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 program is undergoing the most significant changes in over 10 years – maybe ever. The changes are driven primarily by the new regulation increasing investment amounts and significantly restricting the geographical areas that qualify as “targeted employment areas”. Secondarily, the lengthy quota backlogs in the three most prolific EB-5 countries, as well as the unprecedented USCIS processing delays, all combine to make the future of EB-5 – – at the very least – – cloudy. Despite the clouds, this intrepid author has turned on his headlights and attempted to illuminate the future. Here is what the looking glass reveals:
Fewer investors/Fewer applications — I didn’t need my headlights for this one. Quota backlogs were already leading to a decrease in investors. The rash of investors who invested and filed before November 21 took many prospective investors out of the equation. Add to that the fact that most geographical areas will require an investment of $1.8 million, coupled with the high value of the U.S. dollar, and it is hard to foresee anything other than a precipitous decline in the number of EB-5 investors.
Increased difficulties with Source of Funds — It will be a lot more difficult for many clients to document the lawful source of $900,000, or $1.8 million, than it was for $500,000. For some, such as those who rely on second mortgages on residential properties, it may prove to be impossible.
In addition, it will be a lot more work for attorneys to prepare I-526 petitions given the need to source between 80% and 260% more funds. One would expect that this would both increase attorney processing time and attorney legal fees.
Currency export problems — Perhaps even more significant, investors will have more difficulty surmounting currency export controls when they are trying to move $900,000 or $1.8 million than they did in moving $500,000. For example, in a country like China, where investors often needed to involve 10 or more friends or family in effectuating currency exports, one would need a calculator to determine the number of friends and family members who would be involved in a transfer of $1.8 million.
Higher percentage of direct EB-5s — Although a reduction in both regional center and direct EB-5s is to be expected, the percentage reduction may be less with direct EB-5s. Investors may be more willing to part with much higher investment amounts if they will be investing in a business that the investor may be able to grow and that may lead to significant returns on investment.
Greater returns on regional center investments — Investors who are willing to part with $1.8 million almost certainly will expect some enhanced rate of return on their investments, especially if the combination of quota backlogs and processing delays will result in their investment being outstanding for far longer periods of time than originally anticipated. It wouldn’t surprise me that a much higher percentage of EB-5 investors view EB-5 as private equity investments where the EB-5 benefits are an attractive add on, rather than being the primary or sole motivator of the investment.
Fewer regional centers — When I first started practicing in the EB-5 area, there were only a handful of regional centers. That number grew over the years to in excess of 800. I expect that number to decline, perhaps precipitously. There are several reasons for this. With fewer investors, there will be fewer projects for regional centers to sponsor. This will make the regional center business less attractive from the standpoint of profitability and economic development. At the same time, prospective legislation is looming that could very substantially increase the cost of operating a regional center. Even if a regional center wants to continue to operate, I anticipate an ever-increasing volume of unwanted regional center terminations initiated by USCIS. Even if a regional center is making major efforts to attract new projects, it may be unable to do so, which USCIS may consider to be a ground for regional center termination for failure to promote economic growth in the region.
Litigation arising out of regional center terminations — Regional center terminations affect not only the regional center, but all investors in all projects sponsored by the regional center. Since USCIS takes the position (which is subject to challenge) that a regional center termination constitutes a material change that can result in the denial of all EB-5 petitions of all investors who have not yet obtained conditional residence, the stakes are exceedingly high. I foresee significant litigation both challenging regional center terminations and challenging the impact of regional center terminations on investors.
Restructuring EB-5 projects — EB-5 projects will require fewer investors and fewer jobs to accumulate the desired amount of EB-5 capital. A project seeking $25 million of EB-5 capital previously required 50 investors and 500 jobs at a minimum. At the $1.8 million investment amount, that same project will now require 14 investors and 140 jobs. On the one hand, the reduced job requirement could lead to the ability of a project to garner even greater amounts of EB-5 capital. On the other hand, the deterrent of the investment amount will reduce the likely number of investors available. The end result of this is likely to be projects with EB-5 as a smaller percentage of the overall capital stack than we had witnessed in the past.
