The EB-5 Reform and Integrity Act of 2022 brought many changes to the EB-5 program. For the latest information, please click here.
The EB-5 world may be changing. The next several months will be critical. This blog will highlight some of the changes that have already occurred and others that are on the radar. Some of these changes will be the subject of separate blogs to follow.
Questions regarding Extension of Regional Center Program
The regional center program expires on September 30. This is not news, and it has been extended continuously since 2003, usually unanimously or close to unanimously. As recently as several weeks ago, there was no reason to believe that this year would be any different. However, in the last several weeks, much of the news coming out of Washington has created some uncertainty as to what an extension may entail.
The new chairman of the Senate Judiciary Committee, Senator Charles Grassley of Iowa – never a big fan of EB-5 – has signaled that he wants changes in the EB-5 program as a condition to extending the program. Former Senate Judiciary Committee Chair, Senator Patrick Leahy of Vermont – a big fan of EB-5 – has indicated that he will very shortly be presenting an EB-5 bill that appears to align with at least some of the changes being advocated by Senator Grassley. DHS Secretary Jeh Johnson authored a letter to Senators Grassley and Leahy advocating changes in the EB-5 program (a number of which appear to be consistent with changes advocated by at least Senator Grassley). (The Johnson letter will be the subject of a separate blog.)
The result is that there are several possibilities:
- The EB-5 program does not get extended. The chances of this remain remote.
- The regional center program is extended for a short time (six months or less) while Congress debates the proposed changes. This is a very real possibility.
- Congress agrees in advance of September 30 to changes to the EB-5 statute and extends the EB-5 program for three years with the changes. Currently, many think this is the most likely scenario; however as we continue to move quickly towards the September deadline, the circumstance outlined above in (b) becomes more likely.
- The EB-5 program gets extended with no changes. This is still a possibility, albeit a remote one, especially if the September 30 deadline is imminent or has passed and there is no reasonable likelihood of debating proposed changes to the EB-5 program.
- Congress extends the program permanently. In the present setting, this has to be viewed as highly aspirational in the short term.
Possible Changes to the Regional Center Program
Among the many legislative changes that are possible, two stand out as having the largest impact.
The first is an increase in the minimum investment amount. Almost certainly, the next time there is a legislative change to the EB-5 program, it will include an increase of the minimum investment amount. The most likely increase seems to be at or about $800,000 for TEAs and $1,200,000 for other investments. There will likely be an ongoing inflation adjustment. Given that there has been no change in the minimum investment amount since the program commenced in 1990, many believe that such an amendment would not be controversial.
For Chinese investors, the impact would not be just investing more RMBs. Documenting 60% more invested funds may be challenging for many investors. Perhaps more significantly, the traditional method of getting 10 friends and family to transfer $50,000 each to meet Chinese currency export restrictions would now require 16. Investors will need very large extended families or an expansive circle of friends. To avoid this result, many investors may choose to invest before any change in the law occurs.
The second change, which would be more controversial, is a change in the definition of a targeted employment area. Senators Grassley and Leahy, as well as Secretary Johnson, are reportedly considering limitations to state-designated TEAs based on census tract aggregation. The Johnson letter proposes a limited number of contiguous census tracts. If there is any federally imposed limitation on state-designated TEAs, it will be critical that the language encompasses a broad enough area to cover normal commuting distances for workers coming to work at EB-5 projects, especially in urban areas. Merely picking an arbitrary number of census tracts could eliminate many or most urban TEAs even though such projects draw employees from high unemployment areas. This is perhaps the most important area for advocacy by regional centers and developers.
Other legislative changes would likely include an expansion of USCIS authority to revoke regional center approvals based on criminal or security concerns and expansion of USCIS authority to regulate regional center principals.
If some or all of these legislative changes occur, it is too soon to know how Congress will legislate effective dates, retroactive application, grandfathered applications, impact on projects that already have some investors, etc. These are critical issues for investment projects that have already commenced planning, financing and/or EB-5 capital raises. Offering documents being prepared presently should account for these possibilities.
While the impending expiration of the regional center program and the suspense involving its extension are the primary causes of consternation, other changes are or will be playing a key role in the EB-5 market:
China EB-5 Quota Regression: Since the quota backlog just started on May 1, its impact is still uncertain. Although a longer wait for Chinese investors to immigrate to the U.S. may dissuade some, the prevailing sense is that a very high percentage of the investors who would have invested will continue to invest. There is also some sense that investors realize that the quota waiting list will only become longer over time and that an investment now will result in a much shorter wait than an investment a year or two later. It is certainly possible that an indirect effect of the uncertainty in the market presently is that there may be fewer I-526 petitions filed for the remainder of this fiscal year than had originally been anticipated. In the category of every cloud has a silver lining, the silver lining in this cloud may be that fewer new petitions result in the quota retrogression being shorter than originally anticipated.
Source of Funds Issue: Within the last few months, USCIS has begun issuing RFEs, NOIDs and denials for investor source of funds in factual scenarios that have never previously resulted in denials. USCIS confirmed its present position (without acknowledging the fact it was a complete change in position) during the stakeholders meeting on April 22. Although our experience is that the change in policy affects at most 10% to 15% of the investors, some agents advise that the percentage is higher. At the very least, this will require investors to change how they document the lawful source of their invested funds. Specifically, the practice of using indebtedness on a property that is owned by someone other than the investor to fund the investment, in whole or in part, is likely to result in a denial of the I-526 petition. This will likely be the subject of litigation and is the subject of another blog.
Adverse Publicity: This is taking its toll. Fortune Magazine, ABC News and other media outlets have adopted EB-5 as their whipping boys. Until the EB-5 industry is able to counteract the impact of this negative publicity, it will continue to act as a drag on the market.
The Mayorkas Report: By itself, the DHS Inspector General report chiding former USCIS Director Mayorkas for his activities relating to the EB-5 program might not have a major impact. Added to other negative publicity, it has a cumulative effect.
SEC Investigation: It is no secret that the SEC has been investigating regional centers and immigration attorneys in connection with issuance and acceptance of finders fees and possibly other securities violations. The results of these investigations are likely to become public over the next two or three months. Whatever the result, they will not be helpful to the EB-5 industry.
GAO Report: The U.S. Government Accountability Office will be issuing its report on EB-5 most likely this summer. While its findings are not presently known, at the very least it adds more uncertainty in very uncertain times.
If there were ever a time to advocate for the EB-5 program – whether it be to media or to legislative representatives – that time is now. It is my sense that the next six months will be pivotal in determining the parameters of the EB-5 program for many years to come.
