This is a guest post by Danvers Baillieu and Emma Peacock who are both senior associates at international law firm Pinsent Masons LLP. Danvers is the co-founder of Bootlaw.com, the legal meetup for tech start-ups and entrepreneurs and he specialises in technology law; Emma specialises in immigration and employment law and contributes to HRnetwork.tv and out-law.com.

The news that the British government has introduced the new “entrepreneur visa” has been widely welcomed by the start up community, not least here on TechCrunch Europe, and cited as evidence that the UK has in one respect stolen a march on Silicon Valley as the US government seems unwilling or unable to make progress with its much vaunted Startup Visa Act.

In the short time that the new rules have been in force, we have already been asked by London based start up clients to advise them on obtaining visas for overseas based founders under this new route and wanted to share our views – and specific concerns with the community, in the hope that this new regime can be further improved. The headline takeaway is that, to quote Jon Bon Jovi, “we’re halfway there”, but to quote John Reid, the regime is not yet “fit for purpose”.

The legal framework of the new visa is that the government has changed the rules for the existing Tier 1 Entrepreneur and Investor categories and introduced a new temporary Entrepreneur category. The changes came in force on 6 April 2011.

Directors or other individuals who wish to invest in a UK company may look to use these routes to enable them to work for a company which is unable to sponsor them as a Tier 2 worker (e.g. under a intra-company transfer).

What is particularly attractive about this route is that it will lead to settlement (indefinite leave to remain in the UK), unlike the tier 2 route which is only for a limited period.

The new regime adds more flexibility for migrants with overseas business interests: entrepreneurs and investors may be absent from the UK for 180 days a year, (rather than the usual 90 days) without losing the right to apply for settlement.

For investors:

• Applicants need to show that they have access to £1 million which is disposable in the UK. There will be no need to demonstrate a particular level of English or that they can maintain themselves.
• Investors will be able to apply to settle in the UK after 5 years. Investors will be able to apply for settlement after 3 years if £5 million has been invested; and after 2 years if investing £10 million.
• To extend the visa the migrant must prove (a) the required investment was made, and (b) he/she has created 2 full time equivalent jobs for settled workers in the UK.

For entrepreneurs:

A new category will allow entry to the UK for 6 months so that “Prospective Entrepreneurs” can enter the UK to make arrangements for set-up of a business. Applicants will then be able to switch into the full Entrepreneur category whilst in the UK, avoiding the migrant having to return to their home country to apply for a visa and may mean that an expedited visa decision is available.

• Entrepreneurs will need to have access to at least £200k, which may be their own or a third party’s money such as an investor or a family member – as long as they are allowed “unrestricted access” to the funds. The requirement is reduced to £50k where the funding is from a “reputable source” – currently defined by the government as: an FSA registered Venture Capital firm, an “entrepreneurial seed funding competition recognised by UKTI” (a list of which UKTI publishes on its website from time to time), or a UK Government Department. For either the £50k or £200k investment, the funds can be shared between an entrepreneurial team of up to 2 people, and both business partners can qualify for a visa (only one is permitted currently).
• There will be English language and maintenance requirements: in particular, the applicant must show a positive bank balance of £2,800 (with a further £1,600 for each dependent accompanying) for at least 90 days prior to making the application.
• Entrepreneurs will be able to apply for settlement after 5 years and after 3 years if 10 full-time roles have been created or the company has a turnover of over £5 million.

Broadly speaking this is all good news and the UK now compares favourably with the equivalent rules for other countries – including US and we echo the welcome given to the changes by the business world. However, whilst this is likely to increase the number of High Net Worth Individuals in the UK, our view is that the Entrepreneur rules on funding do not go far enough.

We’ve identified four main problems and have proposed some simple solutions.

First, the criteria to qualify for a £50k investment are somewhat bizarre to say the least. FSA registered Venture Capital firms do not make a huge volume of deals at the £50k to £200k level so it is difficult to see how their inclusion helps. Equally, there are not many seed funding competitions which offer more than £50k of investment and UKTI currently lists just two on its website as qualifying: Seedcamp and Springboard. Springboard offers £5000 per founder, so well short of the required amount meaning Seedcamp is unique in its ability to satisfy this category. Finally, given the current state of the nation’s finances we are not betting on the UK Government stepping up to make lots of £50k investments.

On the other hand, a high proportion of investment in the £50k to £200k bracket comes from angels and angel networks, many of whom are based outside of the UK. We understand that the reputation of such individuals and the source of funding are important to the Government (although quite frankly, money is money), it is a shame that the rules do not go further and embrace this vital source of finance. At a minimum, membership of the British Business Angels Association would be one way of qualifying angel investors.

Secondly, the rules are based on the strange assumption that the entrepreneur him or herself will have “unrestricted access to the funds” provided by a third party. The reality is that investors invest into companies – not individuals – and rarely with no strings attached, as investors demand customary controls and protective rights over how their investment may be spent. At a stretch one could argue that any person with signing rights to the company cheque book has such access but we are not convinced that this is watertight. A more appropriate test would be whether an individual is a significant shareholder in a UK-based company which has received the qualifying investment. We would propose a threshold of 20% on a fully diluted basis would be appropriate.

Thirdly, the rules imply that the full amount of the funds must be available at the point the application is made which does not allow for an application to be made once the company in question has started to spend it. Again, we would suggest that the rules allow for an application to be made within a given time period of a qualifying investment.

This also ties into the rules on maintenance, which is the fourth problem: in our experience most unfunded entrepreneurs are unlikely to be running a balance of £2,800 for 90 days prior to an application, although it might be realistic for this to be the case after funding. The danger here is that entrepreneurs are excluded because by the time they qualify under the maintenance rules, the investment has already been made (or even spent). Equally, provided the company has been funded and is paying a minimum salary to the entrepreneur (e.g. £15,000 to £20,000) the maintenance qualification would appear redundant.

We believe that if these minor adaptations are taken on board by the UK Government, the Entrepreneur Visa would be workable and practical and start to make a real difference in encouraging entrepreneurs to come to the UK and give a much needed boost to the economy: in other words do the job it is supposed to do.