks. The 30 percent tax

also does not apply to interest that qualifies as “portfolio interest” (certain U.S. source

interest received by a nonresident alien or foreign corporation with respect to

qualifying debt obligations).

Compared to other business structures, corporations have access to a broader range of

financing options, including the issuance of equity and the incurrence of debt to fund

corporate activities.

In the United States, the default requirement to issue securities (debt and equity

instruments) to investors involves registration of such transaction with the U.S.

Securities and Exchange Commission (SEC). However, there are various exceptions to

this rule, and many business entities choose to raise capital in the form of debt or

equity pursuant to certain exceptions from registration. The most common of these

exemptions is the “Regulation D” exemption promulgated under the Securities Act of

1933, as amended. While a Regulation D offering allows a corporation to raise capital

without the cumbersome registration process required for a public offering, its major

drawback is that the securities issued typically will be illiquid, as there will be no public

marketplace for the securities of a corporation that is not “public.” If a corporation

elects to register its securities and conduct a public offering, its securities may then be

listed on a public market or stock exchange (such as a tier on the OTC Markets, Nasdaq,

or New York Stock Exchange (NYSE)).

Traditional financing options from banks, such as term loans with fixed interest rates

and long-term repayment plans, small business loans, and secured and unsecured lines

of credit, are also available to corporations.

Under certain circumstances, a foreign parent entity may be able to provide a cross-

border guarantee or security arrangement for a debt incurred in the United States by

the U.S. subsidiary corporation. For example, in 2014, China adopted rules allowing

“guarantees and security arrangements provided by Chinese entities of offshore

indebtedness” (“nei bao wai dai” in Chinese). This is normally accomplished through a

Chinese parent company providing guarantee or security over its assets in China to a

bank in China with operations in the United States, which provides a loan through the

bank’s U.S. branch to the U.S. subsidiary of the Chinese company.

In addition, it is not uncommon for a foreign parent entity to make a loan to the U.S.

subsidiary to fund its various stages of operation.

BUSINESS STRUCTURE

Other fairly traditional ways to access

capital for a corporation would include

the use of a small business credit card

(based on both the owner and the

company’s credit score, which also

requires the owner to be personally

responsible for repaying debt on the

card) and a corporate credit card (based

on the company’s credit history and

financial performance).

(2) General or Limited Partnership

A general partnership is a business entity managed and operated by at least two people

(the partners) who contribute money, property, labor, or skill and expect to share the

profits and losses of the business. Each partner in a general partnership has unlimited

liability for the partnership’s debts and obligations, meaning that each general partner can

be sued for the full amount of the partnership’s debts and obligations. Each general

partner contributes to the day-to-day management of the business and has the authority

to make business decisions and legally bind the partnership in entering into contracts. The

contributions, responsibilities and liabilities of the general partners are often equal, unless

stated otherwise in a partnership agreement signed by all partners.

A limited partnership consists of one or more general partners with unlimited liability who

manage the business, and one or more limited partners with limited liability (meaning that

limited partners are not responsible for the payment of the partnership’s debts with their

personal assets) who do not play an active role in the management of the business and

have no authority to bind the partnership in entering into contracts.

(a) Formation

There is no filing requirement in most states to form a general partnership. The legal

name of a general partnership is based on the names of the partners. Some general

partnerships may choose to adopt a fictitious, assumed, or “doing business as” (DBA)

name by filing with the relevant state authority.

A limited partnership is formed through the filing of a “certificate of limited partnership”

(which name may vary from state to state) with the appropriate state authority. A

limited partnership agreement signed by all partners sets the rules of managing the

business and defines the rights, responsibilities, and liabilities among the partners.

BUSINESS STRUCTURE

(b) U.S. Federal Income Tax Implications

A partnership files an annual income tax return with the IRS to report the income,

deductions, gains, and losses from its operations, but it does not pay U.S. federal

income taxes. Instead, the partnership “passes through” any profits or losses to its

partners. Each partner is required to report that partner’s distributive share (whether or

not the partnership distributes cash to the partner) of the partnership’s income, gains,

losses, deductions, and credits. Thus, it is possible that partners could incur U.S. federal

income tax liabilities without receiving from the partnership sufficient cash distributions

to defray such tax liabilities. This situation is commonly referred to as “phantom

income.” After the end of each fiscal or calendar year, the partnership generally delivers

tax information on a Schedule K-1 to the partners necessary for the completion of each

partner’s income tax return.

If a foreign investor invests in a partnership that is engaged in a U.S. trade or business,

the foreign investor will be treated as engaged in a U.S. trade or business. Thus the U.S.

trade or business activities of a partnership are attributed to its foreign partners,

regardless of how many intermediate partnerships separate the foreign partner from

the underlying partnership that is engaged in a U.S. trade or business. Treaty protection

is generally not available to foreign partners of a partnership engaged in a U.S. trade or

business because most such partnerships have a permanent establishment in the

United States. Furthermore, a partnership engaged in a U.S. trade or business must

withhold U.S. income tax on any ECI of the partnership allocable to its foreign partners,

regardless of whether the foreign partner has actually received a cash distribution.

Generally, gain recognized by a foreign partner from the sale of an interest in a

partnership that does business in the United States is ECI. Thus, the foreign transferor

partner will be subject to U.S. tax on their gain. The ECI gain will also be subject to 10

percent withholding tax on the amount realized on the sale. The purchaser (transferee)

of the partnership interest must withhold tax from the sales proceeds, but if it fails to

do so the partnership is required to withhold the amount of the tax plus interest from

future distributions to the transferee (purchaser).

Subject to certain exceptions, U.S. federal income tax law imposes a 30 percent tax on

interest, dividends, rents, royalties, and other FDAP income derived by a foreign person

from U.S. sources. A U.S. (domestic) partnership with FDAP income must collect and

remit the tax on behalf of the foreign partner.

Forms of financing options available to partnerships are similar to corporations,

although with some limitations. For example, partnerships typically are not publicly

traded, and they will normally convert into corporations prior to an initial public

BUSINESS STRUCTURE

offering (IPO). Moreover, when a partnership applies for a loan or line of credit from a

bank, the personal credit history and financials of the partners will be reviewed by the

bank in addition to those of the partnership.

When a partnership raises funds through a private offering of securities, it offers its

partnership interests for sale. It may permit some or all of the existing partners to

invest more capital into the partnership, or bring in new partners with new capital,

which has the effect of diluting the percentages of ownership of the existing partners.

(3) Limited Liability Company

A Limited Liability Company (LLC) is a business structure combining structural elements of

a corporation with the tax benefits of a

partnership. Rules and regulations

pertaining to LLCs vary by state.

Owners of an LLC are called members,

whose ownership of the LLC is

represented by their holding of a certain

percentage of membership interests or a

certain number of membership units

(which are similar to shares of a

corporation) of the LLC. An LLC is allowed to have different classes of membership

interests or membership units, providing the flexibility to distribute voting rights and

profits in different ways. Most states allow members to include U.S. and foreign individuals,

corporations, and other LLCs.

LLCs may comprise a single member or multiple members. LLCs can be either member-

managed, in which all members participate in the day-to-day operation and decision-

making process of the LLC, or manager-managed, in which one or more managers are

appointed by members as agents of the company to manage the business. A manager may

be a member but does not have to be.

Like corporations, members of LLCs are not personally liable for the LLC’s obligations,

debts, or liabilities. Although the maintenance of company formalities is not as stringent for

LLCs as it is for corporations, it is generally considered good practice to follow similar

guidelines and observe such formalities as corporations.

(a) Formation

LLCs are formed by filing a certificate of formation or articles of organization,

depending on the state, with the appropriate state authority. Most states require that

names of LLCs end with a certain designator, such as “Limited Liability Company” or

“LLC.” Some states may have additional requirements for setting up an LLC.

BUSINESS STRUCTURE

An organizer, who does not have to be a member, is the person who files the certificate

of formation or articles of organization to form the LLC. After formation, the organizer

executes organizer resolutions (similar to incorporator resolutions), which list the

members and/or managers of the LLC, and thereupon relinquishes the duties of the

organizer.

Similar to bylaws of a corporation, the operating agreement of an LLC, signed by all

members of the LLC, governs the internal operations of the LLC. While many states do

not require operating agreements (without which state default rules apply), it is

generally considered good practice for members of an LLC to have an operating

agreement to delineate the rights, obligations, and rules pursuant to which the

members will own and operate the LLC.

(b) U.S. Federal Income Tax Implications

An LLC may be treated by the IRS as either a corporation, partnership, or a “disregarded

entity” (meaning an entity disregarded as separate from its owner for federal income

tax purposes), depending on the number of members and any elections filed by the LLC

with the IRS.

An LLC with at least two members is classified as a partnership for federal income tax

purposes, unless it affirmatively elects to be treated as a corporation. The U.S. federal

income tax implications of foreign investors investing in partnerships is discussed

above (in “General or Limited Partnership”). An LLC with only one member is treated as

a disregarded entity and the LLC’s income, gains, losses, credits, and deductions are

reported on the owner’s income tax return, unless it elects to be treated as a

corporation.

For LLCs treated as partnerships for U.S. federal income tax purposes, a foreign

investor must pay tax on its share of the ECI generated by the LLC, regardless of

whether the member has actually received a cash distribution from the LLC. Many

foreign investors in LLCs prefer the LLC to file an election with the IRS to be taxed as a

corporation to avoid having to file income tax returns with the IRS and paying U.S.

income tax on its share of ECI (as would be the case if the LLC were treated as a

partnership or a disregarded entity for U.S. federal income tax purposes). Alternatively,

many foreign investors opt to invest in a corporation to avoid having to file income tax

returns with the IRS and paying U.S. income tax.

LLCs have similar financing options as those available to partnerships, as well as

limitations. When an LLC raises funds through a private offering of securities, it offers

its membership interests for sale.

BUSINESS STRUCTURE

(4) Branch Office

A foreign company is not required to set up a separate U.S. entity in order to do business in

the United States and could instead do so through a branch office. A branch office is an

extension of the foreign company that conducts business directly in the United States and

does not have its separate legal existence from the foreign company. This exposes the

foreign company itself to U.S. tax and legal liabilities with respect to the branch office’s

operations.

(a) Formation

It is not necessary to form a new entity in order to set up a branch office. The foreign

company will need to be registered as a “foreign corporation” (as defined under state

law) by filing a certificate of authority to do business in the state where business will be

conducted through the branch office.

(b) U.S. Federal Income Tax Implications

A foreign corporation that operates directly in the United States through its branch

office will be subject to income tax on the income attributable to its U.S. operations. If

the activities of the foreign corporation constitute a U.S. trade or business, the

corporation would be subject to U.S. federal income tax on a net basis (21 percent

maximum corporate tax rate for tax years beginning after December 31, 2017) and the

30 percent “branch profits” tax.

Foreign corporations are subject to U.S. tax on any income that is ECI. They are also

subject to branch profits tax at a 30 percent rate on any deemed repatriations of ECI

(generally, earnings and profits generated by the U.S. operations of the foreign

corporation to the extent not reinvested in a U.S. trade or business). However,

depending upon its country of residence and its ability to qualify for treaty benefits, the

corporation might be eligible for an exemption from, or reduced rate of, branch profits

tax pursuant to a treaty. Without treaty relief, foreign corporate investors could be

subject to tax on ECI at an effective tax rate of 44.7 percent (54.5 percent for tax years

beginning before January 1, 2018).

A foreign corporation that does not conduct a U.S. trade or business is nonetheless

subject to tax at a flat rate of 30 percent (or a lower tax treaty rate) on the gross

amount of certain U.S. source income that is not effectively connected with a U.S. trade

or business, generally payable through withholding. Income subject to such a flat tax

rate includes, but is not limited to, dividends and certain interest income.

Certain types of income are specifically exempted from the 30 percent tax, and thus

withholding is not required on payments of such income to a foreign corporation. The

30 percent tax does not apply to U.S. source capital gains (whether long- or short-term)

BUSINESS STRUCTURE

or to interest paid to a foreign corporation on its deposits with U.S. banks. The 30

percent tax also does not apply to interest that qualifies as “portfolio interest.”

Because it is not a separate legal entity, a branch office does not have the option to

raise capital from private or public offerings.

Compared to a U.S. entity, a branch of a foreign company may experience additional

scrutiny by a bank when trying to open a U.S. bank account.

II. Conclusion

The choice of structure for a particular business depends on many factors. This chapter

touches briefly on a few important factors to consider and does not discuss all the factors

that may be relevant, such as immigration laws, estate planning considerations, and tax

implications for the foreign investors in their home countries. Foreign investors are

strongly encouraged to consult with their legal, financial, and tax consultants in both the

United States and their home countries to choose a business structure that best suits their

business needs.

BUSINESS STRUCTURE

About Robinson & Cole LLP

Founded in 1845, Robinson & Cole LLP is a U.S. based law firm of more than 200 attorneys

with 11 offices throughout the United States, including in the major metropolitan centers of

Boston, New York, Philadelphia, Miami, and Los Angeles. We are a full-service law firm with

experience in areas such as corporate formation, mergers & acquisitions, capital markets,

U.S. securities laws, tax, immigration and employment, manufacturing/distribution,

intellectual property and technology, construction/real estate, and litigation. The firm

represents companies of all sizes, with an emphasis on industrial companies that are small

to medium-sized and/or are family owned.

Our International Experience

Robinson & Cole LLP has been representing international companies that wish to do

business in the United States for decades. Our lawyers regularly represent clients around

the world in connection with cross-border transactions with U.S. companies and with

expansion into the U.S. market. We have a long history of advising companies located

throughout Asia and Europe, and we take pride in understanding and adapting to the

cross-cultural differences that may exist in how decisions are made based on history,

culture and the different legal systems. Our lawyers are leaders in the economic

community and have been invited to speak at the White House and the U.S. Department of

Commerce events, and by U.S.-based economic development organizations that wish to

attract companies to the United States.

Disclaimer

This chapter was prepared by Anna Jinhua Wang, Jeffrey J. White, J. Michael Wirvin, and

Michael J. Kearney with Robinson & Cole LLP. Views expressed in this chapter are the

authors’ own, not that of the International Trade Administration. This chapter does not

constitute legal advice. Readers interested in investing in the United States should consult

legal counsel.

Taxes

An Overview of Key U.S. Tax

Considerations for Inbound Investment

Jillian Symes

Julia Tonkovich

Brian Smith

TAXES

s the world’s largest economy, the United States provides tremendous operating

and investment opportunities, with an innovative and productive workforce, robust

infrastructure, and lucrative markets. However, foreign businesses interested in

investing in the United States can find it daunting to navigate the U.S. federal tax code and

regulations, as well as state and local taxes. Inadequate preparation can create undue risk,

result in increased and unanticipated tax costs, and ultimately impact the overall success of

U.S. operations. In addition, overlooking potentially valuable tax and financial benefits,

including federal, state, and local credits and incentives, can result in missed opportunities

to reduce tax costs and benefit from capital and operational cost offsets.

This chapter is intended to provide businesses interested in investing in the United States

with some general guidance about various levels of U.S. tax imposed on non-U.S. investors,

as well as available government incentives. It is critical to consult with a qualified advisor

before making any business or tax-related decisions to more fully understand the impact of

those decisions on the specific facts of the investment.

The Fundamentals of U.S. Federal Tax

Who must pay?

U.S. tax-resident individuals, citizens, corporations, and their foreign branches are subject

to U.S. federal tax (and potentially state and local taxes) on their worldwide income.

Conversely, non-U.S. tax resident individuals and non-U.S. corporations and partnerships

are generally only subject to U.S. tax on income that is “effectively connected to a U.S. trade

or business” (referred to as ECI) and U.S. source income that is “fixed, determinable,

annual, or periodical” (FDAP). FDAP income generally includes U.S. source interest,

dividends, rents, and royalties.

ECI must be associated with U.S.-based activity that rises to the level of a U.S. trade or

business. Although the U.S. tax code does not define a U.S. trade or business, case law

generally frames it as activity in pursuit of profit that is “considerable, continuous, regular,

and substantial.” If the foreign parent or subsidiary is resident in a country that has an

income tax treaty with the United States, business profits are subject to U.S. federal income

tax only to the extent that the income is attributable to a U.S. permanent establishment

(PE). In general, a PE requires a more permanent business connection with the United

States, so it is possible that a non-U.S. company could carry on a U.S. trade or business that

does not rise to the level of a U.S. PE (and therefore is not liable for federal income tax).

The views expressed are those of the authors and do not necessarily represent the views of Ernst & Young LLP or any other

member firm of the global EY organization.

TAXES

How much is the tax?

For non-U.S. corporations, ECI is subject to federal tax at the same rate as applies to U.S.

domestic corporations.

In addition to federal taxes, there may also be applicable state and local taxes on a non-

U.S. corporation’s U.S. business income, discussed further below. A deduction is generally

available on the federal income tax return for all state and local taxes; thus, despite the

addition of state and local taxes, it is not unusual for a corporation to have a U.S. effective

marginal tax rate of approximately 25 percent.

Tax on FDAP is withheld by the payor on a gross basis at a 30 percent rate, though this rate

can be reduced (potentially to zero) under an applicable U.S. income tax treaty if the

income recipient is eligible for treaty benefits. Certain exceptions to FDAP withholding tax

may also be available under federal law.

Corporate tax rates at a glance

*Additional taxes, including federal payroll taxes, duties and customs and a variety of other state and local taxes, may

apply.

Choice of Entity

There are various ways a non-U.S. company can structure its U.S. business. The choice may

be driven by customer requirements, business and commercial needs, though U.S. and

non-U.S. taxes can also play a role. Typical business models include a representative office,

branch office, or wholly owned subsidiary. Each has its own implications and compliance

requirements for U.S. tax purposes; this discussion focuses on tax considerations

associated with the models.

A representative office is the easiest option for a company just starting to do business in

the U.S., and it may not trigger U.S. federal corporate income tax if the U.S. activities are

very limited. A representative office may be appropriate for the very early stages of a

Nature of tax Rate

Corporate income tax 21%

Capital gains 21%

State and local income taxes

Varies by state from 0% to 13%, but generally

deductible against federal income tax

FDAP withholding taxes, including

dividends, interest, rents, royalties

30% (applicable to non-U.S. recipients) - note this

may be reduced under an applicable treaty

Branch profits tax

30% (applicable to non-U.S. recipients) - note this

may be reduced under an applicable treaty

TAXES

company’s U.S. expansion but will likely need to be transitioned into a branch or subsidiary

as the U.S. business grows.

A branch structure is similar to a representative ofﬁce in that it does not require

incorporating a separate legal entity, but a branch can perform a substantially broader

range of activities than a representative office. A branch will, however, constitute a taxable

presence in the U.S., which means that the business must annually account for and ﬁle U.S.

federal income tax on the branch’s proﬁts. The parent company of the branch will be

considered the U.S. taxpayer, and, as such, the parent company’s other operating income

could potentially be pulled into the U.S. tax net in certain circumstances. It is important that

all related party transactions between the U.S. branch and the parent company are based

on arm’s length U.S. transfer pricing principles.

Non-U.S. companies that intend to have people or property in the United States often

choose to incorporate a wholly owned U.S. subsidiary to “ring fence” the U.S.-based

activities. A subsidiary does not have to necessarily be incorporated in the state in which it

is primarily doing business. It is common to incorporate in a state with flexible

incorporation laws and then operate in many other states, which may require registering

the corporation to do business in those other states and applying for a certiﬁcate of

authority to do business there. As with branch structures, it is important that all related

party transactions with the U.S. subsidiary are based on arm’s length U.S. transfer pricing

principles to control the amount of profits subject to U.S. tax.

Considerations associated with typical U.S. operating models

Considerations

U.S. representative

office

U.S. branch

U.S. corporate

subsidiary

Allowed

functions

Activities are limited

to ancillary and

support activities such

as advertising and

market research.

No specific

restrictions apply to

U.S. branch

operations.

No specific

restrictions apply to

corporate

subsidiaries, though

all related party cross-

border activities

should use U.S.

transfer pricing arm’s

length principles.

U.S. federal

income tax

If activities are

sufficiently limited,

the representative

office should not be

subject to U.S. federal

income tax.

Branch profits that

are ECI are taxed at

the 21 percent

corporate tax rate.

Taxed at the 21

percent corporate tax

rate.

TAXES

Dividends

The representative

office should not be

able to pay dividends.

A 30 percent

branch profits tax

on deemed

withdrawals from

the branch

(potentially

reduced/eliminated

under treaty).

30 percent dividends

withholding tax

(potentially

reduced/eliminated

under treaty).

State and local

taxation

Varies depending on

state tax nexus

profile.

Varies depending

on state tax nexus

profile.

Varies depending on

state tax nexus

profile.

Alternatively, some non-U.S. companies choose to operate through a U.S. limited liability

company (LLC). For U.S. federal income tax purposes an LLC can elect different tax

classifications. For example, an LLC with a single owner is, by default, classified as a

disregarded entity (the equivalent of being classified as a branch) for U.S. tax purposes,

unless the owner elects to treat it as a corporation. Likewise, an LLC with more than one

owner is classified as a partnership, unless the owners elect to treat it as a corporation.

These rules are commonly referred to as the “check-the-box” rules. Before choosing to use

an LLC for U.S. business purposes, the non-U.S. company should carefully consider local

country treatment of the LLC (such as whether it could be considered a hybrid entity).

Financing U.S. Operations

U.S. operations can be funded via debt, equity, or a mix of debt and equity, though it is

recommended that U.S. operations not be fully funded by debt. Although interest expense

is generally deductible, the U.S. tax code imposes various restrictions on deductibility. In

addition, the Internal Revenue Service (IRS) can recharacterize purported debt as equity for

U.S. tax purposes, which could potentially lead to disallowed interest deductions and/or

additional withholding tax liability.

Interest paid to a non-U.S. creditor is generally subject to a 30 percent rate of U.S. federal

tax through the application of the FDAP withholding regime described above. This rate may

be reduced (potentially to zero) if the creditor is eligible for benefits under an applicable

U.S. income tax treaty. Certain exceptions to withholding are also available under federal

law. Note that most U.S. tax treaties contain a “limitation on benefits” article (an anti-treaty

shopping provision) that limits treaty benefits to persons that have a measurable business

nexus to their country of incorporation (for example, the country of residence of the

ultimate owners, or the conduct of an active trade or business in the country where the

non-U.S. company is resident). Eligibility for a reduced rate of federal tax on interest

TAXES

payments, whether the reduction is based on federal law or a tax treaty, should be

confirmed prior to entering into any financing arrangements.

Repatriation of U.S. Earnings

Once U.S. operations become profitable, consideration should be given to how best to

repatriate the cash to the home office. If a U.S. corporate subsidiary is established,

dividends paid to the non-U.S. parent company are generally subject to a 30 percent r a te of

U.S. federal tax under the FDAP withholding regime described above. The 30 percent rate

may be reduced (potentially to zero) under an applicable U.S. income tax treaty if the

recipient is eligible for treaty benefits. For non-U.S. companies that are operating in branch

form in the U.S., a federal branch profits tax imposes similar withholding (and relief from

branch profits tax may also be available under a U.S. income tax treaty).

In some cases, a non-U.S. company may choose to utilize debt to fund U.S. operations to

repatriate cash back to the home country office if the federal withholding tax rate on

interest is less than the federal withholding tax rate on dividends.

State, Local, and Other Taxes

In addition to the activities and structures that generate U.S. federal income tax liability,

inbound companies (depending upon where they locate, how they conduct their business,

and to whom they sell their products) can also be subject to subnational state and local

income taxes, as well as certain non-income taxes, such as sales and use taxes, gross

receipts taxes, real and personal property taxes, unemployment and payroll taxes, among

others.

State income taxes

Non-U.S. companies expanding into the

United States may be surprised to learn

that they may be subject to state income

taxes not only in their state of

incorporation, but in other states as well.

States generally impose tax when a

company creates state tax “nexus” in the

state. Nexus is generally formed when a

company has people or property in a state,

even temporarily (and increasingly, some states also have economic nexus rules whereby a

liability could exist even without people or property in that state so long as the company

has made a threshold level of sales to the state). As such, it is possible for a non-U.S.

company to create state tax nexus in multiple states.

TAXES

Although most states use federal taxable income as a starting point for calculating the state

tax liability, each state may provide significant additions to, or subtractions from, that

amount to determine state taxable income. States typically do not allow the same amount

of depreciation and usually will add back state and local taxes, among other items, to

determine the state tax base. Thus, the state income tax base could vary widely from state

to state. In addition, and quite unusual compared to other countries around the globe, the

states rely upon formulary apportionment to divide the tax base of a multi-state business.

In the past, most states used a blended factor comparing the ratio of property, payroll, and

sales in the state compared to everywhere the taxpayer was engaged in business. Now,

increasingly the states rely solely upon a sales factor to apportion the tax base among the

states. In some cases, certain types of income, such as income from the sale of real

property located in the state or from certain intangible income, is allocated entirely to one

state, although these rules vary from state to state. In theory, there should not be double

taxation amongst the states as the total income of a company should be allocated and

apportioned amongst the states where the company has created nexus, but because there

is no mechanism among the states to settle double taxation disputes, it is possible that a

single stream of income could be subject to taxation by more than one state.

In general, states may choose whether to conform to the federal Internal Revenue Code

(IRC) and may even pick and choose which parts of the IRC to which they wish to conform.

Some states opt for “ﬁxed date” conformity, which means that they follow the IRC as of a

certain date. Some states choose “selective” conformity and adopt only certain IRC

provisions or conform to those provisions at different times compared to their original date

of adoption for federal income tax purposes. Others practice “rolling” conformity,

automatically updating their reference to the IRC on a continual basis and thus conforming

to the most recent version of the IRC as it is amended.

In addition, it is possible to create state tax nexus (and thus a state tax liability) even if

there is no federal tax due, such as when a treaty eliminates the federal tax liability,

because U.S. tax treaties are limited by their terms solely to the U.S. federal income tax

(other than the non-discrimination provisions). Thus, non-U.S. companies should be aware

that if they believe they do not have a U.S. PE and are thus not subject to U.S. federal

income tax, they may still have sufficient state nexus to be subject to state income taxation.