Increased use of E-2 visas — There are at least 2 reasons for this. One reason is that the increased investment amount for EB-5 will put that program out of the reach of a large number of investors. E-2 investment amounts of a fraction of the amount required for EB-5 will likely make the E-2 visa (which is often issued for 5 years, renewable indefinitely) more attractive. Another reason for the expected increase in E-2 applications is the combination of increased processing times and increased quota backlogs for EB-5, rendering the E-2 visa an attractive alternative for an investor to spend the often very lengthy waiting periods for EB-5 green cards in the U.S. as opposed to overseas.
More rural investments — In the pre-November 21, 2019 world, over 90% of all investments qualified as TEA investments of $500,000. Under the existing regulations, rural TEAs will remain the same but there will be far, far fewer high unemployment TEAs. In addition, the $900,000 difference between TEA and non-TEA investments may well render non-TEA investments to be impractical or unattractive for many or most investors who would otherwise be interested in EB5. I expect to see an increased incidence of rural projects sponsored by regional centers and a decrease in the number of urban projects.
More projects will have problems — With quota backlogs ranging from 8 years to 15 years, or more, regional centers and projects have to remain in existence for a very large number of years. This leaves a very large number of years for problems to happen, whether it be innocent or otherwise. One sure impact of problem projects is litigation – – whether it be litigation by investors against projects and regional centers, litigation by investors challenging the impact of these problems on the approval of their petitions, or otherwise.
Mandamus — Speaking of litigation, I expect EB-5 mandamus complaints to be a growth industry. The unprecedented processing delays by themselves are a good reason for this. Add to that the benefit provided by the new regulation regarding retention of priority date, but only upon approval of the EB-5 petition. Finally, EB-5 investors are likely to be highly motivated to have their petitions approved sooner rather than later in order to avert any adverse impacts that could come from termination of a regional center, voluntary decision by the regional center to no longer stay in business or problems that may occur in the project.
Redeployment — This will be a huge issue going forward. Billions of dollars of EB-5 money will have to be redeployed. I expect that sometime, in the not too distant future, USCIS will establish realistic and concrete guidelines for redeployment, either voluntarily or through litigation. Investors are unhappy with the entire concept of redeployment, which is likely to result in increased litigation by such unhappy investors.
Revisions to PPMs — PPMs need to be revised regarding different classes of investors based on different investment amounts. They may need to include specific disclaimers regarding the fact that projects will no longer know for certain in advance if they are in a TEA since USCIS will not adjudicate that issue until it adjudicates the petitions. Finally, offering documents may make reference to the possibility of legislation that would eliminate the per country quota system that presently exists. Such legislation, which has passed the House of Representatives at the time of this writing, could result in long quota backlogs for all countries of the world that presently have no quota delays.
New investor markets — The EB-5 program has been characterized by an inordinate percentage of investors from China, Vietnam and India. Going forward, I anticipate a far smaller percentage from those countries and an increased percentage from markets that have not previously produced large numbers of EB-5 investors. For various reasons, including conditions in certain countries, my cloudy crystal ball foresees South Africa, Argentina, Columbia and Nigeria as possible markets of interest.
Legislation — Here is where the crystal ball gets especially cloudy. Anyone who dares predict legislation in Washington is braver than I am. However, I do think that our future includes legislation that will extend the regional center EB-5 program at least 5 years while greatly enhancing the compliance requirements of regional centers and administrative agency oversight over regional centers and projects. I would like to say that my crystal ball foresees legislation that will increase numbers available for EB-5 investors; however, that part of the crystal ball remains especially murky. There will likely be some effort to lobby for a legislative reduction of the investment amount below the present regulatory levels, possibly in trade for other provisions that the EB-5 community might have, at different times, viewed as unpalatable.
The beauty of an article like this is that, if any one of the above occurrences happen, I will be able to say, “I told you so.”
The material contained in this article does not constitute direct legal advice and is for informational purposes only. An attorney-client relationship is not presumed or intended by receipt or review of this presentation. The information provided should never replace informed counsel when specific immigration-related guidance is needed.
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