On Jun 18 2013 by H. Ronald Klasko
New Ground Forged by the May 30, 2013 EB-5 Policy Memorandum (Part 2)
This is part two of my article discussing the highlights of the USCIS EB-5 Memorandum issued on May 30, 2013.
A major issue that the various draft memoranda took varying positions on is the question of when jobs must be created. Unfortunately, the Memorandum continues to provide two answers to this question. The first answer is that the jobs must be created within 2½ years of the approval of the I-526 petition. A separate article on this point will explain why this standard is wrong factually, legally and as a matter of policy.
The second timing issue is an attempt to define the standard of job creation within a “reasonable time” of the I-829 adjudication. Existing law provides no specific timeframe for “reasonable time.” The third draft Memorandum referenced six months as being a “reasonable time.” The final Memorandum requires proof that jobs will be created within one year after the end of the two years of conditional residence “unless extreme circumstances, such as force majeure, are presented.”
There are a couple of interesting points about this. USCIS choose to start the one year period not from the time of filing the I-829 petition, not from the adjudication of the I-829 petition, but from the end of the two year conditional residence period. The second interesting issue is how USCIS will interpret “extreme circumstances,” which will obviously have to be a case-by-case determination.
I mentioned in the previous article that a key difference between an actual project and a hypothetical project is the requirement that an actual project contain a Matter of Ho-compliant business plan. Significantly, this Memorandum for the first time states that a business plan does not need to contain everything mentioned in Matter of Ho in order to be Matter of Ho-compliant. This could be a very significant clarification if followed by examiners.
USCIS has traditionally been uncomfortable with the “fund model” project in which money is invested in a new commercial enterprise and then disbursed among a variety of job-creating enterprises. The May 30 Memorandum, while leaving many questions unresolved, reveals an increased comfort level with these projects. In the case of a direct EB-5, money can go to a portfolio of wholly-owned subsidiaries. In the case of a regional center EB-5, the money can go to a portfolio of unrelated companies. Left unanswered are questions such as whether any particular investor’s investments must be identified as going to a particular job-creating enterprise, what happens if some of the portfolios of companies do not create sufficient jobs, what happens if one of the portfolio of companies is determined not to be in a TEA, etc.
There is some significant amplification of the “at risk” investment requirements. The Memorandum makes clear that an investor can receive a return on capital (not a return of capital) during or after the conditional residency period as long as the return is not guaranteed. The most troublesome language states: “if the investor is individually guaranteed the right to eventual ownership or use of a particular asset in consideration of the investor’s contribution of capital into the new commercial enterprise, such as a home (or other real estate interest) or item of personal property, the expected present value of the guaranteed ownership or use of such assets does not count towards the total amount of the investor’s capital contribution in determining how much money was truly placed at risk.” Arguably, this prohibition does not apply if the ownership or use of an asset is an option of the developer and not a right of the investor. This would appear to be a critical distinction, but time will tell whether USCIS recognizes it as a distinction. It appears for now that USCIS does not recognize that the right to ownership of real estate is inherently speculative and at risk with a completely indeterminate value, if any, many years hence when the investor has removed conditional residence.
One of the less clear statements in the Memorandum is the following: “if a change in plan requires the liquidation of an investment and reallocation of that investment into either another job-creating entity or new commercial enterprise, the petition may not comply with the requirements to invest and sustain the investment throughout the period of the alien’s residence in the United States.” There are at least two possibilities of situations to which this concept might apply. If there is a change in the NCE, it is not surprising that USCIS would question whether the investment has been sustained. However, if the investment is sustained in the NCE, for example in a loan model, and the NCE makes a second loan to another job-creating entity, the requirement that the investment be sustained in the NCE would presumably be met. This will require further clarification.
Presumably, this statement is not meant to apply to a refinancing or early prepayment of a loan in the loan model where the jobs have been created in the JCE and then the money is returned to the NCE (but not to the investor). This involves neither a reallocation of the investment into another job-creating entity or into another NCE. However, this important point continues to need clarification from USCIS.
Finally, I wish to make brief reference to a number of other points in the Memorandum:
- The Memorandum reiterates that EB-5 petitions should be adjudicated using the preponderance of the evidence standard. This is nothing new, but it is important that it is in the Memorandum because it has often been honored in the breach by examiners.
- The Memorandum is binding on USCIS.
- The Memorandum does not reference which previous memos are specifically rescinded and which are not. It also does not amend the Adjudicators Field Manual, but supersedes it if conflicting. Therefore, if an issue is not referenced in this Memorandum, reference must continue to be made to the AFM.
- For the first time, USCIS confirms that there is nothing that prevents an escrow account from being held outside of the U.S. However, the investor then bears the risk of fluctuating currency exchange rates resulting in the amount of investment being insufficient at the time of release of escrow. The investor also bears the risk of problems with currency export restrictions.
Although not really treading new ground, the Memorandum provides a helpful explication regarding TEA determination where a business may create jobs in multiple locations. The Memorandum states that the TEA is based on the location in which the NCE is “principally doing business” in a direct EB-5 and where the job-creating enterprise is “principally doing business” in a regional center EB-5. The Memorandum provides a helpful definition of “principally doing business.”
- In direct EB-5 cases, apparently the lawful source of investor capital of non-EB-5 investors must be proven. This is potentially highly problematic, requiring documents that may be unavailable to the investor, and arguably beyond the requirements of EB-5 law.
- The Memorandum recognizes that EB-5 investments can be used for non-job-creating purposes, such as purchasing land or obtaining licenses. Of course, these expenditures are not calculated in projecting job creation.
In summary, the Policy Memorandum is a major step forward. In some areas, it significantly improves the EB-5 Program. In other areas, it leaves unanswered questions or worse. However, if the Memorandum is followed by all examiners (and based on past history that remains a question), it will provide far more guidance to regional centers, project developers and professionals advising in this area than existed prior to the Memorandum.