These rules governing tax presence vary widely from state to state and, notably, even with

respect to particular state or local taxes within a single state.

Sales and use taxes

Unlike many other countries, the United States does not impose a national sales tax or

value-added tax (VAT). Instead, such consumption-based taxes, known as sales and use

taxes [but which may go by other names such as a “general excise tax” (in Hawaii) or a

“transaction privilege tax” (in Arizona)], are levied in all but five states. In most states, in

TAXES

addition to the state-wide sales tax, counties, cities, and other local regional authorities are

entitled to levy their own sales and use taxes. Fortunately, in most states, these additional

local jurisdictional sales and use taxes are merely imposed as an incremental addition to

the existing state sales tax base and collected by the same state taxing authority. However,

in certain states, some local “home” rule jurisdictions are granted the authority to

administer their own sales and use taxes separately from the state, meaning that they may

have a tax base that is different from the state’s and may require taxpayers to file and

report such local taxes separately as well. Sales taxes are typically assessed on the final

consumer purchase, with wholesale transactions usually exempted. Generally, all sales of

tangible personal property occurring within a state are subject to sales tax unless

speciﬁcally exempted by statute. In most states, sales of services and intangible property

(such as electronically delivered software) are usually excluded from sales tax unless

specifically taxable. It is the seller’s responsibility to collect and remit sales tax, although

state and local law typically allows the cost to be transferred to the consumer.

Prior to the 2018 U.S. Supreme Court ruling in South Dakota vs. Wayfair, Inc. (Wayfair),

company generally needed to have a physical presence in a state to trigger an obligation to

levy and remit sales tax on sales within a state. The Wayfair ruling eliminated the physical

presence standard, meaning sellers may be required to collect sales tax on transactions

with remote consumers that previously were not subject to sales tax. After the Wayfair

ruling, many states enacted presence thresholds for sales and use tax purposes that apply

depending on the dollar amount of sales and/or number of transactions within the state

(typically either $100,000 or more of revenues derived from sales to consumers in the

state, or 200 or more transactions with consumers located in the state, although these

thresholds vary from state to state). Moreover, in response to the rapid development of

online retailers who allow third-party retailers to sell through their internet portals, nearly

every state now imposes a sales tax collection responsibility on the operators of the

internet sales portals.

Non-U.S. companies selling into the United States (including those without a physical

presence in the United States) should assess their potential sales tax obligations following

the Wayfair ruling and the ongoing changes in state and local tax laws in response to that

ruling, and ensure they have compliance and reporting processes in place to satisfy any

obligations. Even though the state and local taxing authorities may not have an immediate

ability to enforce collection, the failure to file returns means that the statute of limitations

for sales tax collection assessments remains open indefinitely. Non-U.S. companies that do

South Dakota v. Wayfair, Inc., 585 U.S. __, 138 S.Ct. 2080 (2018).

TAXES

not comply may later be surprised to learn they have significant state and local sales tax

liabilities.

Employment taxes

Human capital is an area that can become quite

challenging for an inbound company,

especially if the home country headquarters

is left to deal with the diverse and often

complex requirements of federal and

multistate taxing jurisdictions. Many

businesses coming to the United States

decide to outsource some or all of their

human resource management activities

such as payroll and beneﬁts administration

since these areas require considerable local

knowledge.

1. Social security tax

Under the Federal Insurance Contributions Act (FICA), social security tax is imposed on

wages or salaries received by individual employees to fund retirement beneﬁts paid by

the federal government. For 2022, the social security tax is 12.4 percent. Half of the tax

(6.2 percent) is withheld from the employee’s wages and half (6.2 percent) is paid by the

employer. The portion relating to the social security portion of the federal tax is subject

to a wage limitation that periodically changes while the portion relating to the federal

Medicare program (1.45 percent imposed on each of the employer and the employee)

is not subject to any such limitation.

2. Federal unemployment tax

Federal unemployment tax (FUTA) is imposed on the wage payments that employers

make to their employees for services performed within the United States regardless of

the citizenship or residency of the employer or employee. The 2022 projected tax rate is

6 percent on the ﬁrst $7,000 of wages of each employee. Connected to this federal

unemployment insurance program, most states also impose their own unemployment

taxes that are creditable against FUTA tax when paid; rates vary from state to state as

well as on the historic unemployment performance of each particular employer.

3. Employer reporting and withholding

An employer (whether a domestic or foreign United States employer) is responsible for

withholding and remitting United States federal, state, and local income and social

security taxes from the wages of resident and nonresident alien employees. The

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employer is also responsible for reporting the compensation income of its employees

working in the United States.

Federal, state, and local credits and incentives

Although the U.S. network of federal, state, and local taxes can be complex to navigate,

there are also federal, state, and local incentives available for inbound investors where the

investment involves material capital investment, research and innovation, or leads to job

creation. These can include tax credits, abatements, cash grants, land grants, low interest

loans, and other benefits. Companies should consider a strategy for identifying and

securing these investment incentives as they can help mitigate upfront costs and ongoing

operational costs associated with investing in the United States, as well as strengthen the

inbound investor’s relationship with the U.S. communities in which it does business.

Glossary

Branch profits tax (BPT): The branch proﬁts tax, which simulates the tax treatment of a

corporation that issues dividends, is a 30 percent U.S. federal tax on deemed withdrawals

from a branch. The tax base for the branch proﬁts tax is the dividend equivalent amount,

which is essentially the branch earnings for the year less the amounts reinvested in the

United States. In some cases, the 30 percent branch proﬁts tax can be reduced or

eliminated by treaty.

C corporation: Under U.S. law, most corporations are established in accordance with the

law of the state of incorporation. Although the corporate laws of most states are similar,

those of certain states are more ﬂexible than others. A corporation has a separate legal

identity distinct from its shareholders. This can be used to cap any risks that may be

inherent in a branch or partnership. A “C corporation” is a reference to the United States

federal income tax treatment of a corporation under Subchapter C of the IRC. Most

corporations are treated as “C corporations” unless special elections or qualifications apply.

Use of a C corporation also prevents United States proﬁts and losses from ﬂowing up to

the shareholders. The proﬁts earned by a C corporation are subject to a 21 percent federal

income tax rate (plus any applicable state and local taxes) in the United States.

Effectively connected income (ECI): Income that is effectively connected to a U.S. trade or

business associated with activity that is considerable, continuous, regular, and substantial.

ECI is generally used to determine what foreign corporations and their U.S. branches and

partnerships are subject to U.S. tax.

Fixed, determinable, annual, or periodic income (FDAP): Includes dividends, interest,

rents, and royalties; generally excludes gains from the sale of real or personal property.

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Federal Insurance Contributions Act (FICA): A social tax imposed on wages or salaries

received by individual employees to fund retirement beneﬁts paid by the U.S. federal

government.

Federal unemployment tax (FUTA): Imposed on the wage payments employers make to

their employees, regardless of the citizenship or residency, for services performed within

the United States.

Internal Revenue Code (IRC) of 1986, as amended: The basic federal income tax law for

the United States.

Internal Revenue Service (IRS): The agency of the U.S. federal government responsible

for enforcing U.S. federal tax laws, collecting taxes, processing tax returns, and issuing tax

refunds.

Limited liability company (LLC): An entity created under state law. From a U.S. federal

income tax perspective, an LLC is an eligible entity that can be treated as either a

partnership, a corporation, or a disregarded entity. An LLC may be disregarded only if it has

a single member (i.e., owner). If it has two or more members, unless it elects to be treated

as a corporation, an LLC is treated as a partnership for U.S. federal income tax purposes

(provided it does not engage in certain businesses for which such an election is not

permitted). From a state business law perspective, LLCs provide their members with

liability protection similar to that offered to shareholders by being organized in corporate

form.

Permanent establishment (PE): A ﬁxed place of business through which the business of

an enterprise is wholly or partly carried on, which most U.S. double tax treaties say

includes a place of management, a branch, an ofﬁce, or a factory.

Sales and use tax: Sales and use taxes in the United States are generally assessed at the

state and/or local level and are usually assessed on the final consumer purchase, with

wholesale transactions remaining tax exempt. As a general rule, all sales of tangible

personal property are subject to sales or use tax unless specifically exempted by statute

(sales of services and intangible property vary by state). Use taxes are imposed on the use,

storage, or consumption of tangible personal property by a business itself, within a state’s

borders.

State tax nexus: Generally refers to the requisite business activity in a state or local taxing

jurisdiction sufficient to allow a state to impose an obligation to pay or collect and remit a

tax. Based on U.S. Supreme Court rulings, state tax nexus can be limited by provisions of

the U.S. Constitution. Moreover, state laws may also establish the thresholds by which a

taxpayer may have sufficient connections to the state to be subject to a state tax payment

or collection obligation [generally based upon physical presence, such as the presence

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(even on a temporary basis) of employees or independent contractors in the state, leased

property in the state, or based on the dollar amount or number of transactions occurring in

the state]. Such rules vary from state to state and also, even within the same state, based

upon the type of tax. As indicated elsewhere, U.S. income tax treaties by their very terms

do not apply to the states. Consequently, even though a non-U.S. company may not have a

PE in the United States due to the invocation of treaty protection, it may still have “state tax

nexus” and an obligation to pay or remit certain state or local taxes.

U.S. trade or business: There is no comprehensive deﬁnition of a U.S. trade or business; it

is largely deﬁned by case law. In order to make a determination of whether a trade or

business exists, the owner’s level of activity must be measured. Activity in pursuit of proﬁt

that is “considerable, continuous, and regular” is necessary to establish a trade or business.

About EY

EY is a global leader in assurance, tax, transaction, and advisory services. The insights and

quality services we deliver help build trust and confidence in the capital markets and in

economies the world over. We develop outstanding leaders who team to deliver on our

promises to all of our stakeholders. In so doing, we play a critical role in building a better

working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of

Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global

Limited, a UK company limited by guarantee, does not provide services to clients. For more

information about our organization, please visit ey.com.

Disclaimer

This chapter was prepared by Jillian Symes, Julia Tonkovich, and Brian Smith with EY. Views

expressed in this chapter are the authors’ own, not that of the International Trade

Administration. This chapter does not constitute legal advice. Readers interested in

investing in the United States should consult legal counsel.

Workforce

Creating Employment Success

in the United States

Michael Sachs, Senior Attorney

Adam Boland, Member

Vanessa Kelly, Senior Attorney

Paul Starkman, Member

Charles Russman, Senior Counsel

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he key to any organization is people, and any company doing business in the United

States will have to recruit, interview, hire, and manage a workforce. The process of

hiring and managing a U.S.-based workforce may differ greatly from those practices

customary in other countries. In the United States, employers are regulated by (1) federal

laws that apply to all companies regardless of location; (2) state laws, for the individual

state(s) where the employees are physically working; and (3) local- or city-based ordinances

in some larger cities. Also, the law may be shaped by “public policy” considerations and

court decisions. Employers are generally afforded great latitude in structuring their

workplace policies and practices. This freedom, however, is not without limits, as federal,

state, and local laws regulate such areas as minimum wage and other issues relating to the

payment of wages and prohibit workplace decisions taken for discriminatory reasons.

There are also other types of protections, including those for disabled or pregnant workers.

This chapter is designed to provide a general overview of federal, state, and local laws; how

these laws work to protect employers and employees; and how the United States works to

provide safeguards against discrimination through the classification of people into

“Protected Classes.” In fact, these protected classes should be some of the most important

considerations for employers as they delve

into the laws governing the workplace. Title

VII of the Civil Rights Act of 1964 and

corresponding federal civil rights statutes

define who is protected. In the United

States, employment laws prohibit

discrimination based on these protected

characteristics, which Federal law identifies

as age, race, sex and gender, national

origin, disability, color, and religion. Several

U.S. states and some local governmental entities have added to these categories to provide

broader protections.

Section 1 – The Employment Relationship

Recruitment

In a nutshell, recruitment cannot show a preference for a class of people or discourage

someone from applying because they are in a protected class. This is true whether an

employer recruits through job postings, recruiters, or word of mouth. For example, job

postings cannot seek “females” or “recent college graduates,” since the first would show a

preference for women and discourage males from applying, and the second would

discourage people over 40 from applying. Likewise, employers cannot direct their

recruiters to only interview people inside or outside protected categories or recruit in a way

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that will only yield members outside the protected categories. Therefore, employers should

review job postings for potential issues to ensure neutral language and impact and review

directions given to recruiters. There are also some state-specific restrictions on what

employers may inquire about pre-hire, such as salary histories.

Employee benefits are an essential part of U.S. recruitment and compensation. While

benefits vary by size of the business, geographic region, and sector of the economy, the

most common are health care (medical, dental, and vision), retirement plans, and paid time

off. Some less common, but still popular, benefits include incentive programs, education

reimbursement, and discounts on some products. Employee benefits are constantly

evolving to incorporate new concepts and new expectations from employees. Many

companies are reassessing their benefits in light of the priorities of the workforce they are

looking to attract and retain. Each employer is free to choose the types of benefits they

offer and how these benefits are provided. However, some benefits must be offered

uniformly to all similarly situated employees. There are also some selected benefits that

can be tailored for specific employees or potential employees. A key point to remember is

that the legal requirements and restrictions are changing as fast as the benefits.

Interviews

Like recruitment, employers should not inquire into, or make decisions based upon, an

applicant’s disability, race, color, gender, sex, national origin, age, or religion. Employers

should avoid asking questions about family or marital status and club or union

membership. Instead, interview questions should be limited to determining if a person is

qualified for the job. For example, if a job requires an employee to lift 50 pounds, the

interviewer can ask if the applicant meets

all the required qualifications. On the other

hand, the interviewer should not ask, “I see

you are in a wheelchair. Can you still lift 50

pounds?” Similarly, if an employer requires

applicants to take a test as part of the hiring

process, the test must be related to the job

and may not exclude people because of

their membership in a protected category.

Ban the Box Laws

Multiple states (16 at the time this chapter was drafted), and many more cities, have

implemented so-called “Ban the Box” laws. These laws are designed to limit or eliminate

employers’ ability to inquire into past criminal convictions or use past convictions in hiring

decisions. While these laws vary between states (and localities), they generally: restrict the

type of conviction that can be asked about; limit the ability to use past convictions in hiring

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decisions; delay background checks; and require that employees be notified when criminal

information is used in hiring decisions. Several localities within these states have additional

requirements on what information can be sought or used. Some states require a detailed

analysis be undertaken before rejecting a candidate based on a criminal conviction.

Pre-Hiring Drug Testing

Pre-hiring drug testing is another area where the laws and requirements vary dramatically

between various states and localities. Some states have no restrictions on pre-hiring drug

testing; others have some limited restrictions. Certain localities go even further by

eliminating the ability to require pre-hiring drug testing, except under very limited

situations, or by restricting employers from testing for certain drugs such as cannabis,

except in certain narrow circumstances. Some states that permit the use of medical

marijuana have revised testing procedures to accommodate the use of cannabis outside of

work. There is some tension between federal and state law on the issue of drug testing.

Some employers who have federal contracts, federal grants, or are subject to Department

of Transportation (DOT) or Department of Defense (DOD) guidelines, may have more

expansive drug testing requirements than those permitted under state law.

Managing the Workforce

Employers have great latitude about decisions on promotions, pay increases, discipline, or

termination. However, employers must be mindful to follow Equal Pay Act laws and other

non-discrimination and non-retaliation laws in making these important workplace

decisions. Again, employers must consult federal, state, and local laws on these topics.

(Refer to Section 4: Compliance) In general, employers are free to design pay policies based

on merit, performance metrics, client development, or other important considerations

without being lock-stepped solely by tenure or the position level.

Section 2 – At-Will Employment

Almost every state in the United States applies some version of the “at-will” employment

doctrine. Generally, the at-will doctrine means that either the employee or employer may

terminate the relationship at any time, without notice or “cause.” Any employment

decision, even taken in a state that follows a broad application of the at-will employment

doctrine, must still comply with all federal, state, and local laws regulating employment

decisions, including protected classes.

The at-will doctrine may be a new concept for international business investors, who may be

accustomed to hiring through employment contracts with a fixed term (duration) that may

restrict the ability to terminate employees. Under the at-will doctrine, there is no set term

of employment, no standard affecting employment decisions, and, as a result, each party

can end the employment relationship at any time. In short, the doctrine does not require a

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long-term commitment by either party. In an at-will situation, an employee who simply

wishes to stop working can end the employment relationship at any time, as can the

employer. Indeed, since 1888, Texas has held that employers can terminate an employee

for good cause, bad cause, or no cause at all. Most other states have court decisions that

contain similar holdings.

Employers and employees can disregard the at-will doctrine by entering into contracts that

specify the length of employment and the conditions for, and consequences of,

termination. Even without an express written contract, however, the doctrine does have

some limitations. Even though the at-will employment doctrine presents a straightforward

approach to the employment relationship—both parties will continue to work together if

each party desires to continue the relationship—the application of federal and state law

supersede the doctrine. The most obvious exception is that an employment decision

cannot be based on an act or reason that has been deemed “illegal,” and for purposes of

this chapter any hiring or firing practices where the decision is based on the employee’s

identification with any protected class is illegal.

In addition to non-discrimination limits, several states provide protection against

“retaliation,” such as termination because an employee has engaged in whistleblower

activities (such as reporting illegal or fraudulent conduct; filing a complaint about

discrimination or unpaid wages; seeking workers’ compensation benefits; or engaging in

some other protected action).

Moreover, when applying the at-will employment doctrine, some states exercise an

amended version of the doctrine. For example, some states apply an implied contract

exemption to the doctrine, meaning employers can establish a “just cause” standard for

employment decisions through a contract, an employee handbook, or other employment

policies. Further, some states applying the doctrine also exercise a good faith exemption. In

these states, even though the at-will doctrine applies, an employer may only terminate

employees for “just cause.”

While the at-will doctrine provides

employers with a fair amount of

flexibility, there are limits based on

federal, state, or local law that must be

considered. Employers should take care

that internal personnel policies do not

create contractual expectations. As a

practical matter, most employers use

caution when terminating employees.

The expense of hiring and training and

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the impact on employee morale are all important considerations that practical employers

evaluate before terminating employment.

In addition, unemployment insurance is an important consideration. Most states require

that employers contribute monies into a state unemployment insurance fund administered

by the state government. Employees who are terminated are often eligible to make a claim

for unemployment benefits, which is a partial wage replacement for a period to assist the

employee until he or she can locate new employment. The amount the employer is

required to contribute to the fund is determined by several factors, including the total

amount of the payroll dollars and the employer’s claims experience. If an employer has

high turnover of its employees, and many former employees file for unemployment

benefits, the employer is likely to receive a risky rating and may be required to contribute a

higher percentage based on its adverse claims experience. Employers and employees can

submit information relating to the termination and claim; employers can object; and there

are limited appeal rights if either employee or employer disagree with the findings of the

unemployment claims examiner.

As a practical matter, employees who do not understand why they are terminated are

more likely to file an administrative or court claim against their employer alleging

discrimination or wrongful termination. As such, most employers attempt to resolve

performance problems and terminate only where the problems are unsolvable, the

employee is unsuitable, or there are financial issues compelling the termination.

Section 3 – Use of Employment Agreements

An employer may decide that it is useful to have employment agreements for its executives

or key employees. This type of agreement is helpful to cover such essential terms as: (1)

length of employment; (2) expanded notice upon resignation; (3) compensation and bonus

structures; (4) equity participation; (5) termination for cause or without cause; (6)

severance; (7) post-employment

restrictions, such as non-competition, non-

solicitation, and nondisclosure covenants;

(8) detailed performance expectations; (9)

housing, car, or entertainment stipends or

allowances; and (10) relocation benefits and

expectations. If the business is a start-up or

encountering financial difficulties, the

agreement may cover a “stay bonus” or

otherwise incentivize remaining with the

employer for a period. Severance provisions can be important as a method of pre-

negotiating the end of the employment agreement, minimizing the consequences of any

WORKFORCE

potential emotions. Often, severance agreements are conditioned on the employee giving

up the right to make a post-employment claim for damages, where permitted.

In addition to executives, employment agreements are useful for employees who have

access to, and work with, trade secrets and confidential information; who are hired to

invent or work on research and development (R&D) activities; or where the employee will

be responsible for developing good will (sales). There is federal and state statutory

protection for some of an employer’s intellectual property rights; however, in the absence

of a written agreement and affirmative steps to safeguard proprietary information, an

employer’s rights may be unsettled or result in shared ownership of an intellectual

property asset. Employers may wish to impose post-employment restrictions on working

for a competitor, soliciting employees or customers, or disclosing confidential information.

Invention agreements detail ownership rights in intellectual property conceived or

developed by the employee with the employer’s time or resources. An employer may elect

to have stand-alone agreements covering the protection of trade secrets, good will, non-

competition, or intellectual property rights. Employers may instead include these post-

employment restrictions in a general employment agreement covering the topics identified

in the preceding paragraph.

State law varies on the requirements for such agreements and their ultimate enforceability.

All agreements must be supported by “consideration.” In legal terms, consideration is a

bargained-for exchange of something of value for something else of value. The parties of

the agreement can decide if what they are exchanging is valuable enough to be part of the

agreement. Sometimes, continued employment can be deemed sufficiently valuable and

therefore enough “consideration” to uphold the agreement. The agreements themselves

must be reasonable in scope, duration, and geographic area subject to the post-

employment restraints. In addition, they must support legitimate interests, such as

protection of trade secrets or goodwill. Under no circumstance can they be created for the

sole purpose of limiting competition between similar goods or services. Lastly, the

agreement cannot violate public policy, be injurious to the public interest, or unduly

burdensome to the employee. Courts enforce these agreements to varying degrees; if this

is of importance, employers should consult with employment counsel in their specific

geography and/or their specific industry, as specialized aspects to these negotiations might

exist.

Section 4 – Compliance

Employment Laws

U.S. federal and state employment laws generally prohibit discrimination, harassment, and

retaliation based on protected classes, characteristics, and conduct. Most federal

employment laws cover employers with 15 or more employees. Federal laws prohibit

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discrimination based on race, color, national origin, religion, sex, disability, familial status,

genetic information, citizenship, pregnancy, veteran or military status, and age (federal law

protects employees who are over age 40, Oregon and the District of Columbia protect

employees 18 and older, and Michigan and New Jersey protect employees of all ages).

Federal law protects LGBT (lesbian, gay, bisexual, and transgendered) employees. In

addition, at the time of publication, more than 32 states and the District of Columbia

protect sexual orientation and/or gender identity/expression.

State employment laws expand coverage to smaller businesses or provide additional

protection, such as:

• Height and weight: Michigan and Washington

• Marital status and parenthood: Alabama

• Possession of a driver’s license: California

• Exercise of free speech rights: Connecticut

• Reproductive health decisions: Delaware, Hawaii

• Family responsibilities: Delaware, the District of Columbia

• Personal appearance, matriculation, or political affiliation: The District of Columbia

• Credit history: The District of Columbia, Hawaii, Illinois, Oregon

• Breastfeeding: The District of Columbia, Illinois

• AIDS and HIV status: Florida; Missouri; Nebraska; Vermont; San Francisco, California

• Sickle cell trait: Florida, Louisiana, North Carolina, New Jersey

• Arrest record and criminal history: 13 states

• Protective order status and work authorization status: Illinois

• Choice of a Sabbath: Kentucky

• Status as a smoker or non-smoker: Kentucky, Louisiana, Mississippi, New

Hampshire, New Jersey, Nevada, Oklahoma, Oregon

• Exercise of right to bear arms: North Dakota

Medical and recreational marijuana users are protected in more than 18 states. As of

January 2022, 12 states also prohibit hairstyle discrimination.

Wage & Hour Laws

The Federal Fair Labor Standards Act (FLSA) and various state wage and hour laws require

that employers comply with minimum wage requirements; properly classify workers as

exempt or non-exempt from overtime pay; and impose recordkeeping obligations, child

labor restrictions, and posting requirements. These laws also prohibit the misclassification

of employees as independent contractors.

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Leave of Absence (LOA) Laws

Federal and state LOA laws require employee LOAs in specific circumstances and prohibit

retaliation against employees who exercise their LOA rights. The Federal Family Medical

Leave Act (FMLA) requires employers with 50 or more employees who work in a 75-mile

(120-kilometer) radius to provide 12 weeks of unpaid leave for eligible employees’ own

serious medical condition or the care of a covered family member. Other federal and state

LOA laws require unpaid leaves for bereavement; military service; jury and witness duty;

voting; victims of domestic violence or criminal activity; blood, bone marrow, and organ

donation; school activity; pregnancy and nursing mothers; and voluntary firefighter, first

responder, or civil air patrol. Although federal LOA laws require only unpaid leave, 16 states

and various municipalities now require paid sick leave.

Required Harassment Prevention Training

Federal law does not yet require that employers provide sexual harassment prevention

training; however, it is required in seven states and in New York City, New York.

Posters, Notices, and Filings

U.S. employers must post conspicuous summaries of applicable federal and state

employment laws. The Department of Labor (DOL) e-Laws Poster Advisor

helps employers

determine which federal law posters must be posted. States require additional posters for

unemployment insurance, worker’s compensation, workplace safety, and wage laws. More

information on

employment law poster requirements by state can be found on a state-by-

state basis.

Work Eligibility Concerns

All employers are required to have employees complete I-9 Forms and provide appropriate

documentation that the employee is eligible to work in the United States. Employers are

required to maintain such records and provide access to these completed forms if audited.

“Right-To-Work”

In the United States, workers in many industries have unions that are designed to help

employees in bargaining for wages and benefits with employers. Unions are not necessarily

present in all industries, and some unions are more powerful than others, but where

unions exist, members pay dues. The “Taft-Hartley Act” (better known as The Labor

Management Relations Act of 1947) implemented the right-to-work concept at the federal

level by putting into law that employees can choose to join a union or not, pay dues or not,

and cannot be forced out of their job if they choose not to join a union. In addition,

employees who do not join the union can still benefit from the services offered by the

union because the union exists to represent all employees. This relationship is so ingrained

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that employees who are not union members and/or do not pay dues can sue the union if

they feel they were not well represented in their case against their employer. In addition to

the federal-level regulation, 27 states and Guam have right-to-work laws currently in effect.

Section 5 – Privacy Laws

Employee privacy in the United States does not consist of a unified privacy law, but rather a

series of laws at the local, state, and federal level, many of which apply only to specific

aspects of privacy or certain sectors of the economy. At the federal level, there are several

prominent laws dealing with privacy, three of which often come into consideration with

hiring and employment matters.

First is the Federal Trade Commission Act (FTC Act), which governs the collection of

personal information on websites. Most importantly, the FTC Act requires those collecting

personal information from a website to specify what information is collected and how it will

be used. This is critical to keep in mind when hiring individuals or seeking qualified

candidates for a position through a website, even if a third party or add-in is used to do so.

The FTC Act will apply if the information is collected by employers or for their benefit.

The second applicable federal law is the Health Insurance Portability and Accountability Act

(HIPAA), which covers health benefits provided to employees once employed. HIPAA

requires certain disclosures to employees and prohibits disclosure of protected health

information without express authorization. Employers must also set up HIPAA-specific

procedures and practices, conduct a risk assessment, and enter into agreements with third

parties that may receive information subject to HIPAA on the employer’s behalf.

The third important privacy regulation is the Genetic Information Nondiscrimination Act

(GINA), which prohibits employers from using genetic information to make most decisions

about employees.

At the state level, almost every state and the District of Columbia has passed laws

protecting their residents. While these laws differ greatly and are being revised and

expanded regularly, a few key components are common and applicable to employment.

First, in the event personal information is used in a way that violates the law or is used

contrary to its intended purpose, the individual must be notified about what happened,

advised on how to prevent the risk of identity theft, and, in many cases, the employer must

contact the state or federal government. Second, many states have passed laws prohibiting

employers from requesting or otherwise accessing personal accounts of employees,

especially social media. Third, individuals, including employees, must receive notice of their

rights regarding their personal information and how their personal information is being

used. This often goes well beyond what is required to comply with the FTC Act described

above. Specifically, in some states, notices must be provided about where information is

WORKFORCE

obtained, how long it is stored, who it is shared with, and whether it is sold as part of a

dataset. Fourth, states are increasingly restricting when and how very sensitive

information, such as biometric information, can be collected and used.

In all cases, employers must carefully monitor their data collection and maintain employee

privacy, keeping such information well contained. Meeting these standards at the state and

federal level requires the assistance of knowledgeable professionals. If data is exchanged

outside of the United States in countries that have their own data protection laws, U.S.-

based employers must comply with those laws as well.

Section 6 – Employee Recourse

If employers run afoul of federal, state, or local employment laws, aggrieved employees

have several avenues to vindicate their rights. First, if the employer has workplace policies,

the employee can use the employer’s internal resources, such as their manager or human

rights manager, to address the departure from a workplace rule or law. Employees are not

required to do this, but this is a viable option. An employee may file a complaint with either

a federal or state civil rights agency, such as the EEOC or the state’s department of labor.

Some laws require that the employee first file a complaint with such an administrative

agency (called “exhaustion of administrative remedies”). Other laws do not require

exhaustion and an employee can file a complaint with any court that has jurisdiction to

hear the controversy – typically the state or federal court where the employee works or

lives. Lastly, by agreement, an employer may compel the employee to pursue claims

through an alternative dispute mechanism, such as arbitration.

Conclusion

The United States provides great investment opportunities and a well-educated diverse

workforce. There is a substantial amount of freedom to recruit, manage, and retain a

productive workforce. This chapter has sought to provide a high-level review of these key

areas of flexibility as well as the restrictions that employers need to know. However, it is

strongly encouraged that any business consult legal advisors for more specific information

about the legal requirements where the new business will operate.

Glossary

Arbitration: Arbitration is a private method of resolving a dispute without either party

having to file a complaint with an administrative agency or court. The parties can use the

rules established by a recognized arbitration association, set their own rules by contract, or

refer to the federal or state arbitration act. The purported benefits to using arbitration are

confidentiality (no public filing in an agency or court), shorter time to resolve the dispute,

WORKFORCE

and a smaller expense of attorneys’ fees. There are downsides to arbitration, such as no

judge to make decisions, no jury to hear the dispute, and limited appeal rights.

At-Will Employment: At-will employment is a policy that provides employee or employer

with the freedom to end the employment relationship at any time, for any reason (except

for an unlawful reason), without advance notice. In the absence of an employment

agreement, or a specific federal or state statute, employers need not pay any separation

pay, severance pay, or notice pay. Employers must comply with the law in terms of paying

wages and accrued but unused benefits (such as vacation or sick time); otherwise,

employers are free to create employment policies addressing what is payable at the time of

termination.

Employee Benefits: Employee benefits typically refer to the accoutrements or emollients

of employment, such as paid time off, health insurance, retirement plans, and flexible

benefit plans. Most states do not require provision of paid time off, except for sick time.

But most employers routinely provide time off not only for sickness, but personal reasons

or vacation as well. Most states do not requirement payment of unused paid time off at the

time of termination, but some do. If the employment policies or practices require such

payment, then the employer must follow those policies or practices.

Consideration: Consideration” is a bargained-for exchange of something of value for

something else of value (for example, the promise to work in exchange for payment).

Exhaustion of Administrative Remedies: A federal or state law may require that an

employee file a complaint with a specific administrative agency before he or she can file the

complaint in court. The idea behind exhaustion is that the specific administrative agency is

charged with the responsibility to enforce the law and has expertise in interpreting the law,

an interest in deterring violation of the law, and expertise and authority to issue a remedy,

including a public-facing remedy. For example, if an employee wants to file a claim under

Title VII of the Civil Rights Act alleging she was fired because she was a woman, she will first

have to file the complaint with the EEOC and provide them with an opportunity to resolve

the dispute before she can file a complaint with a federal or state court of law and submit

her dispute to a jury.

Federal Law: Federal law refers to the United States Constitution and its Amendments,

and the Acts passed by the United States Congress and signed by the sitting President.

Various federal agencies having oversight or enforcement responsibilities for certain laws

may publish regulations that interpret federal law and provide more detail on the scope of

the law. Also, federal agencies may publish guidelines that provide interpretative guidance

to regulatory bodies, employers, employees, and the courts. In this paper, all these sources

are considered federal law.

WORKFORCE

State Law: The United States is comprised of 50 sovereign states, each with its own

executive branch, legislative branch, and judicial system. Instead of a president, states have

governors. States are permitted to pass laws if the state law does not conflict with or

override federal law. For example, the states can establish their own minimum wage which

may differ from the federal law but cannot be a lesser amount than the federal minimum

wage law. The states can enact more generous rules of law, but not more restrictive. Many

states augment federal employment law by provider greater employment rights or

benefits; however, some do not. The law of some states closely mirrors that of federal law.

One approach is not better than the other. It is simply something to be aware of when

conducting business in the United States. Business activities need to comply with federal

and state law, and even local law, such as that enacted by larger cities.

About Clark Hill

At Clark Hill, our value proposition is simple. We offer our clients an exceptional team,

dedicated to the delivery of outstanding service. We recruit and develop talented

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experience. With 27 locations and more than 650 lawyers spanning the United States,

Ireland, and Mexico, we work in agile, collaborative teams, partnering with our clients to

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http://www.clarkhill.com

to learn more.

Disclaimer

This chapter was prepared by Michael Sachs, Adam Boland, Vanessa Kelly, Paul Starkman,

and Charles Russman with Clark Hill. Views expressed in this chapter are the author’s own,

not that of the International Trade Administration. This chapter does not constitute legal

advice. Readers interested in investing in the United States should consult legal counsel.

FDI Restrictions

Limitations on Foreign Investment

into the United States

Edward S. Rivera

Senior Attorney

(International)

Office of the Chief Counsel

for International Commerce

U.S. Department of

FDI RESTRICTIONS

I. Introduction

he United States has consistently ranked as a top destination for foreign direct

investment (FDI). The United States boasts a high Ease of Doing Business ranking, a

population of over 325 million people, the world’s largest economy, and one of the

best educated, most productive, and most innovative workforces in the world. The benefits

of an open investment regime, based, to the extent possible, on the principle of national

treatment, have been noted for decades. National treatment strives to ensure that foreign-

owned companies in the United States are treated the same as domestically owned firms.

This principle and its benefits were eloquently expressed in a policy statement issued by

President Ronald Reagan in 1983.

That policy statement emphasized further liberalization

of trade, protection of intellectual property rights around the world, and the importance of

national treatment as a principle. Subsequent U.S. Presidents have also emphasized the

importance and benefits of the United States’ liberal and open investment regime.

Given the openness of the United States investment regime and the vast amount of FDI

that the country continues to attract, it may seem unnecessary to consider the limitations

foreign investors may face. Indeed, these

limitations are few and far between, but

foreign investors and their legal counsel need

to be aware of them. This chapter describes

the most important limitations by sector and

does not cover, nor is it meant to cover,

authorities and activities of the Committee on

Foreign Investment in the United States

(CFIUS).

This chapter reflects the views of the

author and is intended as a starting point to

understanding the limitations on investing into

the United States.

II. Energy

A. Atomic Energy

Commercial nuclear power and atomic energy are governed by the Atomic Energy Act of

1954.

Under the Atomic Energy Act, a license issued by the United States Nuclear

Statement on International Investment Policy, National Archives, reaganlibrary.gov/research/speeches/90983b.

For more information on CFIUS, see SelectUSA Investor Guide, Chapter 7: “The Committee on Foreign Investment in the

United States.”

42 U.S.C. §§ 2011 et seq.

Topics Covered:

• Energy Sector

• Transportation Sector

• Financial Services Sector

• Miscellaneous (Including

Radiocommunications and

Tech)

• State and Local Restrictions

FDI RESTRICTIONS

Regulatory Commission (NRC) is required for any person in the United States to transfer or

receive in interstate commerce, manufacture, produce, transfer, use, import, or export any

nuclear “utilization or production facilities” for commercial or industrial purposes.

These

licenses cannot be issued to “an alien or any alien corporation or other entity if the

Commission knows or has reason to believe it is owned, controlled, or dominated by an

alien, a foreign corporation, or a foreign government.”

An NRC-issued license is also required for nuclear use in medical therapy, industrial and

commercial purposes, and research and development (R&D) activities.

This second

category of licenses has a restriction nearly identical to the commercial licenses previously

discussed.

The legal limits on issuing licenses to foreign entities are implemented by 10

CFR 50.38, which provides that “Any person who is a citizen, national, or agent of a foreign

country, or any corporation, or other entity which the Commission knows or has reason to

believe is owned, controlled or dominated by an alien, a foreign corporation, or a foreign

government, shall be ineligible to apply for and obtain a license.”

The NRC has therefore established a “foreign owned, controlled, or dominated” test (FOCD)

for the purpose of determining if an investment into the United States civil nuclear sector

may fall under this prohibition.

The NRC has issued a Final Standard Review Plan (SRP) on

Foreign Ownership, Control, or Domination, which details some of the complexities that go

into making an FOCD determination.

For example, in some situations a license can be

granted where there is 100 percent indirect ownership by a foreign parent company if that

foreign parent company’s stock in turn is “largely” owned by U.S. citizens.

On the other

hand, the analysis under the “domination” principle may render an applicant ineligible for

the license if its corporate structure makes a foreign company or foreign citizen appear to

be dominant.

42 U.S.C. § 2133.

42 U.S.C. § 2133(d).

42 U.S.C. § 2134.

Compare 42 U.S.C. § 2134(d) with 42 U.S.C. § 2133(d) (using nearly identical language in describing limitations on granting

licenses to foreign persons or foreign companies).

The NRC also has FOCD information on its website regarding nuclear reactors, which can be found at:

nrc.gov/reactors/focd.html

64 Fed. Reg. 52355-01, 52358 (Sep. 28, 1999).

Id. (This treatment may reflect a view that in such case the firm is not really foreign owned since it is ultimately, albeit very

indirectly, owned by U.S. citizens).

Id.

FDI RESTRICTIONS

B. Oil, Gas, and Certain Mineral Rights

The limits on investment in the oil and gas sector by citizens of other countries and foreign

corporations are found in the Mineral Lands Leasing Act of 1920.

Under that law, there

are limitations on the acquisition of rights-of-way for oil or gas pipelines, or pipelines

carrying products refined from oil and gas, across onshore federal lands. These restrictions

also apply to acquiring leases or interests in certain minerals (including coal and oil) on

onshore federal lands. Citizens of other countries and foreign corporations may have up to

a 100 percent stock ownership in a domestic company that owns such rights, interests, or

leases, provided that the foreign investor’s home country reciprocates with rights to U.S.

companies.

III. Transportation

A. Land Transport

There are two primary restrictions on investment in land transportation in the United

States. The first is for transportation within the United States (cabotage), which is limited to

persons of the United States using U.S.-registered and either U.S.-built, or duty-paid trucks

or buses.

The second restriction is cross-border bus or truck services, which require

operating authority from the Department of Transportation (DOT).

B. Maritime Transport

The occasional complexity of the limitations on foreign investment into the United States is

perhaps best illustrated by U.S. cargo preference laws and obligations stemming from the

Military Cargo Preference Act of 1904 and the Cargo Preference Act of 1954. Military

cargoes must be carried exclusively on U.S.-flag vessels.

At least 50 percent of all

government-generated (procured, furnished, or financed by) cargo tonnage must be

carried by privately- owned U.S.-flag commercial vessels (provided those are available at

30 U.S.C. §§ 181, et seq.

30 U.S.C. §§ 181, 185(a) (This requirement of reciprocity applies to deposits of coal, phosphate, sodium, potassium, oil, oil

shale, gilsonite, gas, and federal lands containing such deposits).

See, “Guidelines For Compliance of Commercial Motor Vehicles (CMV) and CMV Drivers Engaged in Cross-Border Traffic,”

Homeland Security, May 2012 at: https://www.dhs.gov/xlibrary/assets/policy/dhs-cross-border-trucking-guidelines.pdf; see

also, “How do I enter the United States as a commercial trucker,” U.S. Customs and Border Protection, at:

https://www.cbp.gov/border-security/ports-entry/cargo-security/carriers/land-carriers/how.

These regulatory requirements can be found in 49 C.F.R. Subtitle B, Chapter III.

10 U.S.C. § 2631.

FDI RESTRICTIONS

fair and reasonable rates).

This requirement includes agricultural cargo,

but cargo

generated under Export-Import Bank loan guarantees must be exclusively carried on U.S.-

flag vessels (provided that the guarantee amount is over $20 million or the term of the loan

is over seven years).

In turn, a U.S.-flagged vessel must be owned and crewed by U.S.

citizens (with certain limited exception),

but the entity that owns the vessel may have a

foreign parent company. Finally, it is worth noting that the cargo preference laws and

regulations do not apply to non-military and non-government agency commercial goods.

There are several limitations on the

transportation of goods and people within

the United States (cabotage) by vessel.

Cabotage of passengers is generally not

allowed by foreign-flagged vessels.

order for a vessel to engage in cabotage

services of goods or passengers, it must

meet at least one of three essential

requirements qualifying it as eligible to

engage in “coastwise trade.”

The

coastwise trade requirements for a vessel are (1) ownership by a U.S. citizen and

documentation as coastwise under U.S. law (which requires the vessel to have been built in

the United States); (2) ownership by a U.S. citizen, exempt from documentation, and

otherwise entitled to documentation with a coastwise endorsement but for tonnage

(because vessels measuring less than five net tons are excluded from documentation

altogether); or (3) ownership by a partnership or association in which at least 75 percent

interest is owned by a U.S. citizen, exempt from documentation, and otherwise entitled to

documentation with a coastwise endorsement but for tonnage (because vessels measuring

less than five net tons are excluded from documentation altogether), citizenship of owner,

or both.

The catching and transport of fish in U.S. waters is similarly limited to vessels built in the

United States and either owned by a U.S. citizen or owned by an entity in which there is at

46 U.S.C. § 55305; 46 CFR 381.

Id.

See 46 U.S.C. § 8103.

46 U.S.C. § 289.

19 CFR § 4.80.

46 U.S.C. § 289.

FDI RESTRICTIONS

least 75 percent ownership and control by U.S. citizens. Control, for the purpose of this

provision, means either having the right to direct the business of the entity; possessing the

ability to limit actions of or to replace CEOs; holding a majority of the board of directors,

general partners, persons serving in management capacities; or being able to direct the

transfer, operation, or manning of the vessel. Control does not include certain financial

rights or simply the ability to participate in the previously listed actions.

The limitations in the maritime transportation sector listed above are by no means

exhaustive. The United States maintains an extensive list of reservations in its international

trade agreements regarding this sector.

C. Air Transportation

Air carriers must be U.S. citizens in order to engage in domestic air service (cabotage) and

to provide international air service as U.S. air carriers.

Foreign Civil Aircraft, as defined by

U.S. law, require authority from the Department of Transportation (DOT) in order to

operate in the United States.

Non-U.S. citizens also require authority to engage in indirect

air transportation activities such as air freight forwarding and passenger charter

activities.

The grant of such authority is determined by the DOT, which takes into

consideration, among other things, the reciprocity granted to U.S. investors by the foreign

investor’s home country. Under the Aviation Programs statutes, 49 U.S.C. Subtitle VII, a U.S.

citizen is defined as an individual who is a U.S. citizen; a partnership in which each member

is a U.S. citizen; or a U.S. corporation where at least two thirds of the board of directors are

U.S. citizens, the president and other managing officers are U.S. citizens, and at least 75

percent of voting interests are owned or controlled by U.S. citizens. A foreign company may

therefore own up to a 25 percent voting interest in a U.S. air carrier or a company engaged

in indirect air transportation activities without a DOT grant of authority.

IV. Financial Services

The United States has a number of restrictions on foreign investment in the financial

services sector, via both mergers and acquisitions (M&A) and greenfield investment. This

See United States-Korea Free Trade Agreement (KORUS), signed June 30, 2007, Annex II, pp 4-7 (listing maritime transport

sector non-conforming measures); Agreement Between the United States, Canada, and Mexico (USMCA), December 12, 2019

text, Annex II, pp 5-7 (listing maritime transport sector non-conforming measures). The text of the KORUS agreement can be

found at: https://ustr.gov/trade-agreements/free-trade-agreements/korus-fta; The text of the USMCA can be found at:

https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/agreement-between

49 U.S.C. Subtitle VII.

Id.

FDI RESTRICTIONS

section provides a brief overview of some of these restrictions. At both the national level

and state level, there may be citizenship requirements for banking. For example, all

directors of a national bank are required to have U.S. citizenship, a requirement that the

Comptroller of the Currency can waive only for a minority of the total number of directors

of a given national bank.

The varying requirements imposed by different states operating

with different banking regulations add an additional level of complexity at the sub-federal

level. Some U.S. states do not account for foreign banks in their licensing process and

requirements. This may limit a foreign bank’s ability to enter into that state’s financial

sector or create additional steps and requirements for that foreign bank to enter that

state’s financial sector, which are not applicable to U.S. banks. Some states also impose

citizenship requirements on members of the boards of directors of state-chartered

depository institutions. There are also similar requirements for insurance companies,

which are generally regulated at the state level. Various states also regulate insurance at a

more local level of government, and such regulations may include citizenship requirements

for their board of directors, citizenship requirements for incorporators, and residency

requirements for various organizational structures.

There are also limitations on what foreign banking corporations and branches of foreign

banks can do in the United States. Corporations organized under a foreign country’s laws

cannot establish thrift institutions (credit unions, savings banks, or savings associations).

Foreign non-bank firms cannot own Edge Act corporations, which are corporations that

either take deposits from and make loans to companies doing business internationally or

invest in foreign companies. This limitation does not apply to foreign banks and their U.S.

subsidiaries.

Foreign banks cannot engage in securities advisory and investment services

without first registering as an investment adviser under the Investment Advisers Act of

1940.

Foreign banks cannot be members of the Federal Reserve System (and relatedly

cannot vote for directors of the Federal Reserve Bank).

Finally, there are a number of financial services activities that are limited by reciprocity

conditions, and likely require an analysis of the foreign investor’s home country’s laws.

These limitations include acting as a sole trustee of an indenture for a bond offering in the

12 U.S.C. § 72.

12 U.S.C §§ 1463 et seq., 12 U.S.C §§ 1751 et seq.

12 U.S.C. § 619.

15 U.S.C. §§ 80b-2, 80b-3.

12 U.S.C. §§ 221, 302, 321 (this restriction does not apply to U.S. bank subsidiaries of a foreign bank).

FDI RESTRICTIONS

United States and being designated as a primary dealer in U.S. government debt

securities.

Similar reciprocity requirements may also exist at the state and local level.

V. Additional Limitation – Highlights (Including Technology

Transfers and Radiocommunications)

There are various other limitations on investing in the United States that do not fit neatly in

any of the other categories in this chapter. Many of these are not so much restrictions on

investment, but rather conditions on doing business in the United States that are not

applicable to U.S. investors. The largest group of such limitations is on business and export

promotion services provided by the U.S. government. Foreign persons and foreign

corporations cannot apply for a certificate of review under the Export Trade Company Act

(ETCA) of 1982, which limits liability under federal and state antitrust laws when engaging in

the certified export conduct.

Foreign nationals and foreign companies can still receive the

benefits of such a certificate by becoming members of a qualified applicant.

U.S.

International Development Finance Corporation (DFC) programs are administered

preferentially for U.S. citizens or entities controlled by U.S. citizens, and their availability to

foreign-owned or -controlled U.S. enterprises may depend on the extent of U.S. ownership

or participation.

A key restriction for foreign investors that falls into the miscellaneous section are the

regulations surrounding controlled technologies, such as lasers and sensors, nuclear

materials, and chemicals. Release of a controlled technology to a foreign national in the

United States, which may be a foreign investor or part of a foreign investor, is deemed to

be an export to the home country of the foreign national, and as such requires written

authorization from the Bureau of Industry and Security (BIS) at the U.S. Department of

Commerce (DOC).

There are also requirements surrounding practicing before the U.S. Patent and Trademark

Office. U.S. patent attorneys must be U.S. citizens or lawful residents, and U.S. patent

agents must be U.S. citizens or lawful residents or registered to practice in a country that

15 U.S.C. § 77jjj(a)(1); 22 U.S.C. §§ 5341, 5342.

15 U.S.C. §§ 4011-4021; 15 CFR Part 325.

Id.

22 U.S.C §§ 2191. The DFC maintains a useful website which can be found at: dfc.gov on what programs and resources it

offers as well as some of the eligibility requirements for projects.

15 CFR Parts 730-774. BIS maintains guidelines for foreign national license applications, which can be found here:

bis.doc.gov/index.php/licensing/14-policy-guidance/deemed-export/109-guidelines-for-foreign-national-licenses

FDI RESTRICTIONS

allows for U.S. patent agents to practice there (for the limited purpose of patent

prosecuting applications of applicants located in another country).

Lastly, there are limitations on foreign investment in the radiocommunications sector. The

United States prohibits the granting of a station license to a foreign government or

representative thereof.

The United States also prohibits the granting of broadcast,

common carrier, aeronautical en route, or aeronautical fixed station licenses to foreign

citizens or their representatives, corporations organized under foreign laws, and

corporations with more than one fifth of their capital stock being foreign owned.

There

are also additional limitations on the ownership of the stock of companies that own

radiocommunication company stock that are too detailed to address in this chapter.

VI. State-Level Restrictions (Primarily Real Estate)

This section addresses sub-federal

restrictions on investment, which are

primarily found in insurance and real estate

sectors at the state level. Since the

restrictions on insurance are highlighted

briefly in Section IV above covering financial

services, this section will focus on real

estate. Some states have established

restrictions on the purchase of agricultural

land and may require that foreign entities

comply with reporting requirements and /or establish residency in the United States. In

addition, some states have limited the purchase of agricultural land by any entity (foreign

or domestic) or placed restrictions on how many acres of agricultural land may be acquired

by non-U.S. residents. Similarly, a few states have residency requirements for owning real

estate. For example, Oklahoma allows non-U.S. citizens to own real estate only if they fall

within certain exceptions (which include residency).

Several states also have various

preference systems for either U.S. citizens or residents to own land, placing limits on how

long non-resident non-U.S. citizens can own real estate without changing their status to

47 U.S.C § 310(a).

47 U.S.C § 310(b); Foreign Participation Order 12 FCC Rcd 23891, paras 97-118 (1997).

47 U.S.C. § 310(c). The Federal Communications Commission, which regulates this sector, maintains guidelines on foreign

ownership, which can be found here: fcc.gov/document/foreign-ownership-guidelines-fcc-common-carrier-and-aeronautical-

radio

Okla. Const. art. XII §§ 1,2 (restricting the purchase of real estate by non-U.S. citizens); Okla. Stat. tit. 60, § 121 (creating an

exception if the right is guaranteed by a U.S. treaty or if the person’s country of origin affords such rights to U.S. citizens);

Okla. Stat. tit. 60, § 122 (creating an exception for resident aliens or aliens who intend to become residents).

FDI RESTRICTIONS

become a U.S. resident or U.S. citizen. Ultimately, there are not outright restrictions on

foreign investors owning real estate, but instead conditions and limitations at the state

level.

VII. Conclusion

The previous sections have covered the sectors and subsectors where the United States

has the most extensive limitations on foreign investment. While a few of these limitations

are stringent in nature, many allow for high levels of indirect ownership, for investment

based on corporate structure, and for investment where the home country of the foreign

investor reciprocates. The volume of FDI into the United States remains the highest in the

world and stands as a testament to the nation’s friendly investment environment. The

United States ultimately welcomes foreign investment even in the sectors where there are

limitations and has made a variety of resources available to foreign investors seeking to

invest into the United States, including the SelectUSA program. In that same light, this

chapter will hopefully prove a useful addition to foreign investors looking to navigate the

U.S. investment regime.

Disclaimer

This chapter was prepared by Edward S. Rivera with the Office of the Chief Counsel for

International Commerce (OCCIC). Views expressed in this chapter are the author’s own, not

that of the International Trade Administration. This chapter does not constitute legal

advice. Readers interested in investing in the United States should consult legal counsel.

The Committee on

Foreign Investment in the

United States (CFIUS)

Considerations for Foreign Direct

Investment

Office of the Chief Counsel

for International Commerce

Office of Investment

Security

U.S. Department of

Commerce

CFIUS/FIRRMA

What is CFIUS?

he Committee on Foreign Investment in the United States (CFIUS) is an interagency

committee that is authorized to review certain transactions involving foreign

investment in the United States and

certain real estate transactions by foreign

persons, in order to determine the effect of

such transactions on U.S. national security.

CFIUS is exclusively focused on national

security risk and takes action only when

other provisions of law do not provide

adequate authority to address the risk.

CFIUS operates within the broader context

of the U.S. open investment environment.

FIRRMA Regulations and the U.S. Investment Climate

In August 2018, the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA)

was enacted to strengthen and modernize CFIUS. FIRRMA provides authorities to the

President and CFIUS to address national security concerns more effectively, including the

ability to review and take action to address any national security concern arising from

certain non-controlling investments and real estate transactions involving foreign persons.

New regulations published by the U.S. Department of the Treasury to implement FIRRMA

became effective in 2020.

Open Investment Policy:

In FIRRMA, Congress acknowledged the important role of foreign investment in the U.S.

economy and reaffirmed the United States’ open investment policy, consistent with the

protection of national security.

The United States is one of the most open countries in the world to foreign investors. The

United States is also one of the best places to invest, with strong economic growth policies,

a strong innovation ecosystem, and a large and highly developed market. The United States

maintains a transparent regulatory environment and unparalleled rule of law.

The CFIUS statute and regulations provide clarity to the business and investment

communities with respect to the types of transactions that are subject to CFIUS review and

the benefits of such review. The CFIUS process, as modernized and strengthened by

FIRRMA, enhances investor confidence in our nation’s longstanding open investment policy.

In addition to the summary

below, information on the

CFIUS process, frequently

asked questions, and other

resources are available at:

http://www.treasury.gov/cfius

CFIUS/FIRRMA

Expanded CFIUS Authority:

Prior to the enactment of FIRRMA, CFIUS had the authority to review the potential national

security effects of any transaction that could result in foreign control of any U.S. business.

FIRRMA expanded CFIUS’s jurisdiction to allow CFIUS to also review certain non-controlling

investments and certain real estate transactions.

Non-Controlling Investments:

Under FIRRMA, CFIUS is authorized to review certain non-controlling investments (called

“covered investments” in the CFIUS regulations), but only if such investment affords a

foreign person specified access to information in the possession of, board membership or

observer rights in, or involvement in the substantive decision-making of, certain U.S.

businesses related to critical technologies, critical infrastructure, or sensitive personal data,

each as defined in the CFIUS regulations.

• Critical technologies: CFIUS may review certain transactions involving U.S.

businesses that produce, design, test, manufacture, fabricate, or develop one or

more critical technologies. “Critical technologies” is defined to include certain items

subject to export controls and other regulatory regimes, as well as emerging and

foundational technologies controlled pursuant to the Export Control Reform Act of

2018.

• Critical infrastructure: CFIUS may review certain transactions involving U.S.

businesses that perform specified functions—owning, operating, manufacturing,

supplying, or servicing—with respect to critical infrastructure across subsectors

such as telecommunications, utilities, energy, and transportation, each as identified

in an appendix to the regulations.

• Sensitive personal data: CFIUS may review certain transactions involving U.S.

businesses that maintain or collect sensitive personal data of U.S. citizens that may

be exploited in a manner that threatens national security. “Sensitive personal data”

is defined to include ten categories of data maintained or collected by U.S.

businesses that (i) target or tailor products or services to certain populations,

including U.S. military members and employees of federal agencies with national

security responsibilities, (ii) collect or maintain such data on at least one million

individuals, or (iii) have a demonstrated business objective to maintain or collect

such data on greater than one million individuals and such data is an integrated

part of the U.S. business’s primary products or services. The categories of data

include types of financial, geolocation, health, and identifiable genetic data, among

others.

CFIUS/FIRRMA

Real Estate Transactions:

FIRRMA also authorizes CFIUS to review certain real estate transactions involving the

purchase or lease by, or a concession to, a foreign person of U.S. real estate that is in

and/or around specific airports, maritime ports, and military installations. The relevant

airports, maritime ports, and military installations are described in the CFIUS real estate

regulations with additional guidance on the Department of the Treasury’s CFIUS website

The CFIUS real estate regulations include certain exceptions, for example, real estate that is

a “single housing unit” and real estate located in certain “urbanized areas” or “urban

clusters,” in each case as defined in the CFIUS real estate regulations.

Other Topics:

Foreign Person and Excepted Investor:

FIRRMA does not prohibit investments from any particular country, and investments from

all foreign persons remain subject to CFIUS jurisdiction where a transaction could result in

foreign control of a U.S. business. As required by FIRRMA, however, the CFIUS regulations

create exceptions with respect to covered investments that do not result in control and

certain real estate transactions by certain foreign persons, defined as “excepted investors”

(or “excepted real estate investors”) from certain “excepted foreign states” (or “excepted

real estate foreign states’) as identified on the Department of the Treasury’s CFIUS

website.

Any such excepted investor must meet specific criteria to qualify for this status.

Declarations:

FIRRMA modernized CFIUS’s processes to better enable timely and effective reviews of

transactions falling under its jurisdiction, including by introducing the concept of a

declaration—an abbreviated notification to which CFIUS must respond within a 30-day

assessment period—as an alternative to a voluntary notice, which has been the traditional

means of filing a transaction with CFIUS. Instructions are available on the Department of

the Treasury's CFIUS website

Process Remains Largely Voluntary:

The CFIUS process remains largely voluntary, where parties may file a notice or submit a

short-form declaration notifying CFIUS of a transaction in order to receive a potential “safe

harbor” letter (which prevents CFIUS from subsequently initiating a review of a transaction

except in limited circumstances).

In some circumstances, filing a declaration or notice for a transaction is mandatory. In

particular, the regulations require submission of a declaration for covered transactions

where a foreign government is acquiring a “substantial interest” in a U.S. business that is

involved in specified ways with critical technologies, critical infrastructure, or sensitive

CFIUS/FIRRMA

personal data. Additionally, the regulations require filings for certain covered transactions

involving U.S. businesses that produce, design, test, manufacture, fabricate, or develop one

or more critical technologies.

There is no mandatory filing requirement for real estate transactions under the real estate

regulations. Parties may file a notice or submit a short-form declaration notifying CFIUS of

a real estate transaction in order to potentially qualify for a “safe harbor” letter.

Disclaimer:

This chapter does not constitute legal advice. Readers interested in investing in the United

States should consult legal counsel.

Intellectual Property

An Overview of Intellectual Property

For Foreign Investors

Trademarks and Copyrights

Arnold Lutzker, Partner

Susan Lutzker, Partner

Patents and Trade Secrets

Jeffrey Love, Partner

INTELLECTUAL PROPERTY

Introduction to Intellectual Property (IP) for Foreign Investors

or foreign investors, like other business owners, the most valuable assets of a

business are its Intellectual Property (IP). The heart of the IP are four categories of

assets: trademarks, copyrights, patents, and trade secrets. Each of these assets is

the basis upon which a business is built and thrives. All four categories have unique legal

systems that invest ownership in the creator and enable lawful control and exploitation.

Generally, IP is managed on a national basis, with a common set of international principles

developed over more than a century of bilateral and multilateral treaties.

For all creators, protection starts in one’s home country and then extends to the target of

foreign investment, which is the United States for the purposes of this chapter. Therefore,

foreign investors should always start by first protecting their IP in their home country.

Then, once a decision is made to conduct business in the United States, the investors need

to take effective steps to protect their IP in the United States.

The U.S. legal system provides one of the

most expansive sets of protections for IP

assets of any nation. It starts with core,

constitutional principles, which are clarified

and implemented by federal and state

statutes, administrative regulations, and

judicial determinations. Some IP, like

trademarks and patents, should be

identified, cleared as available for exclusive

ownership, and protected as early as possible. Other IP, like copyrights and trade secrets,

once created, should be protected formally, by registration or contract. Failure to analyze

the availability of IP assets for exclusive ownership and to secure full legal protections can

place in jeopardy both the assets and the financial investment made to create them.

In the United States, there are limitless options to promote and utilize an investor’s product

via sale and licensing through traditional channels, online, and through apps. When it

comes time to seek additional capital or sell a company, IP assets are the bedrock of the

business’s value. Protecting an investor’s IP and enforcing subsequent rights against

infringers requires knowledge of the applicable laws and the ability to react quickly to an

ever-changing landscape. This is a basic guide for all foreign investors.

Trademarks and Servicemarks

What Is a Trademark/Servicemark?

Trademarks (for goods) and servicemarks (for services) are the words, phrases, symbols,

designs, product configurations, and even colors and smells, that stand for a business in

INTELLECTUAL PROPERTY

the eyes of the consumer and in the minds of competitors. They are the shorthand

expression that defines the goodwill a company has built over time. The central basis for

trademark protection in the United States is “use in commerce,” and the law protects

against the “likelihood of confusion” between a business’s mark and a competitor’s mark.

Trademark rights are exclusive to the proprietor; therefore, it is critical that a business

protects its brand as soon as plans to enter the United States are formalized.

How Do Investors Protect Their Trademarks?

In the United States, there are both state (local) and federal (national) ways of protecting a

trademark. On the local level, merely using a mark gains common law rights and enables a

business to carve out protection in the state or states where it operates. An investor can

also register a trademark with the state-level Secretary of State (not to be confused with

the federal role of the same name). However, common law/state protection will not

necessarily prevent someone in a distant state from using the same mark competitively. To

best protect against this challenge, investors should plan to secure federal rights and take

advantage of the benefits of registering with the U.S. Patent and Trademark Office (USPTO).

Federal rights are protected under the Lanham Act (15 USC §1051 et seq.), which is the

federal trademark statute.

The USPTO offers two options for trademark owners. First, before a business begins use,

the company can claim a mark by filing an “Intention to Use” application (ITU). An ITU filing

can be submitted even before entering the U.S. market, and it is strongly recommended.

The ITU is a formal reservation of rights to the mark, which, once allowed by the USPTO,

must be perfected by using the mark in

commerce. Critically, if someone else

(Company B) uses the same mark for the

first time after another company’s

(Company A’s) ITU filing, the original

company (Company A) can force them to

stop that use. However, without the filing,

the original company’s (Company A’s) mark

may be restricted instead.

Second, if a company has not filed an ITU, but its mark is in use in the United States, the

company can submit a standard application. While not required to secure common law

trademark rights, the importance of filing and securing federal registration cannot be

overstated. Once a mark is registered, it acquires national protection, and the trademark

owner has a virtual monopoly on the right to use the mark for those products or services.

That monopoly can be enforced in any federal court in the United States. Also, by

international treaties, a registrant can extend protection to other countries.

INTELLECTUAL PROPERTY

How Should Investors Select a Trademark for Their Business?

If a company has a brand in its home market or is selecting a new mark for its U.S.

business, the company should strive to develop a distinctive mark that will stand up against

competitors. The hallmark legal issue in trademark law is “likelihood of confusion,” so a

company should have a mark that will withstand a claim that it confuses the consumer as

to the source of the good or service.

Additionally, trademarks can be characterized by their strength in the public’s mind as

follows (from strongest and most protectable to weakest or not protectable):

• Fanciful marks: these have no dictionary meaning or connection with the business,

like Qorvo for technology or radio frequency solutions.

• Arbitrary marks: these are dictionary words but have no connection to the goods or

services, like Apple for computers.

• Suggestive marks: these creatively hint at a feature of the goods or services, like

Federal Express for national overnight package delivery.

• Descriptive marks: these describe a feature of the good or service, and some are

protectable, some not. If, with the investment of time and money, the mark gains

public recognition and stands as a unique source, like ChapStick for lip balm, it can

be exclusively owned; however, if the description is needed by all competitors to

describe the product, like “sun block” for sunscreen, it is not protectable.

• Generic terms: these are not trademarks but rather words or phrases that stand for

the genus of the product or service, like dry ice or cell phone.

To avoid investing in a brand that would later have to be abandoned (or leave a company

vulnerable to charges of infringing another’s mark), businesses should conduct a search to

determine the availability of the mark in the United States and be assured that it would not

create a likelihood of confusion with another’s mark. Searches can be cursory or detailed,

and the extent of a search depends on such factors as where the mark fits on the strength

continuum and how much will be invested to promote the brand. Because of the

importance of the internet to marketing, you should also quickly secure the mark’s domain

name as well.

How Does a Business Get Federal Protection for Its Trademark?

Once a mark is “cleared,” the next step is to file an application with the USPTO. It is

important to file an ITU application before a company commences business in the United

States, as well as a standard application once use in the United States commences. There

are also treaties, such as the Paris Convention, which allow a foreign entity to claim U.S.

INTELLECTUAL PROPERTY

trademark rights based on first use at home. All options for registration should be carefully

considered.

The time between filing an application and registration can vary, but typically the process

takes about a year. An Examining Attorney reviews the application for technical formalities

and to assess whether the mark applied for is confusingly similar to a registered mark. An

important note for foreign investors: the Examining Attorney will translate foreign words to

assess the meaning and “strength” of the mark.

A letter or “office action” informs the applicant of any issues and must be answered within

three months. If approved, the mark is published in the USPTO’s Official Gazette, which

allows for public comment, including opposition. Assuming no challenge, the application

will proceed to registration or, for ITUs, to allowance. Marks allowed by ITU must be in use

within three years. A registration is granted for ten years and may be renewed indefinitely

as long as it is in use. Nevertheless, every registered owner must file an affidavit of

continued use in the fifth year after initial registration to get the full ten-year benefit.

Failure to file that affidavit will result in registration being canceled. Before registration, a

trademark owner can use the informal symbol TM adjacent to the mark to indicate a

trademark claim. Once the mark is registered (and only after registration), an owner should

adopt the statutory notice symbol, ®.

Special considerations apply to trademarks that might be considered disparaging in the

United States or that involve federally banned products (such as cannabis), so early legal

help is essential for producers in these cases.

How Does a Business Protect Its Trademark After Registration?

Once a mark is registered, it is important to monitor the marketplace to identify any third

party uses that may create confusion. Failure to monitor a trademark and to act on

infringements can create cracks in a company’s IP claims and open the brand to a claim of

abandonment. Trademark “watch services” help monitor USPTO records and provide the

opportunity to intervene early to protect a mark.

Copyrights

What Is a Copyright?

movies, books, music, software, or photos. A copyrighted work must be original; have a

modicum of creativity; and be fixed in a tangible medium of expression. The law protects

expressions, but not facts or ideas, which are an essential part of free speech and the flow

of information.

INTELLECTUAL PROPERTY

The U.S. Constitution (Article I, Section 8, Clause 8) empowers Congress to grant to

“authors” the exclusive right to their writings “for limited times.” This power is implemented

through the Copyright Act, 17 USC §101 et seq. Through copyright law reform, the “limited

times” has been extended to nearly a century. Once the term of copyright expires, the work

falls into the public domain, which means that it is free to be copied and used by anyone

without prior approval.

The exclusive rights granted to a copyright

owner are these: the right to reproduce

(copy) the work; the right to prepare

derivative works based on the original; the

right to distribute copies to the public; the

right to perform the work publicly; the right

to display the work publicly; and the right to

perform sound recordings publicly by

means of digital audio transmission. These

rights can be sold, licensed, loaned, or given

away and can pass from one generation to the next.

Importantly, copyright law balances the grant of exclusive rights to owners with a set of

limitations designed to permit certain public uses either without consent or subject to a

compulsory license. The most prominent limitation is fair use, which defends against a

charge of copyright infringement by establishing that the use is permitted, for purposes

such as criticism, comment, news reporting, teaching, scholarship, or research. Fair use and

other limitations, as well as the compulsory licenses for software and music, are complex

and require careful analysis to assure compliance with the statutory requirements.

How Does a Business Protect Its Copyrights?

Berne Convention), there are no “formalities” needed to gain rights; however, federal

registration and copyright notice (© NAME and YEAR CREATED), while not mandatory, are

essential to enjoy full rights available to copyright owners in the United States. Before filing

a case for infringement, the copyright must be registered. If the work is registered before

infringement, the U.S. system provides for recovery of actual losses, or alternatively

minimum statutory damages ($750-$30,000 per work up to $150,000 in cases of willful

infringement), plus recovery of reasonable attorneys’ fees. Criminal penalties are possible

for certain types of willful copyright infringement. Copyright registration is a simpler and

less expensive process than trademark registration. For certain classes of works (such as

photographs), group registrations are possible. Further, there are special procedures when

registering software programs to maintain trade secrets embodied in code.

INTELLECTUAL PROPERTY

What is the Digital Millennium Copyright Act (DMCA)?

In 1998, copyright law entered the internet’s digital age with the adoption of the DMCA. The

DMCA is an elaborate set of rules dealing with content online; content shared by websites

and online service providers (OSPs); and protection of copyright management information.

Registration of a DMCA agent with the U.S. Copyright Office is now advisable for OSPs and

interactive websites. Given the importance and ubiquity of online websites for businesses

today, entities entering the U.S. market should learn and follow DMCA rules of the digital

road.

What is a Work for Hire Agreement?

If an employee creates materials for their company within the scope of their employment,

the employer owns the copyright. However, if an independent contractor (for example, a

software engineer or a website designer) creates materials that fall within certain statutory

categories (for example, a contribution to a collective work or a motion picture), then

unless there is a written “work made for hire” agreement that defines ownership, the

contractor may claim copyright. In short, absent specific work for hire language appearing

in a written contract, a business risks discovering it does not own clear title to the

copyrights it paid for and needs to succeed. If the materials created fall outside the

statutory categories, then a written assignment of copyright is required. In any event, a

written assignment is an advisable back up to a “work made for hire” provision.

Patents

What Is A Patent?

The United States Constitution grants Congress the power “To promote the progress of

science and useful arts, by securing for limited times to authors and inventors the exclusive

right to their respective writings and discoveries.” (Article I, Section 8, Clause 8.) Pursuant to

that grant, Congress has enacted patent laws, and created a patent office that issues

patents to inventors. A patent is a document granting an inventor, or the inventor’s

assignee, the right for a limited time (currently about 20 years from the date the patent

application was filed) to file a complaint in federal court seeking a reasonable royalty and

other compensation and relief, including an injunction, against persons and companies

practicing the patented invention without authorization, and to file a complaint with the

U.S. International Trade Commission for an order barring the importation of goods that

infringe the patent.

Who Can Get A Patent?

Inventors can get patents on their inventions. Assignees of inventors can get patents on the

inventors’ inventions. U.S. patent law authorizes inventors to transfer to any person or

INTELLECTUAL PROPERTY

company, by written assignment, their rights to patent their inventions, and their rights to

any patents already issued. The law provides: “Applications for patent, patents, or any

interest therein, shall be assignable in law by an instrument in writing.” (35 USC § 261.) In

accordance with that law, employees often assign in writing their patent rights to their

employers.

In some states within the United States, and some countries outside the United States,

statutes provide that employers own any patentable inventions made by their employees

as part of their employment. For example, Nevada Revised Statute 600.500 provides that

“an employer is the sole owner of any patentable invention or trade secret developed by

his or her employee during the course and scope of the employment that relates directly to

work ….” (N.R.S. 600.500

How Does One Get A Patent?

For employers, start by obtaining in advance from employees a written assignment of any

employee inventions and a written nondisclosure agreement obligating them to keep

company inventions confidential.

Then, identify potential inventions. Many companies create incentives for employees to

create inventions, identify them as potentially valuable, and submit summaries of them to

management. These companies also create systems for management to regularly review

the summaries and determine whether they merit a patent application. Patent lawyers

often assist individuals and companies in identifying and evaluating potentially patentable

inventions, obtaining written assignments of inventions from employees, and creating

systems for receiving and reviewing invention summaries from employees.

After a potential invention is identified,

keep it confidential, and do not sell

products embodying it, until an

application to patent it is filed or a

decision is made to not patent it.

Nondisclosure agreements can help keep

inventions confidential. Public disclosure

of the invention (for example in articles or

presentations or in sales of products

embodying the invention) prior to the

filing of an application can result in the loss of patent rights. Patent lawyers routinely advise

individuals and companies on how to keep potentially patentable inventions confidential

and when to file a patent application.

Finally, file a patent application with the USPTO and prosecute the application through

issuance of the patent. Often it is best to file an initial patent application early, to preserve

INTELLECTUAL PROPERTY

rights in the invention as initially conceived, and then file a second application later after

the invention has been more fully developed. Patent rights generally may extend for up to

20 years from the filing of the application.

Why Get A Patent?

Patents can keep out competition over use of one’s patented inventions and provide

grounds for seeking a reasonable royalty for use of the inventions, for the life of the

patents. If an invention that gives a significant competitive advantage is patented, or a

patent application is pending, potential competitors may decide not to copy it to avoid the

risks of patent litigation. If they do copy it, a successful patent lawsuit may result in a court

order prohibiting further copying for the life of the patent; awarding a reasonable royalty;

or, in some cases, lost profits and treble damages.

Patents are valuable assets that increase the sale value of a company and its product lines.

Potential purchasers of a company or product line often expect the company’s products to

be protected from wholesale copying by competitors by a substantial patent portfolio.

Patents can be valuable assets in negotiating cross-license agreements with competitors.

Patents can be a valuable source of income through licensing, litigation, and sale of the

patents. The process of identifying, keeping confidential, and seeking to patent inventions

can provide a company with incentives to be more inventive.

What Can Be Patented?

U.S. law provides for three different types of patents: a utility patent, design patent, and

plant patent. These patents cover three distinct types of patentable subject matter:

• Utility Patent: “Whoever invents or discovers any new and useful process, machine,

manufacture, or composition of matter, or any new and useful improvement

thereof, may obtain a patent therefor…” (35 USC § 101);

• Design Patent: “Whoever invents any new, original and ornamental design for an

article of manufacture may obtain a patent therefor….” (35 USC § 171);

• Plant Patent: “Whoever invents or discovers and asexually reproduces any distinct

and new variety of plant … may obtain a patent therefor….” (35 USC § 161).

The U.S. Supreme Court has placed some limits on patentable subject matter, holding that

laws of nature, physical phenomena, and abstract ideas are not patentable. (Diamond v.

Chakrabarty, 447 U.S. 303 (1980).) Patent lawyers advise businesses on which of their

inventions and discoveries are patentable and the best type of patent protection to seek

for them.

INTELLECTUAL PROPERTY

Trade Secrets

What Is A Trade Secret?

A trade secret is information that is (a) valuable in a trade or business, (b) secret, and (c)

protected by the owner’s reasonable steps to keep it secret. The federal Defend Trade

Secrets Act of 2016 (DTSA) defines “trade secret” as follows (18 U.S.C. § 1839(3)):

“the term ‘trade secret’ means all forms and types of financial, business, scientific,

technical, economic, or engineering information, … if—

(A) the owner thereof has taken reasonable measures to keep such information secret; and

(B) the information derives independent economic value, actual or potential, from not

being generally known to, and not being readily ascertainable through proper means by,

another person who can obtain economic value from the disclosure or use of the

information;…”

The Uniform Trade Secrets Act (UTSA) defines “trade secret” similarly (Section 1(4)):

“(4) ‘Trade secret’ means information … that:

(i) derives independent economic value, actual or potential, from not being generally

known to, and not being readily ascertainable by proper means by, other persons who can

obtain economic value from its disclosure or use, and

(ii) is the subject of efforts that are reasonable under the circumstances to maintain its

secrecy.”

Who Can Own A Trade Secret?

Anyone can own a trade secret. Anyone who develops the trade secret, or obtains

knowledge of it by proper means, may own it. Trade secrets may be acquired by written

assignment. For example, part of the acquisition of a company or its assets often includes a

written assignment of trade secrets. Employers often require employees to assign to their

employer in advance trade secrets they develop or discover during their employment.

Some states and countries have statutes that provide that trade secrets discovered by

employees are owned by their employers.

How Does One Protect A Trade Secret?

As with patents, employers can start by obtaining in advance from employees a written

assignment of any trade secrets developed or discovered by employees and a written

nondisclosure agreement obligating them to keep company trade secrets confidential.

INTELLECTUAL PROPERTY

Then, companies identify potential trade secrets. A company can offer incentives for

employees to identify potentially valuable trade secrets and put in place systems for

management to regularly review and determine whether they merit special protection.

When a company identifies a potential trade secret, it should keep it confidential. Public

disclosure of the trade secret can result in the loss of legal rights for the secret.

Unlike patents, there is no government office for submitting trade secrets for approval or

protection. The owner of the trade secret maintains legal rights in it by taking reasonable

steps to keep the information secret. These steps may include labelling documents “secret,”

segregating them from ordinary business information in a secure location, such as a safe

or password-protected computer in a locked room, requiring people with access to the

information to sign nondisclosure agreements, minimizing the number of copies of

documents that contain the secret, and promptly taking steps to minimize any public

disclosure of the secrets.

Why Make the Effort to Maintain Information as Trade Secrets?

For valuable information that is not generally known, establishing them as trade secrets by

taking reasonable steps to maintain their secrecy gives them substantial protection under

both state and federal laws throughout the United States. Since 1981, almost all states

have enacted a version of the UTSA, which is a model Act drafted in 1979 (and amended in

1985) by the Uniform Law Commission, a state-supported organization of lawyers

established in 1892 to provide states with non-partisan model laws.

In 2016, the federal government enacted the DTSA (18 U.S. Code § 1836). It is based on the

UTSA, but with some changes. It provides a single law against theft of trade secrets related

to a product or service used in interstate or foreign commerce. The DTSA applies

throughout the United States; can apply to some trade secret theft outside the United

States; can be enforced in federal courts and state courts throughout the United States;

and can be enforced by the owners of the trade secrets in civil actions and by federal

prosecutors in criminal and civil actions.

State laws based on the UTSA and the DTSA create a private cause of action, which

authorizes trade secret owners to bring civil suits for theft seeking damages and other

relief.

In 1996, the federal government enacted the Economic Espionage Act of 1996 (EEA). It

authorizes federal prosecutors to bring criminal actions, and civil actions to enjoin

violations, in federal court against persons and companies accused of trade secret theft.

Unlike the DTSA and state trade secret laws, the EEA does not create a private cause of

action. The EEA contains two separate provisions that criminalize the theft or

misappropriation of trade secrets. The first provision (18 U.S.C. § 1831) is directed towards

INTELLECTUAL PROPERTY

foreign economic espionage and requires that the theft of the trade secret be done to

benefit a foreign government, instrumentality, or agent. The second provision (18 U.S.C. §

1832) makes criminal the more common commercial theft of trade secrets, regardless of

who benefits. The EEA provides for the criminal forfeiture of any property or proceeds

derived from a violation. The EEA covers conduct occurring outside the United States where

the offender is a citizen or permanent resident alien of the United States or where an act in

furtherance of the offense was committed in the United States (18 U.S.C. § 1837).

A trade secret owner may also file a complaint for theft of trade secrets with the U.S.

International Trade Commission (pursuant to Section 337 of the Tariff Act, 19 U.S.C. §

1337), seeking an order excluding from importation into the U.S. products that incorporate

misappropriated trade secrets.

These and other state and federal laws offer substantial remedies for the theft of trade

secrets. Like patents, trade secrets can help keep out unfair competition. If confidential

information is protected as a trade secret, by taking reasonable steps to maintain its

secrecy, potential competitors may decide not to try to obtain it to avoid the risks of trade

secret litigation. If they do obtain it through theft or other improper means, a successful

trade secret lawsuit may result in a court order prohibiting them from using it and

awarding substantial monetary damages.

Trade secrets, like patents and other intellectual property, can be valuable assets that

increase the sale value of a company and its product lines. Potential purchasers of a

company or product line often expect the company’s confidential information to be

protected as trade secrets by taking reasonable steps to maintain its secrecy. Trade secrets

can be valuable assets in negotiating agreements with competitors and a valuable source

of income through licensing and sale. Unlike patent protection, which expires after a

limited time, trade secrets may be protected for as long as the owner takes reasonable

steps to maintain their secrecy.

What Is Considered A Trade Secret?

Almost any information can be a trade secret if it is valuable to a business and not

generally known. The DTSA gives as examples: “patterns, plans, compilations, program

devices, formulas, designs, prototypes, methods, techniques, processes, procedures,

programs, or codes, whether tangible or intangible, and whether or how stored, compiled,

or memorialized physically, electronically, graphically, photographically, or in writing.” (18

U.S.C. § 1839(3).) The UTSA gives as examples “a formula, pattern, compilation, program,

device, method, technique, or process….” (Section 1(4).)

INTELLECTUAL PROPERTY

Conclusion

Foreign investors should take steps early to protect their intellectual property in the U.S.

Talk to an intellectual property attorney to identify valuable IP and agree on a plan to

protect it. Delay may result in the loss of valuable rights. Basic steps include: registering

trademarks with the USPTO; using trademarks correctly on products, websites and

advertising; registering copyrights with the U.S. Copyright Office; timely applying to patent

inventions with the USPTO; documenting steps taken to maintain the secrecy of trade

secrets, including nondisclosure agreements with employees and business partners; and

obtaining and granting necessary IP licenses and assignments.

Further information on how to protect intellectual property in the U.S. can be found at the

USPTO website, which provides basic information on patents, trademarks, copyrights

and

trade secrets, and at the U.S. Copyright Office website, which provides basic information on

copyrights.

About Klarquist Sparkman, LLP (Authors of IP Section on Patents

and Trade Secrets)

Klarquist Sparkman, LLP was founded in 1941, and is one of the oldest and largest full-

service intellectual property boutique firms in the Northwest United States. Based in

Portland, Oregon, its clients are at the cutting edge of technology and innovation. The firm

includes more than 60 attorneys and patent agents who represent a broad range of clients

including solo inventors, mid-size companies, large corporations and major research

institutions. The firm provides the technical and legal experience needed to preserve,

protect, and defend in litigation all intellectual property rights. Klarquist Sparkman is a

proud member of INBLF. Learn more by visiting

www.klarquist.com.

About Lutzker & Lutzker LLP (Authors of IP Sections on

Trademarks/Copyright) and INBLF

Lutzker & Lutzker LLP is a boutique firm focused on intellectual property, entertainment,

high tech, and privacy issues. The firm provides counseling, transactional and litigation

services to traditional businesses, educators, and creative professionals. Lutzker & Lutzker

LLP is a proud member of INBLF, and Arnold Lutzker serves as the president of the law firm

network.

INBLF is a network of hundreds of boutique law firms in nearly 40 jurisdictions throughout

the U.S. and Canada, and dozens of full-service law firms in more than 30 countries around

the globe. INBLF law firms stand ready to assist foreign investors with all legal services

needed to realize their dreams of investment in the United States.

INTELLECTUAL PROPERTY

Disclaimer

The sections on trademarks and copyrights in this chapter were prepared by Arnold

Lutzker and Susan Lutzker of Lutzker & Lutzker LLP. The sections on patents and trade

secrets in this chapter were prepared by Jeffrey Love and Ramon A. Klitzke II of Klarquist

Sparkman, LLP. Views expressed in this chapter are the author’s own, not that of the

International Trade Administration. This chapter does not constitute legal advice. Readers

interested in investing in the United States should consult legal counsel.

A Checklist for Foreign

Companies Opening a

Bank Account in the

United States

Kirthi Mani, Managing

Principal, Global Advisory &

Outsourcing

BANKING

or a foreign company establishing business operations in the United States, is there

a right way to open a bank account? Consider the what, why, when, where, and how.

What do you want from the banking relationship?

A bank that offers tailored services to support your specific business needs can be a game-

changer. Your banking relationship should go beyond providing transactional activities and

lending options to offer you the support, services, and flexibility you need to help your

business grow. Convenience and security are crucial, especially if your company leadership

is located outside the United States.

When choosing a bank, consider its

experience and resources. Banks with

specialized financial teams that regularly

work with various business models, growth

plans, and operational challenges can offer

valuable insights. Your banking professional

can also be a significant resource for client

referrals, warm leads, and networking

opportunities. Additionally, your bank may

offer tools and services to help streamline

your business operations, such as integrating with your accounting software, restructuring

payroll and bill payments, improving cash flow management, and aligning your banking

and tax goals.

Why you might need a bank account in the United States

There are many reasons why you many need a U.S. bank account. Consider the following:

1. Will you need assistance with investments or business loans? This could include

asset management or a high-yield savings accounts. Eligibility for select federal

government programs require a company to have a U.S. bank account in place for

two years.

2. Will you need a line of credit? If your business has not been operating long enough

in the United States to establish credit or has a low credit score, it could be difficult

to secure credit lines or business loans.

3. Do you require merchant services, financial consulting, or notary assistance? For

example, you may need the assistance of a notary public if you are a retail business.

While renewing local businesses tax licenses, you will be required to provide your

investor and sales valuations, which must be notarized.

BANKING

100

4. How often will you visit the bank? For example, will you need to withdraw cash

regularly, have access to ATMs, access a safety deposit box, or need bank-certified

checks?

5. Do you need to process U.S. payroll? Nearly all U.S. payroll providers require a U.S.

bank account to process U.S. payroll.

If the only reason you need a U.S. bank account is to collect payments from your U.S.

customers, there are other convenient options, like alternative payment methods (APMs).

APMs can be categorized as any form of payment that is not cash or a credit card issued by

a major bank, such as PayPal.

Additionally, the cloud-based Payments-as-a-Service (PaaS) model allows businesses to

utilize various payment options through a single interface, whether consumers are using

prepaid debit cards, global bank transfers, international APMs, or local APMs.

Where should your U.S. bank account be located?

When establishing business operations in the United States, investors typically look to open

an account with a brick-and-mortar U.S. bank. However, in cases where establishing that

type of account may be especially challenging or where your company does not have a

significant need for a traditional banking platform, you may find it worthwhile to consider

certain banking alternatives.

• In your home country — If you sell to the United States or pay suppliers in U.S.

dollars (USD), opening a foreign currency/USD account with a local bank in your

home country could be an option. A foreign currency account allows you to send

and receive funds in multiple currencies, and you could save time (due to

streamlined bank transfers) and money (by avoiding short-term currency

fluctuations and high fees).

You can also open a merchant account, which links your customers’ bank accounts

and your company’s bank account in order to process electronic payments,

including credit card transactions.

• Online — Millions of people in the

United States use mobile banking.

Online banks tend to offer lower fees

and higher interest rates on deposit

accounts, because they do not incur

costs to open and operate a network

of physical branches. Like most brick

and mortar banks, many online

BANKING

101

banks are insured by the U.S. Federal Deposit Insurance Corporation (FDIC). Before

engaging with a bank, use the FDIC’s online database BankFind to make sure you

are working with a legitimate FDIC-insured bank.

• Mul

ti-currency digital bank accounts — These digital accounts are offered by

both bank and non-bank services and are available in multiple currencies, including

USD. Fees under this option may be less than the fees for currency exchange

services charged by most players in the online marketplace.

COVID-19 has fundamentally altered the way we live and work, and banking is no

exception. In a post-pandemic world, an explosion of technologies such as analytics and

artificial intelligence (AI) is influencing every aspect of the banking industry. Digital-only

banks (also known as neobanks), Banking-as-a-Service (BaaS), and mobile banking are all

set to take off, to keep up with changing consumer expectations.

When should you apply for a U.S. business bank account, and how

long will the process take?

• The first step is to create a U.S. entity at the state level. This procedure is generally

straightforward and completed documents can be processed within 24 to 48 hours.

• Once the entity is formed, you must file for a Federal Employer Identification

Number (FEIN) (Form SS-4). This is the number you will use on your federal tax

return. If the company officer who signs Form SS-4 is a U.S. citizen, you can apply for

and obtain an FEIN immediately. If not, it could take two to three weeks.

• Once your FEIN is received, you can apply for a U.S. bank account.

• A bank account normally takes around three weeks to open, and in some cases

requires an in-person meeting with the bank. A U.S. officer of the business, as

designated in company documents, typically attends these meetings and has the

authority to make decisions regarding a bank account.

How does a non-U.S. company open a bank account in the United

States?

Banks undergo extensive customer due diligence procedures, not only to comply with anti-

money laundering and anti-terrorism requirements, but also to guard against reputational,

operational, legal, and concentration risks.

The Financial Crimes Enforcement Network (FinCEN) issued “

Customer Due Diligence

Requirements for Financial Institutions” (the CDD Rule) in 2018 to amend the Bank Secrecy

Act regulations. Under the CDD rule, financial institutions act almost as proxies for law

BANKING

102

enforcement. Banks must now collect information on client companies’ beneficial owners

and provide it to law enforcement agencies upon request.

Consider this representative list of documents you may need.

• FEIN confirmation letter — An FEIN confirmation letter (or Form SS-4) is required

by banks for tax reporting purposes.

• C

orporate documents — As proof of your entity’s creation and how it will operate

and conduct its business, required documents may include Articles of Incorporation

or Certificate of Incorporation, operating agreements, organizational minutes and

bylaws, Certificates of Good Standing, or Certificates of Incumbency.

• B

eneficial ownership information — Banks must identify any individual who owns

25 percent or more of a legal entity, and any individual who controls the legal entity.

• P

hoto identification — Banks generally require two forms of identification for the

beneficial owners and the company representative opening the account; at least

one of these must have a photo.

• P

roof of address — Banks require the company representative to submit a

personal proof of address. Foreign bank account statements are usually preferred,

although utility bills may also be accepted.

• U

.S. business address — Most U.S. banks will not open a business account without

a physical U.S. address. However, banks may accept the street address of a

registered agent or a virtual mailbox service, especially if your business is one in

which having a physical branch is impractical (such as purely online sales).

Watch for common pitfalls when opening a U.S. bank account

• Incorrect or missing information — This can delay the account opening process

by weeks. Communicate with your bank to understand exactly what you need to

provide.

• C

heck-signing authorities — Will your checks require one signature or two? Is this

for all checks or only for amounts over a specified dollar limit? Set up a system of

internal controls and make these decisions before opening your account.

• D

BA versus legal name — Printing a doing-business-as (DBA) name instead of your

company’s legal name on checks could pose a problem. Due to increasing online

banking fraud, most credit card merchant processors are required to match the

entity’s legal name to the one on the check.

BANKING

103

• Apostille requirements — An Apostille is a specialized certificate that verifies a

document as legitimate and authentic so it will be accepted in countries that are

members of the Hague Convention Treaty. This is not a typical requirement but may

arise in specific cases.

• M

inimum deposit — As this may vary from bank to bank, it is good to verify your

bank’s minimum deposit requirements for foreign clients.

Whether you are thinking of starting a business, are in the early stages of launching a

startup, or have been running a business for several years in the United States, look for a

bank that meets the specific needs of your company — not just in the short-term, but for

years to come.

About CliftonLarsonAllen

CliftonLarsonAllen exists to create opportunities for our clients, our people, and our

communities through industry-focused wealth advisory, outsourcing, audit, tax, and

consulting services. A member firm of the Nexia International network, CliftonLarsonAllen

acts as a one-stop-shop, providing Global Concierge Services for our clients. With 7,400

people and more than 120 U.S. locations, we promise to know you and help you.

Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC,

an SEC-registered investment advisor.

Disclaimer

This chapter was prepared by Kirthi Mani with CliftonLarsonAllen. Views expressed in this

chapter are the author’s own, not that of the International Trade Administration. This

chapter does not constitute legal advice. Readers interested in investing in the United

States should consult legal counsel.

104

Site Selection in the

United States

Key Variables, Processes, and

Technologies

Gregory C. Burkart, Managing

Director & Practice Leader, Site

Selection & Incentive Advisory

Service

Kroll, LLC

Keith Hopkins, CEO

StageXchange, LLC

SITE SELECTION

105

Overview of Site Selection in the United States

ite selection is a process of identifying a state, region, and local community to locate

a new corporate facility. When investing in the United States of America, private

companies take responsibility for researching, analyzing, and selecting their

locations. Different levels of government and economic development organizations may

facilitate the corporate decision by providing the company with information, making

available prepared sites, fast-tracking permits, and offering cost reductions such as

economic development incentives.

The decision of where and when to locate resides with

the company, its advisors, and executives.

Site Selection Process

Plan

The process begins with planning. When undertaking a new project, foreign investors

should consider three items initially: corporate strategy, purpose of their facility, and advice

from stakeholders.

Corporate Strategy

Companies invest in the United States for a variety of reasons.

The most common reason

is accessing new markets and customers. In addition, because the shipping distances are

shorter, companies find that their logistical costs are lower if they produce in the United

States and ship to customers in the region, thus freeing working capital for other uses.

The concept of economic development incentives are discussed in depth in SelectUSA Investor Guide, Chapter 11:

“Economic Development Incentives.” This chapter on site selection will incorporate incentives as part of a suggested cost

model for evaluating potential locations.

For a more thorough discussion of corporate strategy, please see SelectUSA Investor Guide, Chapter 1: “Overall Investment

Checklist.”

Plan

•Corporate

strategy

•Facility

purpose

•Team

Research

•Public vs.

private data

•State

variables

•Summarize

Model Costs

•City variables

•Discounted

cash flow

analysis

Tour Sites

•Checklist

SITE SELECTION

106

Others find that they can improve their intellectual property and enhance their products by

hiring U.S. engineers.

Foreign investors typically open the following types of facilities. A sales office is usually

opened to establish a customer base in the United States. A development and engineering

office permits companies to tailor their products to the needs of the U.S. market. After

securing sales contracts, foreign investors typically open a warehouse or distribution

facility where they can inventory products manufactured in their home country. Because of

the lead time associated with overseas production, investors need a place to hold their

goods until required by the customer. Some companies choose to build manufacturing

facilities in the United States as the U.S.-based production reduces lead time for delivering

product to U.S. customers and frees up working capital otherwise tied up in inventory. To

manage the various resources required to operate a manufacturing plant and serve their

growing customer base, foreign investors establish a facility for their corporate staff where

sales, engineering, finance, human relations, procurement, logistics, legal, and executive

leadership can work together.

Facility Purpose

There are several general factors that affect selecting a state and local community. These

factors include workforce, logistics, real estate, business and tax climate, and utilities.

i) Logistics: includes accessibility to major customers, proximity to transportation

infrastructure (such as water ports, railroads, and airports), and costs of

inbound/outbound shipping. Generally, the further a facility is from the primary

transportation node, and the congestion at the node, the higher the freight costs.

ii) Workforce: includes labor availability, skills, costs, and unionization.

iii) Real Estate: includes availability of existing buildings, the time to obtain a certificate

of occupancy, and the cost to construct improvements to an existing building or a

new building on a greenfield site. Generally, the cost and timing of construction

varies widely across the United States.

iv) Business and Tax Climate: includes land use restrictions, environmental regulations,

tax rates, and permits required (conditions and processing time).

v) Utilities: includes available capacity, the cost of adding capacity, generation and

disposal sources, rates, and time to extend/tap.

The priority of these factors usually depends on the type of facility being planned. For

example, the most important site selection factor for distribution facilities is logistics. In this

case, the cost of in-bound and out-bound freight will typically be the single biggest driver of

competitiveness. For manufacturing, labor availability and cost are the major drivers in

SITE SELECTION

107

selecting a site. For office operations, as the average age of the U.S. workforce is rising and

nearing retirement, access to a large pool of younger workers would be critical to business

continuity.

Team of Key Stakeholders

The last step in the planning phase is to assemble a site search team. Failing to cover all of

the disciplines and roles on a company’s site selection team usually causes problems

during the actual search, yielding inefficiencies as the search may have to begin afresh, or

after the project is complete, leading to operational issues and cost overruns. If there are

any gaps on the internal team, a company may consider filling the gap with an outside

professional who is a subject matter expert in the particular field. As a best practice, the

following disciplines should be included on a site search team.

The most critical corporate functions requiring full-time participation are:

i) Human Resources: Given the importance of workforce to site searches, the human

resources department is the most knowledgeable about types of labor, required

skills, and number of associates

required for a project.

ii) Real Estate: The real estate team is

usually tasked with aligning the

physical footprint of the company

to the business operations,

analyzing the attributes of each

site, and coordinating with brokers,

engineers, and architects.

iii) Operations: The operations colleagues, with experience from previous investment

projects, are usually the most knowledgeable about timelines required to meet

customer commitments, placement of equipment in a new facility, and labor

required to efficiently operate such equipment. In addition, the operations team will

operate the new facility after the site is selected.

iv) Supply Chain: The supply chain colleagues analyze the suppliers, assess risks, and

estimate costs to bring inbound materials and transportation charges for shipping

finished products to customers.

v) Finance: The finance team can help the team quantify the decision and measure its

performance by modeling the upfront and operating costs, analyzing key site

selection variables, and assessing risks.

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108

To be successful, there are other functional areas that are required but not necessarily on a

full-time basis:

vi) Communications: In some states, incentives are awarded as an inducement to

create jobs or commit investments to the location for a minimum period of time.

These inducements are referred to in site selection as “but for” requirements (“but

for” the incentive, the company would not commit to creating jobs or making the

investment in the location). A company could violate a “but for” requirement by

publicly announcing its intention to locate a project before entering into an

incentives agreement with a state or community. Since the timing of any

announcements about a project is critical to incentives, the site selection team must

coordinate with the communications team about timing and content of any

announcements about a project.

vii) Government Relations/Public Affairs: Project success could also involve contacts

with government agencies for tasks, such as expediting permits, as well as

monitoring community support for a project.

viii) Legal: The legal department is usually involved in several aspects of a project,

including real estate contracts, permit applications and resulting conditions,

incentive agreements, legal entity formation, and qualifications to do business in a

new jurisdiction.

ix) Tax: The tax team is the best-suited to evaluate tax climate and estimate the tax

liability, including whether there are any planning strategies that could be affected

by an incentive agreement, such as not being able to utilize non-refundable credits

due to lack of a tax liability.

When working with such a large team, it is important to establish the goals and potential

benefits of such an investment project in

order to ensure buy-in from company

leadership and team members. Before

recruiting colleagues to your site selection

team, investors and/or their professional

advisors should estimate a range of

potential benefits. Site selection is a long-

term project that will require many people

to stay motivated over the course of

months or years.

SITE SELECTION

109

Research

Goal: Narrow to a few states

After planning, the next step is research. While identifying variables for their site search,

the site selection team should also agree upon the data to define and measure those

variables. There is little value in using variables that do not have readily available, or costly,

data sets. Once a site search team decides on its key variables and data sets, the rest of

research is essentially a process of elimination, using data to advance from a long list of

considered locations to a shorter list with narrower criteria until the search team eventually

agrees upon a state.

Data – Public versus Private

For data sets, there are two sources of information: public and private. Public data is

generally collected, analyzed, and published by federal and state agencies, such as the

U.S.

Census Bureau, the Bureau of Labor Statistics (BLS), and the Energy Information

Administration (EIA). SelectUSA Stats and Google Public Data Explorer each compile and

aggregate a variety of U.S. and international public data resources as well. The advantage

of public sources is that the information is free. The drawback, however, is the latency of

the data: some sources have lags of 24 to 48 months.

For private sources, data is available to purchase, but the databases are generally user-

friendly, relatively current, and often come with analysis and insights from the providers.

There are several private data providers with information available at the state, county,

and/or city level.

Narrowing the Search Area to a Few States

Selecting a group of eligible states to consider is a challenge in a country as vast and varied

as the United States. An international company seeking to grow its revenue in the North

America may want to start its analysis by identifying the locations of its potential

customers. To identify customers, the U.S. Census Bureau maintains a database called the

Statistics of U.S. Businesses

, which provides data by industry sector at the state and

metropolitan statistical area (MSA) level. To estimate the size of a potential consumer base,

the information is further categorized by number of establishments as well as payroll and

employees per establishment.

In addition to customers, some companies may require a location that is close to their

suppliers or critical infrastructure. For example, some companies require large amounts of

natural gas or electricity. EIA provides publicly available

maps of electric transmission lines

and natural gas pipelines across the United States.

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110

To continue narrowing the search to specific states, companies should focus on a few more

general variables. These variables are best analyzed with independent rankings.

Business climate is a large umbrella that includes several sub-factors such as

environmental permitting requirements, state liability system, and debt as a percentage of

tax revenues. One of the most comprehensive and longest running resource for Business

Climate is “Rich State Poor State

,” which is published by the American Legislative Council

(ALEC). This resource publishes a score card for each state ranking their prior performance

versus the other states and forecasting their future economic outlook.

Another important consideration in site selection is the tax structure for each state. It is

important to analyze costs and burdens associated with corporate income, franchise,

excise, sales/use, and property taxes. A comprehensive resource is the Tax Foundation

Each year the Tax Foundation analyzes the tax structures in each of the 50 states and

publishes a comprehensive explanation and ranking of each state’s competitiveness.

Another resource available for in-depth technical information on state and local taxes is the

Council on State Taxation.

After mapping the locations for its customers and suppliers and ranking the other indices,

the search team will have a range of states to look for the rest of their data points and

further refine the search to a county or city.

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111

Modeling Costs: Refining the Search from States to Cities

Goal: Narrow the search to a local community

To select a specific location from a short list of options, a discounted cash flow analysis

may be most helpful as a means of directly comparing potential communities in

quantifiable terms based on the company’s specific requirements.

Workforce

As discussed above, the most common variable across all types of operations is workforce.

Using workforce to further refine the search has two benefits. First, with workforce data

being available at the county and city level, it is one of the most efficient ways to narrow

your search from states to a local community in each state. Second, finding enough

workers with the right skills and the lowest cost is key to the success of many site searches.

To start the analysis, the site selection team should create a staffing plan focusing on at

least three areas: worker availability, skill levels, and costs.

Availability: To measure availability, a site selection team should consider several factors,

such as:

• Population: absolute and forecasted statistics further categorized by age, race, sex,

income, can be found via the U.S. Census Bureau

• Employment: the numbers of workers employed by industry and by occupation

including absolute and trending rates can be found via the

Bureau of Labor

Statistics (BLS).

• Unemployment: information by state and region is also available via BLS.

• Location Quotient: measuring the concentration of workers in a certain NAICS

code as compared to the U.S. national average can be found via BLS

• Commuting Patterns: mapping where potential employees live and their expected

travel time to/from the anticipated facility can be found via the U.S. Census Bureau

To quantify the “availability” of a workforce in a region, a site selection team should build a

model that considers its current and future labor requirements. For such data points as

retention rates and the number of students at each stage of their studies, the search team

will need to request this information from the economic development organizations (EDOs)

who represent the local communities as these data points are not publicly available. Below

is a simple model.

SITE SELECTION

112

Example Workforce Analysis of a Single Location

Workforce

Total / Percentage in

Location A

Working-Age Population (Civilian Population 20 Years and Older)

310,860

Current Unemployment Rate

Full Employment Rate

Population Available to Join Workforce

3,109

Local University Students Graduating

This Year

Undergraduate

(Bachelor)

Graduate

(Master or

Ph.D.)

Total

Graduating

Total Students

5,500

1,500

7,000

Undeclared

1,100

Science, Technology, Engineering,

Mathematics (STEM) Fields

1,100

375

1,475

Arts & Science

1,925

563

2,488

Business & Finance

1,375

563

1,938

Of All Graduates in STEM, Arts & Science, or Business & Finance Programs

Hypothetical Retention Rate of Local

Universities

50%

75%

90%

University Students Expected to Join Workforce

2,950

4,425

5,310

Local Community College Students Graduating This Year

Associate Degree

Total Students

2,500

Technical

1,250

Business & Finance

1,250

Of All Graduates in Technical or Business & Finance Programs

Hypothetical Retention Rate of Local Community Colleges

60%

80%

95%

Community College Students Expected to Join Workforce

1,500

2,000

2,375

Range of Estimates of Potential Available Workforce (Based on Possible Retention Rates)

Total Available Workforce for Project

Low

Estimate

Middle

Estimate

High

Estimate

Potential Workforce (Existing Available Workforce Plus

Graduating University and Community College Students)

7,559 9,534 10,794

Skills: While precise skill levels are difficult to determine without one-on-one interviews,

there are a few data points that generally characterize the types of labor skills inherent in a

community, including:

• Education attainment, segmented by high school, some college (which includes

community colleges and other two-year institutions), bachelor and post-graduate

degrees, can be found via the U.S. Census Bureau

. In addition to education

SITE SELECTION

113

attainment, the U.S. Census also reports on school financing from state and local

governments.

• Union membership

and participation by occupation, industry and state is available

via BLS, as is information regarding work stoppages.

Cost: Evaluating this factor is difficult given the latency of publicly available data. To

develop a more accurate picture of the current and future labor costs, the site selection

team should request the data from the EDOs or, if not available, from private sources.

• Wages by occupation

are available by industry sector and at the state, county, and

city level via BLS.

• BLS also provides experimental data on labor productivity. Even though it is only

available at the state level for a limited number of years, this data set includes

granular details on labor productivity, number of employees, number of hours,

output, real hourly labor compensation and costs, unit labor cost, and value of

production.

Below is a simple model to compare labor costs in multiple local communities in a single

state.

Occupation

State A,

County W

State A,

County X

State A,

County Y

State A,

County Z

First Line Supervisors of Production and

Operating Workers

$26.88 $28.20 $27.92 $26.93

Structural Metal Fabricators and Fitters $17.02 $17.74 $18.27 $19.47

Computer Control Programmers and

Operators

$19.40 $21.77 $18.11 $17.42

Machine Tool Cutting Setters, Operators,

and Tenders, Metal and Plastic

$14.49 $16.48 $15.81 $15.64

Welding, Soldering, and Brazing Workers $17.03 $17.45 $17.64 $19.33

Critical Occupations $19.50 $21.68 $22.92 $20.29

Additional Factors Specific to the Investment Project

After analyzing the workforce in several communities in each state, a search team can

begin the process of analyzing additional factors that are more specific to the project. To

highlight a state’s strengths and challenges, a project team should prepare a cross-state

cost model. Since many of the costs and the incentives occur annually over a period of

years, the incentives and costs should be discounted to the present value.

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114

A good cost model should account for one-time upfront costs as well as ongoing annual or

periodic operating costs and net incentives against their relevant counterparts.

Upfront Investments

Real Property

Land Purchase

Site Improvements

Walkways

Parking Lots

Utility Extensions and

Upgrades

Roads and Driveways

Building

New Construction

Purchase Existing Building

Renovations

Annual Lease Payments

Leasehold/Tenant

Improvements

Personal Property

Machinery & Equipment

Pollution Control

Furniture & Fixtures

Computers

Office Equipment

Operating Costs

Labor

Wages & Salary

Direct Labor

Indirect Labor

Salaried

Unemployment Insurance

Workers' Compensation

Benefits

Relocation & Recruitment

Utilities

Electric

Natural Gas

Water

Sewer

Telecom / Fiber

Transportation

Inbound

Outbound

Taxes

Corporate

Income

Franchise/Excise

Gross Receipts

Property tax

Real Property

Personal Property

Sales/Use Tax

Economic Development

Incentives

Cash Grants

Training

Recruiting

Deal Closing

Job Creation

Infrastructure

In Kind Contributions

Free Land

Training

Recruiting

Tax Credits / Exemptions

Investment Tax Credits

Payroll Tax Credits

Property Tax Exemptions

Sales/Use Tax Exemptions

Financing

Favorable Lease

Infrastructure

The upfront costs usually include acquiring, constructing, and equipping a facility. If a

facility will be leased, the analysis also considers leasehold improvements and/or

renovations. The responsibility to estimate the cost of a new facility in each community

usually resides with the real estate team. For land prices, the real estate colleagues obtain

quotes from brokers in each community. To estimate the cost of construction in each city,

the real estate members could reference private resources that compile construction data.

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To obtain estimates of equipping a facility, supply chain members should have this

information. The supply chain colleagues, through their supplier network, should be able to

determine the acquisition, shipping, and installation costs of machinery and equipment,

furniture and fixtures, and computers. While the cost of the equipment may be the same

for each location, shipping and installation costs will likely vary.

With respect to operating costs, analysis usually includes labor, utilities, logistics, and taxes.

Labor costs are pulled from previous research using BLS Occupational Employment

Surveys for states and metropolitan areas. In addition to wage rates, the human resources

team analyze incidental costs associated with workforce. For unemployment insurance, tax

colleagues can pull the rates and the salary thresholds from each state’s UI Commission

web page. The U.S. Department of Labor’s website has a convenient map

with a link to

each state’s unemployment insurance agency. For workers’ compensation, ALEC or Cerity

are examples of two resources with human resource data. The real estate colleagues can

obtain a quote to relocate associates from national moving firms. For relocation costs,

there are several online resources, such as the Relocation Center’s

online estimation tool.

For utilities, the supply chain team should have information regarding the production

requirements for water, sewer, electricity, and natural gas, if required. For electrical rates,

EIA provides rates by state and likely utility provider

To estimate logistics costs, the project team should consider transportation of raw

materials and finished goods, as relevant. For example, for a company that plans to utilize

trucking services, several companies offer online quotes for truck loads and less than full

truckloads on expedited and non-expedited basis, including Freight Quote and

Freight

Center. For a more comprehensive decision model regarding transportation methods and

costs, there are several online software tools available, such as Coupa and AnyLogistix.

In addition, for international investors, the project team should consider travel time and

associated costs for executives, suppliers, and customers traveling between international

offices and the U.S. facilities. Cities containing larger hub airports with more international

flights may have a higher cost of living, while those containing smaller regional airports

with few or no international connections may have a lower overall cost of living. To better

understand the size of U.S. airports and their international connections, the Federal

Aviation Administration (FAA) maintains a database

of the number of passengers per U.S.

airport, and the Department of Transportation provides a database of international routes

offered to or from U.S. airports.

When analyzing locations, the site selections team should consider state and local taxes.

The model should consider corporate taxes, such as income, gross receipts and franchise

taxes, sales and use taxes, and property taxes on building, land, machinery, and

equipment. These taxes can vary considerably between jurisdictions. For example, in some

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states, sales/use taxes are levied at both the state and local level. Moreover, some states

offer tax exemptions for pollution control and industrial processing equipment.

Finally,

with respect to property taxes, differences can be driven by multiplier tables, assessment

ratios, and millage rates.

After reviewing each section of the cost model, the site selection team sums the total costs

by year, discounts the cash flows, and ranks the locations. These rankings may change

when the project team nets the value of incentives against the relevant costs.

Tour Sites

Goal: Select a preferred site.

With the cross-state cost model complete, a site selection team should be ready to visit

local communities. Touring communities allows a search team to confirm the costs in its

model, determine a community’s interest in their project, and ascertain whether there is a

good fit. In preparation for site tours, the search team should prepare a checklist so that it

can methodically evaluate the characteristics of each community and site. For a list of items

to consider for the checklist, the U.S. General Services Administration (GSA) provides an

exhaustive list

that it uses for its facilities. Companies can tailor this checklist for their own

projects.

Site Selection Technology

Advancements in technology in recent years have truly transformed corporate site

selection. The rise of technology presents opportunities in the field of site selection from

virtual site tours to online marketplaces to data analysis. As demonstrated in previous

sections, a modern site search analyzes mountains of information on every county and

major city in the United States.

Leveraging Digital Resources

Fortunately, today there is a database for almost every conceivable location factor in the

United States. Whether researching taxes, regulations, workforce, or wages, there is a

useful database a few clicks away. Many of these resources are government funded, free to

the public, and often paired with Interactive search tools and maps that can make your

search more productive.

For a comprehensive discussion of state and local taxes, please see SelectUSA Investor Guide, Chapter 4: Taxes.

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Getting Started

The most common data resources used to begin a search often come from government

agencies, such as BLS or the U.S. Department of Labor. Resources like the U.S. Census,

state and local governmental data, and other free online resources can also be helpful.

As the search for suitable locations deepens, companies will likely require a variety of

resources as they move through the process. It is important to note useful government

resources employed when identifying potential geographic areas (such as at the state,

regional, or metro area level) are rarely the same resources needed to conduct thorough

site due diligence or to find available economic incentives.

Digital Challenges

Given the availability of so much data, it would appear that making an informed location

decision would be easy; however, there are two practical problems most companies face.

The first problem relates to how information is presented and stored during a search.

Unfortunately, most resources present their data independently from any other location

factor, thus creating a silo effect. The problem with having data organized in silos is that it

becomes difficult, if not impossible to compare different locations on the same terms.

The second problem that is commonly encountered by companies with access to a

seemingly endless amount of data is simply information overload. Many firms collect

enormous amounts of data but then struggle to makes sense of what all the data means.

Depending on how unique the requirements for a given search are, a company could easily

find itself needing to simultaneously evaluate dozens if not hundreds of sites across the

country. In fact, it is not uncommon for a search to generate over 10 gigabytes of data that

need be analyzed.

One method that can be used to minimize the impact of information overload is to begin

the search looking for communities that best match the needs of the company as opposed

to considering specific sites in depth too early in the process. Only after narrowing the list

of communities that meet the company’s primary location decision drivers (such as labor

availability, labor costs, or average wages) should the project team begin the evaluation of

specific sites. Finally, preparing detailed pro forma financial models for each site will allow

for accurate comparisons between sites.

Conclusion

With fifty states, five territories, a federal district, and hundreds of diverse metropolitan

areas, selecting new locations in the United States is best approached as a data-driven

process. Equally important steps include planning, researching, modeling, and touring. It is

critical to begin the site selection process with a solid understanding of why the company is

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investing in the United States. Then, selecting data points and reliable sources helps

foreign investors identify a short list of states and communities to run cost models and

quantify their decisions. Finally, armed with the data and cost comparisons, personally

visiting each location permits the site selection team to assess whether a community will

support the company and its employees for the long-term future. Communities in the

United States have a long legacy of welcoming foreign direct investment with open arms.

Dedicating time and resources to the site selection process will help a company identify the

best U.S. location for its long-term success.

About Kroll and StageXchange

Kroll specializes in site selection and incentive advisory services. Our team of professionals

has 100+ years of collective experience drawn from serving previously in the public sector,

big four accounting firms, global law firms and in-house corporate suites. Having advised

on more than 400 capital projects involving $96 billion of investment, we teamed with

StageXchange to create the first digital marketplace, The SITE Selector

, where companies

looking for new sites connect directly with 2,300+ communities across the United

States. SITE Selector

has a suite of tools to help companies identify, organize, and analyze

thousands of pieces of data into a harmonized dashboard to facilitate decision making

from an executive’s desktop.

StageXchange is a private commercial real estate tech platform that leverages Artificial

Intelligence and its own proprietary tools to streamline the due diligence process. Our

custom Dashboards and integrated pro forma models make it easy to analyze hundreds of

potential sites simultaneously.

Disclaimer

This chapter was prepared by Gregory C. Burkart with Kroll and Keith Hopkins with

StageXchange, LLC. Views expressed in this chapter are the author’s own, not that of the

International Trade Administration. This chapter does not constitute legal advice. Readers

interested in investing in the United States should consult legal counsel.

References and links to third parties and their content are provided for the convenience of

readers for informational purposes only and are not exhaustive lists of such resources.

SelectUSA, the Department of Commerce, and the U.S. Government are not responsible for

the availability or content of any third-party content, whether found on an external site or

otherwise; nor do SelectUSA, the Department of Commerce, or the U.S. Government

endorse the third parties or endorse, warrant, or guarantee the products, services, views,

or information described or offered in any third-party content. Please be aware that when

you follow a link to an external site, you are then subject to the privacy and security policies

and protections of the new site.

119

Economic Development

Incentives

An Introduction to Incentives in the

United States

David Hickey, Managing

Director

Jason Hickey, President & CEO

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120

s businesses consider investing in the United States, there are many factors to

assess when evaluating where to locate facilities and operations. Economic

development incentives (also commonly referred to as business incentives) may be

one of those factors because such incentives have the potential to provide financial

support to minimize upfront costs and speed up the timeline to profitability. However,

economic development incentives are typically tied to specific projects, and incentives are

not necessarily offered for all projects.

If offered, incentives can vary widely by type and amount, the terms and restrictions on

incentive packages, and the level of government administering the program, among others.

These programs can help a foreign-owned company establish operations in the dynamic

U.S. economy and facilitate key partnerships, but navigating the process can be

challenging. Economic development incentives are typically the result of an ongoing

conversation with a particular location, and companies interested in exploring options for

incentives packages will likely get the most

useful information after narrowing potential

location options to a short list.

When companies first enter the United

States, they should manage their

expectations for incentives, as the value

varies based on the scope and size of a

project, the location, and other mitigating

factors. As businesses evaluate their

investment projects, it is important to assess

incentive opportunities accordingly. Although incentives can be of significant value, it is

critical to remember that incentives themselves should not lead the location decision

process but remain a necessary part of the overall criteria utilized when making a final site

selection decision.

“Economic development incentives” is a term that describes an array of financial tools and

technical resources available to government agencies, economic development

organizations, and utilities, along with other similar entities. These incentives can be

utilized to support the recruitment and retention of businesses in U.S. communities in

exchange for the job creation and financial investment that those businesses will bring.

These incentives may come in different forms to deliver assistance for businesses,

including credits, rebates, and exemptions for certain tax liabilities; direct grants in the

form of cash and forgivable loans; financing and aid for infrastructure and site

development; loan support; and funding for job training initiatives and programs such as

green technologies and sustainable practices.

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To effectively evaluate and secure economic development incentives, businesses must

conduct proper research and due diligence to identify and understand the true value of

relevant incentives (and the requirements of the associated commitments going forward).

Just as the value, structure, and nature of economic development incentives vary across

the country, so too do the rules and regulations which guide them. Having a strategic

approach and action plan is vital to ensure the best outcome for the business in both the

near and long term.

When evaluating these opportunities, it is also important to review whether the investment

is in an urban or rural community. As economic developers develop their tools and

resources for businesses, the approach, commitments, and value opportunity changes.

The following chapter will guide businesses through the economic development incentives

process and discuss many of the related best practices that companies deploy in the

United States to secure and optimize such incentives.

The Partners

Economic development incentives in the United States are typically delivered through the

creation of public-private partnerships that create bilateral or multilateral legal

relationships between the recipient business and other prospective stakeholders. While the

U.S. federal government offers some business incentives, incentives are most prominently

managed by state-level government agencies, local-level jurisdictions, and the providers of

utility services (together referred to as economic development organizations, or EDOs).

EDOs seek to attract and retain businesses within their jurisdictions. Typically, but not

always, EDOs will collaborate to create a comprehensive incentives package to deliver a

solution best fit for the prospective company.

State Governments

State governments are a common partner for business incentives, as state legislators

frequently adapt existing programs to implement policies and programs that support

economic development within their borders. State incentives programs are typically in the

form of tax incentives, discretionary cash grants, and financing assistance.

Local Governments

Counties and municipalities have varying authority and discretion across the United States

when it comes to incentives. Because these jurisdictions are the ones most directly

impacted by job creation and capital investment, the incentives offered at the county and

municipality level typically leverage the ability to offer consumption tax exemptions,

property tax abatements, tax increment financing, and job training funding.

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Utility Providers

As a key resource for economic development in their area of jurisdiction, utility providers

are increasingly deploying incentives to support growth and retention, particularly for

industrial, logistics, and data center projects. These programs, as discussed later in the

chapter, are likely delivered through direct infrastructure assistance, rebates on energy

efficiency, renewable energy, and sustainability investments, as well as reduced power

rates for certain users.

Federal Government

The federal government can provide support for businesses through funding and financing

support, which is typically delivered in conjunction with incentives offered by a state,

county, or local jurisdiction. These programs range from financing for small businesses,

grants for infrastructure and economic development purposes, and workforce training and

targeted employment programs, among others.

Types of Economic Development Incentives

It can be overwhelming for a business to consider all potential opportunities for economic

development incentives in the United States. Although not intended to be an exhaustive

directory of every incentive option, this section provides a summary of the most common

types of incentives that may be available for businesses. As companies work with the

respective EDOs, the organizations will propose a tailored incentives package based on

discussion and negotiation with the company tied to the specific nature of the proposed

project. These proposals are developed and designed by EDOs to optimize an incentives

solution for the business. The ultimate mission for incentives is to deliver the right support

for a company to have the confidence and business case to make an investment.

Corporate Income Tax Incentives

Each state and local government approaches corporate income taxes in its own way (for

more information on taxes in the United States, see SelectUSA Investor Guide

, Chapter 4:

Taxes), and accordingly, many states and communities may also provide credits, rebates,

and refunds of the effective taxes that a company may owe. These types of corporate

income tax incentives are often tied to a commitment by the company to create a certain

number of jobs and/or make a significant capital investment.

When assessing a corporate income tax incentive, critical factors to evaluate include the tax

liabilities created by the project and the company’s operation in that particular taxing

jurisdiction, the time period of the incentive, whether the tax credit can be carried forward,

and whether the incentive is refundable. On the latter, when a tax credit is considered

refundable, the company will be able to capture the value of the incentive regardless of

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whether the company has an actual tax liability. For example, if the tax credit is worth $100,

and the business only has $50 in tax liability, the remaining $50 will be provided in another

form, which is typically in cash. If the program is non-refundable, in contrast, the business

would need to have $100 of effective tax liabilities in order to capture the full incentive

value.

Consumption Tax Incentives

Throughout the United States, government entities often levy varying consumption taxes,

commonly referred to as a sales and use tax. Depending on the state and local community,

these taxes can differ significantly – not only on the tax rate, but also with respect to the

types of goods and services that are taxed.

To recruit businesses and drive investment, economic developers may leverage

exemptions of these taxes through incentives. It is therefore vital for businesses to

understand the specifics of their investments, particularly equipment, to effectively

evaluate the opportunity. Some states may also provide exemptions for certain

expenditures, such as industrial machinery. Businesses should understand which goods

and services are taxable in the respective jurisdiction, the timing of the investments,

depreciation schedules, and filing requirements, among other considerations in order to

effectively evaluate the true value of these types of incentives.

Workforce Tax Incentives

Many state and local governments levy taxes on employment, primarily through payroll

taxes. In those jurisdictions, EDOs may be able to offer incentives that would reduce and/or

eliminate this tax burden on businesses. These programs can also be delivered as a post-

performance incentive, whereby the respective tax jurisdiction provides a refund of the

payroll taxes paid by the business as long as the company has met agreed-upon project

commitments.

Grants

Businesses may be awarded grants for economic development projects in many

jurisdictions. Grants come in many different forms and from a variety of entities, including

the federal government, state agencies, local communities, and other regional economic

development stakeholders.

Historically, grants would often come at the outset of a project to drive the investment

forward. Today, these programs have transitioned to the post-performance model to

reduce the upfront cost to the taxpayer. A post-performance grant also poses less of a risk

to the business concerning “clawbacks” (repayment) if the project does not fully develop as

committed.

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Infrastructure

Investing in critical infrastructure is a vital aspect of successful economic development

strategy. EDOs often have tools to encourage infrastructure buildout, such as support for

site work, water and wastewater, transportation, electricity, and broadband.

To support a project, economic developers may be able to leverage resources and funding

from federal and state government sources, such as Community Development Block

Grants and the Economic Development Administration (EDA). While these programs often

do not provide direct financial support for the business, this indirect funding may be used

to support and assure the availability of the vital infrastructure needed for a project, as well

as for future development.

Utility and Energy Incentives

To help drive investment into their respective

jurisdictions, many electric, gas, and other

utility companies have established their own

internal economic development programs.

Utilities commonly partner directly with

businesses and state- and local-level EDOs to

provide assistance for investment projects.

The tools and resources used to do so may

include electric and gas infrastructure

support, such as transmission and extensions,

as well as industry rate riders. Rate riders are incentives which provide a reduced power

rate for economic development projects, delivering extensive cost savings over the near

and long term.

Many government agencies and utilities also leverage programs to support green and

sustainable investments. These programs may include rebates for investments in energy

efficiency, such as lighting upgrades, and incentives for the deployment of renewable

energy technologies.

Lending and Finance

Adequate and qualified financing is crucial for businesses investing in the United States,

especially during initial market entry. Through federal, state, and local EDOs, businesses

may be able to access zero-to-low interest loan financing for certain projects.

The lending support can be leveraged by small and mid-size businesses, as well as by large

companies. In this context, it is always critical for businesses to evaluate the opportunity

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for financing support alongside traditional lending options because terms and

commitments can vary depending on the location, project scope, and financial need.

Job Training

Job training incentives are designed to benefit both the community and the investing

business. Not only does the business receive vital financial resources and technical support

for training its employees, but the community is also able to develop its workforce by

introducing and deploying new skills.

These workforce development programs are typically designed to either reimburse

businesses for eligible training activities or to channel such training through a local

academic institution. Companies will need to develop a training strategy and evaluate how

the business can capture support for their specific skill requirements. As with all incentives,

tracking the training activities and relevant expenditures is critical to capture

reimbursements.

Complex Incentives

From the federal government to municipalities, there are additional incentive opportunities

that can be leveraged by businesses to support development and financing. Referred to as

complex incentives, these programs typically require additional due diligence and legal

structuring to be effectively utilized.

Examples of these incentives include Opportunity Zones and New Markets Tax Credits,

which may be leveraged in certain qualifying federally-designated census tracts that have

been targeted for economic development. Investors in these respective zones can capture

significant federal tax savings for eligible projects. Businesses can either directly participate

in the investment or work with the existing investors in the zone to lower the cost of

development and secure critical project financing.

Another complex incentive used for economic development purposes, commonly found at

the municipal level, is tax increment financing (TIF). This development tool leverages

anticipated future property tax revenues to support the financing of a project. Depending

upon the location, these monies can be deployed in a variety of ways for project assistance,

including financing, site, and infrastructure support, and even workforce development

training.

Process to Secure Incentives

With such a wide range of possible business incentives, a company must take a strategic

approach to economic development incentives in order to ensure project success and

reduce risk to the business. Part of that strategic approach requires an understanding of

the processes by which a business may secure such incentives and how that fits into the

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overall site selection. Below are the key steps and best practices of the dynamic economic

development incentives process.

Research and Model

The first critical step to pursuing economic development incentives is to define the project

scope and the key criteria for the ultimate location decision. Economic development

incentives are just one element of site selection. In order to realistically compare potential

economic development incentives, companies must evaluate locations based on a wide

variety of factors in order to narrow down their potential project destinations to a short list

(for additional resources, please reference SelectUSA Investor Guide

, Chapter 10: Site

Selection).

The company will also need to conduct

research and due diligence on the various

incentives opportunities and risks presented

in each jurisdiction. While this can commence

through desktop research using resources

such as databases available on

SelectUSA’s

website, a complete evaluation of the

programs, rules, timing, and commitments

will be required. Working closely with the

respective parties, along with qualified service

providers, is vital throughout the process. One best practice is to develop a financial model

to assess the true impact of the incentives, particularly as different project scenarios may

be under consideration.

Economic Development Engagement

Once the project scope is defined and the location decision process narrows to a short list

of communities, direct engagement with economic development officials is critical.

Ensuring confidentiality is vital in this stage. To do so, the first step is to secure non-

disclosure agreements with the various stakeholders that will be involved in the

conversation, which typically includes state, regional, local, and utility EDOs. Most EDOs will

offer to provide these confidentiality agreements, but procedures and coverage vary across

the country. In many cases, the company, or a qualified service provider, may instead

directly develop the respective confidentiality agreements.

Information and Data Disclosure

Ensuring confidentiality and protection of proprietary information is critical in the

economic development incentives process because there will be certain steps throughout

the process that will require the company to disclose information related to its business

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and the project itself. This typically includes the number and type of jobs that will be

created by the project, anticipated wages and benefits, the amount and nature of capital

investments, and anticipated tax generation, among others. When data is requested,

companies should be sure to work closely with advisors and economic development

partners to understand exactly what might be required.

Negotiation

Throughout the economic development incentives process, a company will have a series of

direct discussions with its EDO partners. Negotiation is a critical element to ensure the

programs are best fit for the business and the project, while also meeting the mission of

the various economic development stakeholders. Based on the business’ requests and

available economic development programs, the involved EDOs will generally make a formal

offer combining multiple options and programs into an incentives package. Although all

such EDOs are constrained by the laws and regulations governing their programs, there

may be room for negotiating the value of the incentives to the business and tailoring them

to best fit the unique requirements of the business and project over the near and long

term.

Legal Documentation

Once an offer of economic development incentives has been made and accepted, a

company will complete the process by formalizing the agreement and the commitments

set forth by all parties involved through legal documentation. It is vital to have proper legal

representation to assess and complete the associated applications, contracts, and

agreements to make certain the business understands the commitments set forth.

Project Announcement

When businesses create jobs and make significant investment commitments, political

officials and economic development leaders are excited to tell the world. Coordinating with

the various partners will be important to ensure the public announcement of the project is

appropriate for the message and mission of the business. Not only can this be a great

opportunity to discuss the exciting project, but this is also a valuable chance to begin the

talent recruitment process.

Incentive Compliance & Aftercare

Once the project commences, the vital phase of compliance begins. In order to receive the

economic development incentives, the business will have a prescribed set of reporting

requirements for the various stakeholders to demonstrate and document project

performance. In this context, it is absolutely critical to develop a strategy and identify

resources to lead this phase because missteps (especially failure to meet technical

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performance standards or failure to provide required reports, for example) may

compromise the receipt of the incentives, even if commitments and milestones are met by

the company.

Important to Know!

Incentives are a Partnership

First and foremost, it is important to consider

economic development incentives as a

partnership between the business and the

community. While vital to ensure the business

meets their goals through this process, the

community will have its own metrics and

mission as well. Economic development

officials should, therefore, be treated as allies

and collaborators, not as adversaries.

Develop an Aftercare Plan

As previously mentioned, even after incentives have been secured, compliance and

aftercare remain critical to assure the monies and benefits are ultimately received by the

business. By developing a sound aftercare plan, businesses will find themselves in a strong

position as the project commences. If those resources do not exist internally, including

legal counsel to assess legal risks associated with non-compliance with incentive

agreements, it is important for the company to find and engage a qualified service provider

to provide support for this phase.

Coordinate Messaging

Ahead of any public announcements, it is a best practice to always coordinate messaging

with economic development partners. Being on the same page with a strong message

about the project can drive more than just a news article, such as buzz for job recruitment

and business development.

Incentives Are Just One Factor

When evaluating where in the United States to locate operations, there is a long list of core

factors to assess. Economic development incentives are only one part of the larger decision

process, which should also include labor, logistics and supply chain, operating costs, and

customer proximity, among others.

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When to Work with Third Parties

The economic development incentives process in the United States requires due diligence,

financial modeling, paperwork, legal construction, and negotiations. Bringing in trusted and

qualified service providers will help reduce the time cost and burden on the business, while

providing a specialized knowledge base that may not be present within most companies.

Conclusion

Business incentives are designed to catalyze economic development in American

communities by providing various forms of direct and indirect financial support to

businesses. In return, the governments that provide such support expect that the

businesses will reciprocate by creating jobs and making investments in infrastructure,

facilities, and equipment that ultimately enhance the local economic climate. Consequently,

these public-private partnerships create real opportunities and can provide substantial

value for foreign businesses that are entering or growing in the United States market.

About HICKEY

HICKEY is a global leader in site selection, credits and incentives advisory, labor analytics,

and supply chain solutions with active projects in the Americas, Asia, Europe, Australia, and

Africa. Utilizing state-of-the-art tools and proven methodologies, HICKEY leverages nearly

40 years of experience to support its clients and provide the professional services needed

to identify optimal locations anywhere in the world.

By having a presence in key global markets, HICKEY ensures our services are always aligned

with each unique local environment and provides our clients with an unparalleled level of

support. HICKEY has offices strategically located across the country and around the globe.

As the largest independent location strategy firm globally, HICKEY advises companies

ranging from Fortune 500 to fast-growing startup businesses serving an expansive list of

industry sectors.

Disclaimer

This chapter was prepared by David Hickey and Jason Hickey with HICKEY. Views expressed

in this chapter are the authors’ own, not that of the International Trade Administration.

This chapter does not constitute legal advice. Readers interested in investing in the United

States should consult legal counsel.

130

Federal Procurement:

An overview of Federal Laws relating to

Domestic Content Requirements for

Government Procurement

Joshua L. Rodman, Senior Associate

Mark J. Segrist, Member

Mark Tallo, Member

131

his chapter will provide readers with an overview of certain country of origin-related

requirements used in U.S. federal procurement, including the Buy American Act

(BAA), Trade Agreements Act (TAA), the Infrastructure Investment and Jobs Act of

2021 (Public Law 117-58), and the Berry Amendment. We will also discuss practical

tips for companies looking to sell products or services to the United States federal

government.

Buy American Act

The Buy American Act (or BAA), as implemented by the Federal Acquisition Regulations

(FAR), incentivizes U.S. federal agencies to purchase goods that comply with the domestic

preference requirements of the BAA. To accomplish this, the BAA deems ‘‘domestic end

products’’ as compliant and ‘‘foreign end products’’ as noncompliant. It should be noted

that neither the BAA nor the FAR prohibit the purchase of foreign end products (i.e., those

items that do not comply with BAA). Instead, the government applies a price penalty to

foreign end products. At the time of publication, the price penalty for foreign products

range from 20% (large business offerees) to 50% for Department of Defense purchases.

The reasoning behind this approach is that when the government is evaluating best and

final offers, including any price penalties for foreign end products, domestic end products

will most likely represent a lower cost to the government when compared to the foreign

end products. This will lead to the procurement of more domestically manufactured items.

Manufactured Products

In order for a manufactured product to qualify as compliant under the BAA, that is, to

qualify as a ‘‘domestic end product’’:

1. the item must be manufactured in the United States; and

2. the cost of the item’s components mined, produced, or manufactured in the United

States must exceed 55% of the cost of all components (scheduled to increase to 60%

in October 2022, 65% in January 2024, and 75% in January 2029).

The term “manufactured” is not defined in the regulations; however, the term has been

interpreted broadly. For instance, the U.S. Government Accountability Office (GAO), which

handles federal contracting disputes, has interpreted the term “manufactured” to refer to

those operations which make the item suitable for the government’s intended use and

establishes its identity. The Civilian Board of Contract Appeals (CBCA) has further held that

the scope of manufacturing operations required to meet the ‘‘manufactured in United

States’’ standard is understood to require more than packaging, but less than a substantial

transformation (i.e., processing that results in an article with a new name, character, and

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use, as that term is used in U.S. Customs and Border Protection (CBP) country of origin

determinations).

On the other hand, the second prong of the BAA test requires that the cost of an item’s U.S.

components exceed 55% of the cost of all components (scheduled to increase to 60% in

October 2022, 65% in January 2024, and 75% in January 2029). When applying the BAA’s

domestic content test for manufactured products, the cost of components is measured at

the component level only and does not include subcomponent cost.

For products that are predominantly made up of iron or steel, the cost of components test

level is a much higher 95% (and, of course, the item must also be ‘‘manufactured in the

United States”).

Non-Manufactured Products

Non-manufactured products, on the other hand, are not subject to the two-prong test

above. Rather, a non-manufactured product qualifies as a “domestic end product” if it is

mined or produced in the United States. “Non-manufactured” items would include items

such as raw materials that are mined in the United States and sold to the government in

bulk, raw form, for example, this would include precious metals mined in the United States.

The complexity of BAA compliance typically arises in the context of manufactured products

and understanding whether both prongs of the BAA compliance test have been met.

BAA Exceptions

There are numerous exceptions to the BAA, as well as the ability for contractors to seek

waivers from the procuring agency. Arguably, the most common exception relates to the

procurement of Commercially available Off-The-Shelf (COTS) items, as well as for

commercial item Information Technology (IT) products. Additional exceptions exist, for

instance, where BAA compliance is unavailable and where the government has determined

that the BAA’s domestic preference is not in the public interest.

‘Buy America’ Rules

Companies selling to the federal government may also need to comply with ‘Buy America”

rules, which are different than the BAA, and vary from agency to agency. These rules

typically apply to large infrastructure or transportation projects funded by the U.S.

Government. While these rules vary across agencies, the ‘Buy America’ domestic content

requirements are often much higher than that of the BAA and there are few, if any,

exceptions to the ‘Buy America’ requirements, including the COTS exception. Similar to the

BAA, however, is the requirement that goods be manufactured in the United States.

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Therefore, contractors selling to the federal government may need to potentially comply

with both BAA and ‘Buy America’ rules for a particular procurement.

Trade Agreements Act

Unlike the BAA’s domestic price preference regime, the TAA imposes a complete bar on the

purchase of items that do not comply with the TAA. Specifically, the TAA limits government

procurement to items which are either: (1) U.S.-origin; or (2) the origin of a TAA-eligible

country. TAA eligible countries are those with whom the U.S. has signed either a

multilateral or bilateral agreement, such as a Free Trade Agreement, or the World Trade

Organization Government Procurement Agreement, or that have otherwise been

designated as TAA eligible (i.e., Least Developed Countries and Caribbean Basin Countries).

A full list of TAA countries can be found at:

https://www.strtrade.com/services/import-

customs-compliance/government-procurement/taa-designated-countries/taa-designated-

countries. The TAA applies to government contracts valued above the TAA threshold, which

is currently $183,000 for a supply contract. In such cases, the BAA requirements are

generally waived and the TAA requirements would apply.

In order for an item to be TAA compliant, the item must comply with one of the following:

1. the item must be wholly grown, produced, or manufactured in the United States or

in a ‘‘Designated Country’’; or

2. the item must be substantially transformed into a new and different article of

commerce in the United States or in a ‘‘Designated Country.’’

A substantial transformation occurs when, as a result of further manufacturing or

processing, the item’s various components (perhaps originating from one or more

countries) lose their individual identity and are transformed into a finished article having a

new name, character, and use. There are no bright line rules when it comes to substantial

transformation and CBP reviews country of origin determinations on a case-by-case basis.

That said, it is generally understood that to rise to the level of a substantial transformation,

assembly operations must be complex and meaningful and cannot be mere final assembly

or screwdriver-type assembly operations. In making such a determination, CBP will look to

a myriad of factors to determine whether a substantial transformation has occurred,

including the country of origin of components, the skill and training level required for those

performing assembly operations, the cost of assembly, and the character and use of the

finished product, among other relevant factors and considerations.

It is important to note that the U.S. Court of Appeals for the Federal Circuit in a 2020

decision (Acetris Health, LLC v. United States) held that, in at least the pharmaceutical

context, certain manufacturing operations which occur in the United States – even though

not rising to the level of a substantial transformation – did in fact satisfy the TAA’s

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compliance standard. However, the scope and reach of this decision in the government

contracts context remains unclear.

Additionally, and unlike the BAA, the TAA expressly applies to both products and services

(whereas the BAA expressly applies only to products). Thus, for the government to

determine whether services provided are in fact TAA complaint, it will look to the

contractor performing those services and where that contractor is incorporated or

headquartered. If the contractor is incorporated or has its principal place of business in the

U.S. or in a TAA-eligible country, then those services will be complaint for TAA

requirements.

Infrastructure Investment and Jobs Act (Public Law 117-58)

The domestic preference requirement in the 2021 Infrastructure Investment and Jobs Act

closely tracks the two-pronged BAA test discussed above for manufactured products.

However, the law makes clear that the government must issue regulations on a wide range

of BAA/domestic preference issues by the end of 2022. Critically, because these

implementing regulations are still forthcoming, it is still unclear how important aspects of

domestic preference contracting – such as the COTS item exception for manufactured

products under the BAA – are to apply to infrastructure bill-funded federal projects.

Berry Amendment

The Berry Amendment applies to DoD contracts and requires that certain DoD purchases

of food, clothing, certain textiles (including fabrics, fibers, and yarns), hand or measuring

tools, and specialty metals be entirely grown or produced in the United States. For the

covered products, the Berry Amendment imposes, by far, the highest bar in terms of the

other domestic preference laws discussed above. The Berry Amendment is implemented

through the Defense Federal Acquisition Regulation Supplement

Under the Berry Amendment, purchases of covered products must be “entirely grown,

reprocessed, reused, or produced in the United States.” This means that unless an

exception applies, the entire production process of a covered product from the growth or

production of the raw materials to the manufacture of all components to final assembly,

must be performed in the United States. For example, procurement of clothing under the

Berry Amendment, requires that the clothing item must be sewn in the United States using

fabric, thread, buttons, and zippers made in the United States from raw materials of U.S.

origin. Components that are not normally associated with clothing (such as electronic

sensors) are not subject to the Berry Amendment domestic sourcing requirements.

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Exceptions to the Berry Requirements

The Berry Amendment includes a variety of exceptions, which may apply to specific

procurement contracts. For example, the Berry Amendment does not apply to:

• Products that are unavailable from American manufacturers at satisfactory quality

and in sufficient quantity at market prices as determined by DoD. If the contractor

cannot locate a domestic source, a Domestic Non-Availability Determination, may be

requested through the contracting officer;

• Acquisitions of food (other than fish, shellfish, or seafood) that have been

manufactured or processed in the United States, regardless of where the foods

were grown or produced. Fish, shellfish, and seafood must be taken from the sea by

U.S. flagged vessels or caught in U.S. waters and processed in the United States or

on a U.S.-flagged ship.;

• Acquisitions outside the United States in support of combat operations, contingency

operations, or emergency acquisitions outside the United States;

• Products containing noncompliant fibers, if the value of those fibers is not greater

than 10% of the product’s total price and does not exceed the Simplified Acquisition

Threshold (SAT);

• Products are intended for resale at retail stores such as military commissaries or

post exchanges; or

• Products that are part of a low-value contract, defined as below the SAT ($250,000

as of 2020). The SAT is considered for possible change in years evenly divisible by

five (i.e., 2020, 2025, etc.).

Finally, there may be instances where a product contains components that are covered by

the Berry Amendment and other items which are not. For example, if DoD is purchasing a

wooden chair with a padded seat cushion, the fabric of the seat cushion is subject to the

Berry Amendment, but the wood is not. In each case, the application of the Berry

Amendment is determined on a case-by-case basis by the contracting officer.

Practical Tips for U.S. Procurement

Contracting with the federal government can be complex, costly, and carry certain risks.

However, understanding the rules and regulations governing federal contracting will help

to mitigate such risks. A few tips in this regard are:

• Know Your Role: Prime contractors, that is, companies that contract directly with the

federal government, assume greater compliance risk than those in the

subcontractor, sub-tier subcontractor, or supplier position. As such, it may be worth

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exploring opportunities to fulfill

government contracts initially as a

subcontractor, sub-tier

subcontractor, or supplier rather

than as prime contractor/direct

awardee.

• Know Your Exceptions: When selling

COTS items to the government, there

are often fewer compliance

obligations that apply than when selling specially designed or customized products

to the government.

• Know Your Obligations: Companies should consider which related corporate entity

or division will be the entity providing services and/or supplies to the federal

government (either directly or indirectly). This is important because the corporate

entity will be subject to certain compliance obligations and risks that could impact

other parts of the entity’s operations.

• Know Your Options: Communicate with the relevant contracting agency regarding

any questions or concerns. Contracting officers are a great resource. Many

contractors are surprised to learn how eager the procuring agency is to assist and

help clarify certain issues that are unclear to the contractor.

• Know Your Limits: If any issues are unclear or perhaps are legally sensitive,

companies are encouraged to communicate with outside counsel, as early and

proactive communication with counsel can provide clarity on legal issues and

mitigate risk.

About ST&R

Since 1977, Sandler, Travis & Rosenberg, P.A. (ST&R) has set the standard for international

trade lawyers and consultants, providing comprehensive and effective services to clients

worldwide, including strategic advice and counsel on issues at the intersection of

government procurement and international trade. ST&R’s Government Procurement

practice offers the following compliance-related services to its clients:

• providing company-specific training regarding BAA, TAA, and other “Buy America”

requirements;

• reviewing strategic product sets/SKUs to determine BAA/TAA eligibility and

compliance;

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• preparing and submitting country of origin determination rulings to CBP for specific

products/SKUs to determine whether a substantial transformation occurred in a

TAA-designated country, and therefore, whether the product is TAA compliant; and

• reviewing contract terms and conditions related to specific product or service

offerings to determine BAA/TAA/Buy America applicability.

You can learn more about ST&R’s Government Procurement practice and the various other

ST&R service offerings by visiting ST&R’s Government Procurement webpage at

https://www.strtrade.com/services/import-customs-compliance/government-procurement

Disclaimer

This chapter was prepared by ST&R. Views expressed in this chapter are the authors’ own.

This chapter does not constitute legal advice. Readers interesting in conducting business

with the United States Federal Government should consult their legal, accounting, and

other applicable advisors.

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Federal Procurement:

The Basics of Entering Federal Contracting

in the United States

Kevin Swatt, CPA

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roviding services to the federal government is no ordinary business. While the

industry can be both rewarding and profitable, it does carry additional compliance

requirements which should all be considered as part of the procurement process.

Throughout this chapter, we’ll explore topics that should be top of mind for organizations

that are looking to enter the federal space.

Basics of Entering United States Federal Contracting

Overview of Federal Contracting

The decision to begin conducting business in the federal space is one that involves careful

planning and consideration. Both the procurement process and operation of contracts and

grants bring with them a set of compliance requirements necessary to both bid on, and to

execute the work, within the federal space. Prospective contractors will have to register

their business in order to become available to win federal work and will be required to

maintain compliance requirements through a company’s lifecycle of providing goods and

services to the federal government. This differs from the commercial space where there is

typically more flexibility in the negotiation of contracts, pursuit of work, and decisions

regarding internal accounting, operations, and other business systems.

Before wading into the waters of working with the federal government, prospective

contractors should be aware of the key decision makers and their role in both the

procurement process and ongoing monitoring of contract and grant performance. Below

are several key roles with which contractors should become familiar, along with their often-

used abbreviations:

• Contracting Officer (CO): This person has the authority to bind the U.S. federal

government to a contract with another entity.

• Contracting Officer’s Technical Representative (COTR): These individuals have

experience in a technical area and provide assistance and recommendations to the

contracting officer regarding technical matters and performance of a contract

against the technical requirements as outlined in the contract document.

• Administrative Contracting Officer (ACO): This person has the responsibility of

administration over a government contract and is assigned this authority from the

contracting officer.

Registration as a Contractor

Unlike opportunities in the commercial sector, bidding and performing work on a federal

contract requires an entity to formally register with the federal government. There are

several steps a prospective international contractor must take in this process in order to

complete these registrations:

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• Obtain a NATO Commercial and Government Entity (NCAGE) code. This is a code

that uniquely identifies a foreign owned company with the NCAGE system and is

required for firms to complete their registration in the System for Award

Management (SAM), which we’ll discuss below. To obtain this code a company must

using the NATO Codification Tool website

(https://eportal.nspa.nato.int/ac135public/

• After obtaining the NCAGE code, a company must next obtain a DUNS number,

which can be completed online (http://fedgov.dnb.com/webform). Upon

completion of the registration a company will receive their DUNS code, which can

then be used for registration with SAM.gov.

• Registration on SAM.gov ― All companies, foreign and domestic, that are interested

in contracting with the United States Federal Government must register on SAM.gov.

Entities will need to create an account, and then complete the steps for registration.

There is a detailed list of the steps that must be taken to register on SAM.gov in the

attached link, which provides step-by-step instructions for an entity to complete the

registration (Quick_Guide_for_Grants_Registrations.pdf (usda.gov)

What the Government Looks for in a Contractor, and Where to

Find Opportunities

In looking at potential contractors, the federal government looks for a particular set of skills

and/or products to fill a need that is either not currently addressed amongst the federal

workforce or needed to enhance the workforce and to meet the goal of a particular

agency’s mission. This can range across a variety of issues and challenges, from process

management, information technology process improvement and software development, to

manufacture of new and innovative products enhancing the ability of the federal

government to meet the mission of its respective agencies. Connecting the skill sets and

products to particular contracting opportunities requires the contractor to get to know its

end customer, in this case the federal agencies with which it is looking to conduct business.

Many of the agencies within the federal government have “industry days” that are designed

to facilitate introductions, communicate agency needs, and identify upcoming contract

opportunities which contractors can participate in. Prior to the COVID-19 pandemic these

were conducted in person. At the time of this writing some industry days are conducted in

a hybrid environment, combining both in person and virtual events.

Prospective contractors can also choose to utilize a number of procurement databases and

services that are specific to federal contracting to identify upcoming opportunities. These

range from government websites (i.e., usa.gov and sba.gov), to subscription databases with

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increased functionality to identify opportunities that may be relevant to the particular

contractor.

Contract Types and Their Importance to Prospective Contractors

Contractors should also be aware of the different contract types typically seen in the

federal space. Each contract type brings additional challenges and compliance

requirements to successfully navigate working with federal government agencies. Below

we identify different contract types that contractors can expect to encounter as they begin

to pursue federal work:

• Fixed Price: Contracts of this type are fixed at the time of award. Outside of change

orders processed during the contract, the pricing does not change during the

performance of the project, regardless of the cost incurred by the contractor.

• Time and Materials: Contracts of this type are structured whereby the contractor

charges for its labor hours incurred times an agreed upon rate by labor category.

Some time and materials contracts also allow for a burden of general and

administrative to be added to the cost of materials in billing to the government end

user.

• Cost-reimbursable: This contract type can go by several names (cost-plus fixed fee,

cost-plus award fee, cost-plus incentive fee). Contractors are reimbursed the costs

they incur plus a burden of indirect cost rate (comprised of fringe, overhead and

general and administrative (G&A) expenses) the costs incurred, plus fee (profit).

Each of the contract types provide additional risks and compliance requirements that

contractors should consider when determining whether to pursue an opportunity:

• Fixed Price: The greatest risk lies on the contractor with fixed price contracts, and

places reliance on a strong estimating process to safeguard a profitable result.

Contracts of this type typically have the least amount of compliance requirements

for the contractor due to the fixed nature of the contract price. Contractors should

still be aware that it is possible, though not required, during the procurement

process that a contracting officer may request pricing support.

• Time and Materials: The primary risk for the contractor lies in its ability to bid out

each of the labor rate categories that will be utilized on the contract. Inaccurate

pricing could result in a contract that operates at a loss. When preparing bids for

this contract type, contractors should make full use of the data within the

accounting system, compensation studies, and other relevant information to

recover the labor cost plus a profit. Contractors should also note that some time

and materials contracts allow the contractor to charge a percentage of G&A costs.

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When this occurs, the contract then takes on a component of cost-reimbursable

contracts, which we will explore further below.

• Cost-reimbursable: This contract type bears the greatest risk to the government,

and therefore carries the most compliance requirements for the contractor.

Prospective contractors will need to ensure they have an adequate accounting

system that can accumulate and segregate costs by cost type and contract, and also

calculate indirect rates on a timely basis. Performance on cost-reimbursable

contracts also carries an annual reporting requirement for an incurred cost

submission, which is due six months after the company’s fiscal year-end. This is a

significant reporting package that provides the government with the company’s

accounting data for the year, cost allocations, indirect rate calculations, and costs

incurred per contract, among other additional information. Contractors should be

careful to evaluate the cost/benefit of entering into cost-reimbursable contracts due

to the additional compliance burden placed upon the company.

As we’ve discussed throughout this chapter,

doing business with the government requires

companies to meet certain compliance

requirements, and those requirements can

differ depending on contract type and agency

with which the company is looking to engage.

Depending on the size, complexity, and

technical requirements of a contract offering,

a company may find they need to comply with

certain business systems. We address the

significant systems here:

• Accounting System: This is the most common compliance requirement amongst

government contracting. A company must have an approved accounting system

before it can be awarded and perform work on a cost reimbursable contract. The

Defense Contract Audit Agency (DCAA) typically performs these assessments,

although independent CPA firms are often allowed to provide as well, should the

contract opportunity allow for it. Prospective contractors will be responsible for

establishing and maintaining an acceptable system design for accumulating costs

under federal contracts. Key requirements of an acceptable system are listed in the

form SF 1408, and they include the segregation of direct, indirect, and unallowable

costs, a timekeeping system with job codes and an approval flow, and an accounting

close cycle that occurs at least monthly.

• Estimating System: This is the contractor’s system, including policies and

procedures, for estimating and budgeting for purposes of preparing cost estimates

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to bid on government contracts. While most companies have informal policies and

procedures as part of their procurement process, the estimating system formalizes

these procedures. In order for a contractor’s estimating system to be approved, it

must meet all the requirements as set forth by the government and will need to be

audited by DCAA or an independent CPA firm. Due to the timing of preparing the

system, maintaining the system, and obtaining the compliance, small to mid-sized

contractors may not all have this system in place.

• Purchasing System: This is a formal system that a company has in place that

addresses a company’s own procurement process for materials, subcontractors,

and other costs. The requirement for an approved purchasing system is typically for

larger contract offerings and calls for significant compliance requirements. Unless

specifically required by a contract, small to mid-sized companies typically do not

have an approved purchasing system in place due to the costs for both initial and

ongoing compliance.

There are additional business systems that can be required for a prospective contractor,

including material management, property management, and earned value management;

however, the systems that we have noted above are the three most commonly utilized by

small to mid-sized government contractors.

Closing Considerations

Prior to entering the government contracting space, contractors should evaluate the

applicable compliance requirements, competitive environment, and specific requirements

by agency. Upon making the decision to enter

the space, contractors should be careful to

read the request for proposal document early

in the procurement process for any and all

compliance requirements to be considered for

award, including the compliance requirements

we have listed above. Some components of

the RFP can require a significant time

investment and will require proper planning in

order to meeting these requirements in

preparing a successful award.

About CLA (CliftonLarsonAllen LLP)

CLA exists to create opportunities for our clients, our people, and our communities through

industry-focused wealth advisory, outsourcing, audit, tax, and consulting services. Our

broad professional services allow us to serve clients more completely — from startup to

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succession and beyond. Our professionals are immersed in the industries they serve and

have deep knowledge of their operating and regulatory environments. With more than

7,500 people, 121 U.S. locations, and a global vision, we bring a wide array of approaches

to help clients in all markets, foreign and domestic.

Disclaimers

This chapter was prepared by Kevin Swatt with CLA. Views expressed in this chapter are the

author’s own. This chapter does not constitute legal advice. Readers interesting in

conducting business with the United States Federal Government should consult their legal,

accounting, and other applicable advisors.

The information contained herein is general in nature and is not intended, and should not be

construed, as legal, accounting, investment, or tax advice or opinion provided by

CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit

CLAconnect.com

CLA exists to create opportunities for our clients, our people, and our communities through our

industry-focused wealth advisory, outsourcing, audit, tax, and consulting services. Investment

advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered

investment advisor.

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Understanding the U.S.

Capital Market Structure

for Capital Raising Success

Dianna Raedle, Deer Isle

Group

146

he capital markets in the United States are the world’s largest which makes them

very attractive for both domestic and international companies that want to grow

and expand. In addition to the public equity markets which represent approximately

55 percent of all global public equity markets, the United States has the most developed

private capital markets for companies that are not yet ready to go public or who do not

want to go public. Since U.S. markets are so diverse, the range of capital providers is large

and the competition for this capital is fierce. This chapter will describe some of the

institutional players in the U.S. market as well as give some tips for effectively raising

capital given the analytical nature of the U.S. institutional investment decision making

process.

Capital Provider Landscape in the United States

Given the dynamism and complexity of U.S. capital markets, the range of potential

investment opportunities for U.S. capital providers is broad. The public equity markets may

be most well known and most liquid, but a U.S. capital provider can choose multiple

investments from many well-developed regulatory, legal and market dynamic investment

options. These options can include funds, direct company investments and structured

products in a wide range of sectors and products – each offering their own risk adjusted

returns. Any company that successfully raises capital from U.S. capital providers needs to

understand the various U.S. capital market players in order to best position their

investment opportunity to compete with the other investment opportunities into which the

capital provider can invest.

U.S. capital providers usually invest into funds or companies (not both – although there are

exceptions to the usual). Those that invest into funds provide the capital for the funds to

invest into companies.

Below is a general summary of the largest capital providers in the private markets – a

market that has many participants.

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Capital

Provider Type

Primary

Investment

Type

Typical

Investment

Range

Additional Comments

Pensions

Funds

$10 to 500

million

Pensions will analyze their investment

opportunities using portfolio construction

analytics and seek to achieve a balanced

portfolio of debt and equity fund investments

that match their long-term liabilities and

preference for lower risk. They have large

investments in mutual and other public funds

but also invest in many private equity fund

strategies since they do not need short term

liquidity and they would like to earn the

expected return premium that comes from

investing into private investments. Pensions are

highly regulated and need to consider

regulatory constraints when making

investments.

Endowments

and

Foundations

Funds and

increasingly

active in co-

investments

to improve

returns

$5 to $250

million

Endowments and Foundations analyze

investment opportunities using portfolio

analytics and seek to achieve the highest

absolute returns across a wide range of

economic scenarios. They are more flexible and

more willing to take risks with smaller or more

niche private investment strategies including

hedge fund, special opportunity funds, private

equity, and venture capital funds since they tend

to believe that these will generate the highest

returns. Endowments and Foundations are

lightly regulated and have a high degree of

flexibility in making investment decisions.

Large Cap

Private Equity

Funds

Large Cap

private

companies –

sometimes

taking public

companies

private

$75 to 500

million

In the private markets, the definition of large

cap can vary as compared with the public

markets where it is usually defined as those

companies with market capitalizations of over

$10 billion. These are the largest names in

private equity and often use leverage to execute

their strategy (sometimes called Leveraged

Buyouts) of improving returns on large

companies with reasonably sustainable and

stable operations. Usually investments are

restricted to those outlined to their investors in

investment offering materials.

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Capital

Provider Type

Primary

Investment

Type

Typical

Investment

Range

Additional Comments

Mid Cap

Private Equity

Funds

Mid-cap

companies

with

sustainable

operations

$5 to 100

million

In the public markets mid cap is defined as

companies with market capitalizations of

between $2 and $10 billion. Mid cap companies

are those who are in the middle of their growth

phase and are attractive to investors since they

have lower risk than small cap companies (their

business model is defined and working) as well

as higher expected returns than large cap

companies since they are often growing market

share or disrupting markets. Usually

investments are restricted to those outlined to

their investors in investment offering materials.

Growth

Private Equity

Funds

Small Cap,

Fast Growing

or Platform

opportunit ies

$5 to 50

million

These investment opportunities are usually

defined as sitting at the intersection of private

equity and venture capital. Growth Private

Equity Funds tend to focus on more traditional

sectors where growth is due to fast revenue

growth including through acquisition strategies

rather than through market or product

disruptions. Usually investments are restricted

to those outlined to their investors in

investment offering materials.

Late-Stage VC

Funds

Venture

capital

backed

companies

that are pre-

IPO (Series C

or later)

$50 to 300

million

Late-Stage VC expects their investment to exit

quickly – often through an IPO and is also known

as Pre-IPO. Many investors like to invest into this

stage since risk of failure if low and potential

growth is still high. Average valuations in 2021

were $114 million for Late-Stage VC

companies.1 Usually investments are restricted

to those outlined to their investors in

investment offering materials.

Early VC

Funds

Venture

capital

companies

that have

passed angel

and seed

stage

Companies that have a defined business model

and have a successful track record of generating

revenue as well as prospects for continued

growth. These investments are also known as

Series A, B, or early series C. In 2021 average

valuations were $46 million.1 Usually

investments are restricted to those outlined to

their investors in investment offering materials.

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Capital

Provider Type

Primary

Investment

Type

Typical

Investment

Range

Additional Comments

Angel or Seed

VC Funds

Venture

capital

companies

who have a

business

plan and

some

revenues.

$1 to 5

million

More and more Angel/Seed investors are

requiring revenue proof (such as proof of ability

to generate revenues) prior to making an

investment which is reflected in the higher

average 2021 valuations. In 2021, average

valuations for Angel companies was $6.3 million

and for Seed companies was $9.3 million.

Usually investments are restricted to those

outlined to their investors in investment offering

materials.

Debt Finance

Funds/Non-

Banks

Companies

with assets

and

revenues

that can

support debt

repayment

$5 to 500

million

There are many non-bank companies including

funds that provide private credit/loans to private

companies. The provided debt is more flexible

than bank debt, usually the credit decision is

made more quickly, and the offset for these

benefits is that often the lending rate is higher.

These organizations usually pride themselves on

being able to structure debt when the

opportunity is complex.

Crowd

Funding

Sources

Startup

Companies

which appeal

to retail

investors

Up to $1

million

within a 12

month

period (by

regulation)

Crowd Funding allows US retail investors to

invest into start up opportunities that are

offered by an SEC registered intermediary

(either a broker or a dealer of a funding portal).

Reg A+

Sources

Smaller

companies

with 2 years

of audited

financials

Up to $50

million in a

12 month

period

The main investors in a Reg A+ offering are retail

investors. Reg A+ offerings are considered mini-

IPO or IPO light offerings since there is an SEC

registration process but the process is more

streamlined than a public offering and the

company must be based in the U.S. or Canada

(there can be international operations).

Individual

Family Offices

A wide range

of potential

investment

opportunities

including

funds and

companies.

$1 to 500

million

Individual family offices have the most flexibility

in terms of their investments since they are only

limited by the family’s investment preferences

and are not regulated. Often family offices have

investment staff who act as fiduciaries to carry

out the family investment program and, as

fiduciaries, they are usually limited in their

investment choices to a defined investment

program.

Pitchbook/NVAC Venture Monitor Q4 2021

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Capital

Provider Type

Primary

Investment

Type

Typical

Investment

Range

Additional Comments

Wealth

Advisors

A wide range

of potential

investment

opportunities

including

funds and

companies

with an

emphasis on

funds as well

as direct

investing into

public

markets.

$1 to 500

million

Wealth advisory firms usually represent a

number (sometimes very high number) of

wealthy families. Since Wealth Advisors have

multiple constituents with potentially conflicting

risk profiles, Wealth Advisors are regulated and

must disclose their investment programs to

their clients and regulators. Different Wealth

Advisory firms focus on different investment

programs with a wide range of risk factors and

compete for wealth clients with their investment

programs. Since Wealth Advisors need to focus

on servicing their clients and providing a range

of services, they often invest into funds to

outsource the investment choice aspect of their

job. Many Wealth Advisors put together specific

public market trading strategies for their clients

and trade public securities on behalf of their

clients.

A basic understanding of these potential capital providers allows the capital seeker to

understand how to best position themselves for capital raising success. Effective positioning

is an important fundamental aspect of capital raising success.

Regulation

Raising capital in the U.S. is a highly regulated activity and can only be undertaken if the

capital seeker understands the type of capital that they are trying to raise as well as the

corresponding regulations under which they will have to operate. Each type of capital raise

has its own set of regulated actors as well as regulatory framework. The below gives a basic

framework for understanding the regulations but every capital seeker that would like to

raise capital in the U.S. must consult with appropriate U.S. legal counsel to obtain definitive

legal and regulatory guidance for their particular capital raise.

Bank Regulation: Banks provide loans to potential capital seekers and operate under

many different regulatory regimes. These regulations include everything from the amount

of capital that a bank must reserve for each loan it makes to fair lending practices that

include anti-discrimination rules as well as anti-money laundering and suspicious activity

reporting laws.

Public capital markets regulation: Public markets are heavily regulated by the SEC and

other regulators. Companies that are public companies are large organizations which are

raising enough capital to offset the costs of the required regulatory compliance of being a

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public company. The amount of regulation and compliance is high since public securities

are sold to retail as well as institutional investors and the regulators/laws assume that the

investors (since they include retail investors) are not sophisticated so the laws are

organized to protect the unsophisticated investors from being the subject of fraud or other

activities that would put them at an investment disadvantage. Therefore, the disclosure

rules are extensive not only at the Initial Public Offering but also include extensive on-going

requirements.

Private capital markets regulation: Private capital market transactions are usually issued

under SEC Regulation D (“Reg D”). Under U.S. regulation, securities must either be

registered with the SEC (ie: public securities) or meet certain qualifications that exempt

them from registration. Generally speaking,

securities offered under a Reg D exemption,

do not have the same disclosure requirements

that apply to a registered offering and are,

therefore, limited to being offered to

“Accredited Investors” or Qualified Purchasers”

(ie: investors deemed to be sophisticated

enough and to have enough capital that they

are able to negotiate their own disclosure and

other investment safeguards such as

investment terms.

Investment Company Act: The Investment Company Act of 1940 is an act of Congress that

regulates the organization of investment companies and the activities in which they

engage. It is the primary source of regulation for wealth advisors, mutual and closed end

funds as well as impacts the operations of hedge funds, private equity funds and some

holding companies.

Crowd Funding/Reg A+: The JOBS Act in May 2016 enabled crowd funded offerings with

the idea of enabling small and retail investors the opportunity to invest in new companies

such that they would be able to enjoy some of the benefits of venture capital investing that

had been limited to Accredited Investors or Qualified Purchasers (ie: sophisticated

investors). The JOBS Act in 2015 also created Reg A+ offerings which is meant to provide

retail investors access to smaller companies that are in a high growth phase so that

investors who are usually prohibited from investing in private investment opportunities

since they are issued under Reg D and limited to sophisticated investors would have access

to them.

Crypto/Digital Assets: Crypto or digital assets are the latest available investment

opportunity and regulations are currently being formed. In general, the SEC would like

Crypto or digital asset issuance which acts, feels, and seems like traditional equity or debt

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securities to be regulated like those securities. There is debate about crypto or digital asset

issuance that could be considered a currency which is defined as having a “use case” that is

not tied to passive appreciation in value. However, if the digital asset has a use case – there

is some argument that it should be regulated by commodity regulators (CFTC). Since there

are many open regulatory issues with regard to issuing digital assets in the U.S. and it is

best to obtain strong legal advice in order to understand the latest regulatory framework

as this is an evolving topic with a lot of regulatory attention.

How to Ensure the Investment Proposition Matches Capital

Provider Goals

The most effective way for a capital seeker to successfully source capital is to understand

the investment goals of their potential capital providers and to have a clearly articulated

investment proposition that addresses the capital provider’s goals.

Capital providers usually want to see a two-page intro and a summary presentation

(“Presentation”) in order to assess the opportunity and fit prior to holding an introductory

meeting or call that would be the first step in a full due diligence process. If the capital

provider does not understand from the Presentation materials how the proposition fits

their goals, they will not want to move forward with their investment process.

The Presentation should provide the investor reasonably concrete information in order for

them to understand how the investment opportunity might help them meet their

investment objectives and provide them with an attractive risk adjusted return. However,

the Presentation is not intended to be an opportunity for the investor to learn about your

company.”

The specifics about your investment opportunity or company are clearly important.

Investors have specific areas of interest, expertise, investment guidelines or preferences

and therefore want to know the details of your investment opportunity and company.

However, an investors desire to know about your investment opportunity and company is

to help them determine whether they think your particular opportunity meets their

investment goals and risk adjusted return objectives.

Investors are comparing your opportunity to others to which they have access. Gaining

access to capital is a competitive endeavor - your investment proposition will be compared

with many others (some that will seem similar to yours and some that will seem different)

Your investment opportunity or company is the vehicle through which an

investor meets their investment goals and risk adjusted return

expectations. Your investment opportunity or company is not the direct

purpose of the investment!

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and your ability to meet the investor’s goals/return requirements needs to be strong

enough to stand out from the pack.

Presentation Best Practices

The Presentation is your opportunity to present yourself in your best possible light and as

you want to be seen. Just as first impressions are made when you first meet someone, your

presentation materials make a first impression and investors will draw conclusions from

them. An investor’s impressions are an important part of their decision-making process.

The Presentation is also your opportunity to leave behind the specific information that you

want the investor to remember. If you rely on the investor taking notes during your

presentation, then it is impossible to know what information they have retained.

It is usually best to actually use the Presentation during your meetings. You have spent

time and effort organizing your thoughts around the investment opportunity while

preparing the Presentation and it should represent all of your important investment

considerations. In addition, by using the presentation during your meeting, you will be

reinforcing to the investor which information you think is important and where the investor

can find it later should they want to use it in for an internal write-up or conversation.

Some best practice considerations for a Presentation (see Appendix for more detailed

descriptions) include:

• Design and Formatting

• Vision and Path to Executable Returns

• Concrete and Supportable Information

• Delivery and Meeting Dynamics

• Regulatory and Legal Standards

Presentation Covered Topics

There is a basic format for most Presentations which covers the breadth and depth of an

investor’s initial inquiry. Within this relatively standard framework, each Presentation will

have varying degrees of emphasis and detail depending upon circumstances. Therefore,

different structures and different stage companies will use different specific information to

create the investor bridge. These areas include:

Shorter is best but there is no “right” number of pages

Be as short as possible (one to two pages per topic) while still conveying

important (i.e.: concrete supporting) information.

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Vision Value Proposition Who & What

• Vision Statement /

Summary Sales Points

• Problem / Market

Opportunity

• Solution / Growth

Opportunity

• Macro Analysis / Market

Size

• Competitive Analysis /

Advantage

• Investment Opportunity /

Process / Attractive

Characteristics / Why Now?

• Pipeline / Case Studies

/Traction / Sourcing

• Concrete Plan / Operations

/ Risk Management

• Financials / Important

Assumptions / Track Record

• Team Biographies

• Summary Terms &

Conditions/ Current Capital

Info / Use of Funds

• Appendix: Footnotes

Financials, Returns, Data, etc.

Presentation Results

The result of a well-constructed Presentation is that it provides the investor supportable,

value-add introductory information about your investment opportunity, a meeting outline

that is easy to present and the basis for continued engagement or due diligence.

The intended outcome is for the investor to enter formal due diligence and request more

information from its Due Diligence Checklist.

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Appendix: Presentation Best Practices

DESIGN & FORMATTING

Look and Feel is Important to Success

CONCRETE & SUPPORTABLE INFORMATION

Provide Concrete Supported Data

Keep slides simple and easy to read.

Header of each slide should be active & easy to

read. Understand pitch by just reading headers:

Rather than “Problem,” say: “Problem: Market

Lacks XXX”.

Say in a few words what can be said in a few

words: Avoid Prepositions (“of”, “to”).

Keep pages interesting: Use graphics, cartoons,

product pictures, tables, maps, testimonials, etc.

Avoid long bullet-point lists.

Ensure that all fonts (styles, sizes, etc.) are

consistent for each information level.

Decide on color scheme and use throughout.

Too many colors make information hard to

read.

Final review that only looks at formatting to

ensure all formatting is consistent.

More concrete and tangible information gives

investors greater comfort.

Rather than “$XXX million Pipeline,” state the

Pipeline. Example:

$XX / (Code) Name / Stage (Any Evidence of

commitments – Memorandum of

Understanding, Draft Agreement, etc.)

Most important part of financial information is

the historical performance, track record and/or

assumptions.

Historical performance or track record provides

the foundation for making future assumptions.

Assumptions should be supported by external

information: historical data / track record,

agreements (MOU, Draft, Signed), market or

peer analysis.

Anybody can make a model – hard to make a

model with supportive assumptions that are

accepted by the capital provider.

Convey financial and other data in charts,

graphics, and tables whenever possible.

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About CLA Deer Isle Group

Deer Isle Group (“Deer Isle”) with its subsidiaries, Deer Isle Capital, a registered

broker/dealer, and Deer Isle Financial, is a differentiated investment bank that provides “as

needed” financial/strategy and closing advisory as well as proprietary technology solutions

that enables a capital seeker to complete a “direct issuance” to a curated subset of 10,000+

institutional investors. Our business is built upon providing investors and capital

seekers/issuers the right tools in order to ensure a transparent, smooth, and efficient

capital solution. Our strength in these factors has helped drive our proven execution

capabilities.

Deer Isle’s successful track record includes having raised over $5 billion in private

placement capital since our founding in 2007.

Disclaimer

This chapter was prepared by Dianna Raedle from Deer Isle Group. Views expressed in this

chapter are the authors’ own, not that of the International Trade Administration. This

chapter does not constitute legal advice. Readers interested in investing in the United

States should consult legal counsel.

VISION

Path to Executable Returns

DELIVERY & MEETING DYNAMICS

Spotlight On – One Hour to Convince

Keep investment thesis and value add simple.

Ensure there is enough data to support thesis.

Without data, a presentation becomes very

generic and does not provide enough tangible

information for an investor to have a

meaningful opinion. Include:

• Market analysis

• Peer analysis

• Performance information

• Pipeline

• Executive biographies

Goal is to keep investor engaged and to agree

to more due diligence. The goal is not to

provide all information for an investment

decision.

Additional information will be provided in data

room and Due Diligence Checklist.

Delivery matters: Be organized. (Use

Presentation).

Speak slowly: This conveys authority and is

effective.

Questions: Start meeting by asking questions. It

sets the stage, so you know what might be

important to highlight during presentation. It

also starts a dialogue.

Encourage questions by leaving space for them.

Also check for questions during the

presentation.

End meeting with questions so that next steps

and current impressions are clear.

REGULATORY AND LEGAL STANDARDS

Ensure that information adheres to regulatory and legal requirements

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Partnering with U.S.

Research Organizations

for SME Technology Firms

Temple University

158

he goal of this chapter is to guide small and medium-sized innovation-based foreign

companies, including startups, interested in entering and scaling in the U.S. market

by developing Research & Development (R&D) activities with a local research

university or a federal agency. Innovation-based means a company with a strong

competitive advantage based on its technology, innovation, patents, and usually with long

sales cycles; a good example is in the life sciences industry.

This chapter is designed to illustrate how U.S. universities and federal laboratories can be

partners to collaborate with and can provide launch pads to test the U.S. market before

any market entry decision/investment.

Establish R&D Partnerships with a U.S. University

We define research organizations as universities and other research institutions “whose

primary goal is to conduct fundamental research, industrial research, or experimental

development and to disseminate their results by way of teaching, publication, or

technology transfer”.

Establishing a research partnership with either a research university

or another research institution, usually associated with a local university, is very similar in

this context. Universities tend to be larger than other research institutions.

The U.S. is the world leader in research

institutions, with 151 out of 1,002 research

universities globally, according to the 2021 QS

World University Ranking.

Their population

sizes vary from thousands to 70,000 or more

students. With infrastructure such as

hospitals, equipment, laboratories, land, and

more, U.S. research universities are training

grounds for innovators and talent through

educational programs and technology transfer

activities that are open to foreign investors. Moreover, many US research universities host

incubators and accelerator programs, as well as Small Business Development Centers

(SBDCs) that help coalesce access to market, industry stakeholders, mentors, and capital in

a specific ecosystem. Some universities even have dedicated soft-landing programs to

attract and retain foreign innovators and companies.

http://www.innoviscop.com/en/definitions/research-organisation

Source: https://www.topuniversities.com/university-rankings/world-university-rankings/2021

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By nature, at the heart of their local ecosystems, universities offer a more neutral place for

business development and commercialization activities, therefore can be a great entry

point to source first projects and clients. As a tech company, the right research

organization can be a great launching pad to enter the U.S. market.

Types of Partnerships

There are multiple ways to collaborate with a university and research organization in

general, from licensing one of its technologies also called “tech transfer”; contracting some

of its faculty/researchers to do some specific research for you, called “sponsored research”

or to endorse your solution as “Key Opinion Leaders”; to working on a specific project or

grant where you both provide part of the technology and experts defined “co-

development” that could lead to shared IP; and to selling your product or service as a

supplier.

The first most natural way of working with a U.S. university to validate or enhance your

technology, is first via a (1) Sponsored Research Agreement. The first step for such

agreement is to identify an appropriate investigator which is the term used in U.S.

academia for the primary researcher. Couple of ways are possible, the tech transfer office

or head of the targeted department can assist you to find the right scientist, professor, or

faculty who will act as your “Principal Investigator” or PI for your research.

Then, the second step is to propose a non-confidential conversation to gauge their interest

and ability. If a good alignment is established, the parties need to establish confidentiality,

i.e., via a Non-Disclosure Agreement (NDA), to protect your Intellectual Property (IP) as well

as the investigator’s.

The third step is to develop a Statement of Work and establish a budget. The last step is to

submit this work through the university’s normal grant, budget, and contract processes,

i.e., via the office of the Vice President for Research, the Center for Innovation, etc. These

contracts typically have an option to license the product of the research if new inventions

are developed.

Second, Universities are often the source of mentors and consultants, typically (2) Key

Opinion Leaders (KOLs), to guide the company's entry into the US market. These contracts

are between the companies and the individuals and can be a simple Consulting

Representation Agreement with an hourly fee; however, the university will insist that no

intellectual property leak out via these agreements.

On occasion universities have core facilities and laboratories, with unique capabilities,

ervices, and equipment, and can offer access to them via a simple (3) service agreement.

Although quicker to deploy, these contracts preclude any “innovation” by the investigator

as that activity would be performed under a Sponsored Research Agreement. Some service

160

agreements can include soft landing programs, with training, office or laboratory space,

and sometimes a temporary work authorization/immigration pathway.

Universities also have portfolios of technologies available for (4) licensing that may fit with

your company’s R&D and pipeline plans. Those are licensed from the technology transfer

office via a well-established process, usually presented in detail on the university’s website.

Lastly, the university has periodic (5) s

pinout companies that may be developing

technologies and find synergies with the foreign company's technology. Agreements here

are principally between the two companies but may involve Sponsored Research backing

the inventors’ laboratories. Certain universities have highly competitive equity-based

accelerator programs for their spinouts, providing capital and infrastructure in exchange

for equity in the venture. Over the years, some of those programs have opened to national

and international entrepreneurs. However, it is always helpful to have a board member,

partner, or mentor from the university you are applying to (examples are provided in the

last section of this chapter).

Do’s and Don’ts

Regarding the “Don’ts”, first it is important to not confuse service contracts with sponsored

research. With a few exceptions, universities are better used for invention and cooperation

rather than service contracts.

Secondly, relying only a consulting agreement is not recommended. While it is encouraged

for the investigators to participate in this type of agreements, they are not a substitute for

collaborative research. Note, under a consulting agreement, your technology will be

protected as in any agreements created by the university, the inventor’s rights are included.

Thirdly, it is important to keep in mind and plan that it is a lengthy process. It is a multi-step

process, universities need to (1) make sure that the technology is not subject to export

control, (2) evaluate the ownership of your company to ensure that it is a suitable partner,

(3) establish the scope of the confidentiality agreement, and then (4) develop and approve

the statement of work, budget, and overall contract.

Fourthly, it is preferable not to ask for a waiver of overhead also called “indirect research

costs” or “facilities and administrative costs”, as it was asked to the Universities by the U.S

government to not waive or reduce these negotiated rates. Their range can vary greatly

from 20% to over 100%. If your budget is limited, overhead costs could be a critical element

to select the right research organization.

Regarding the “Do’s”, it is important to reach out directly to universities in a first place to

understand their processes and costs. Publications and patent searches are the greatest

161

ways to locate a good investigator. Moreover, university’s tech transfer offices are pleased

to help in identifying faculty with expertise in your company's area of interest.

Secondly, it is necessary to have a good intellectual property plan validated by U.S. experts

as some aspects are unique to the United States. Universities, in general, follow the rule

that ownership follows inventorship. Co-innovation is common and welcome in a university

partnership, and your company will have exclusive rights via the contract to license the

technology. However, it is important to keep in mind that filing for protection of certain

uses and designs pre-project could inadvertently disclose-without-claiming patentable

subject matter.

Thirdly, it is recommended to have a clear picture of your technology roadmap and needs

to enter the U.S. market, from a regulatory perspective, e.g., technology needed to collect

data for clinical trials, to a sales perspective, e.g., complementary products or services

needed to answer all the needs of the end user. Those products and services are not

always directly included in your solution but may be ancillary and needed for good U.S.

market penetration.

In relation to negotiation, by law, any

Intellectual Property (IP) generated by the

university's faculty must be compensated at fair

market value. This is equally true of IP created

as part of sponsored research projects. Be

reassured, U.S. Universities do recognize that IP

from sponsored research is likely dependent on

the IP that is already controlled by your

company, and thus will license the new created

IP to you for reasonable terms. Universities

have 5 general terms that can be negotiated for

transferring their IPs:

o License and yearly fees;

o 2) Royalty consideration (based on sales or income);

o 3) Milestones (may not apply but would for new IP owned by the university).

For example, regulatory approval might be a milestone that would trigger a

success payment;

o 4) Sublicensing fee. The company may license the technology to a third party

and universities typically seek to benefit from this transaction; and

o 5) Equity. If the company has little liquidity, universities can accept some

equity instead of money. This last term is not typical for IP generated from