On Jul 11 2016 by H. Ronald Klasko
Attention Receivers and Litigators: EB-5 Investors Are Not Your Typical Clients
EB-5 is a wonderful program. Unfortunately, however, a small but increasing number of EB-5 projects have gone awry, leaving EB-5 investors in a very difficult situation. This may be caused by economic failure of the project, or it may be caused by fraud on the part of the project developer.
Each individual investor in these projects needs competent and experienced counsel to advise regarding his or her options. Those options need to be customized to the particular circumstances of each investor. That is not the subject of this blog.
The subject of this blog relates to 2 types of third party actors who purport to represent the interests of the entire group of EB-5 investors but may unwittingly be taking action inconsistent with the best interests of the investors. One such party is the court-appointed receiver. The other is the class action litigator. This blog addresses issues that receivers and litigators need to understand in order to properly represent the interests of investors.
It is critical to understand that different EB-5 investors have different interests depending upon:
- Whether the investor’s money remains in escrow, or whether it has already been deployed to the project?
- What stage of the immigration process the investor is in; e.g. whether the I-526 petition is pending, or the I-526 petition has been approved or the investor is a conditional resident or the I-829 petition is pending or the I-829 petition has been approved?
In considering these issues, receivers and litigators purporting to act on behalf of EB-5 investors need to understand that EB-5 investors have different motivations as compared with other investors. In the case of every other investor, the investor’s interest is to get his money back. With EB-5 investors, that is almost always a secondary issue. The primary motivation for the EB-5 investment is virtually always obtaining an immigration benefit. For all but the last category of investors specified above, getting the money back may result in loss of the immigration benefit, which means that the action of the receiver or litigator may be directly adverse to the interest of the investor.
For purposes of obtaining the ultimate immigration benefit – permanent resident status – there are two major issues:
- The investment must be sustained until conditions are removed and the investor becomes a permanent resident; and
The necessary number of jobs must have been created.
Now let’s look at each of the categories of investors with these two concepts in mind.
Investors with pending I-526 petition:
If the investor recently filed the I-526 petition, and if the money remains in escrow, getting the money back and reinvesting in another project may be the best option. If the petition has been pending a lengthy period of time, and especially if the investor has a child who may age out if a new petition is filed, getting the money back and starting over may result in a wait of many additional years (especially if the investor is in China) and loss of immigration benefits of the child.
The issue for these investors is whether there is any way for the project to be saved and, if so, whether any changes necessary to save the project would be deemed a “material change” for immigration purposes (which determination may be different for securities law purposes). While it is beyond the scope of this blog to explicate the nuances of USCIS interpretations of what does and does not constitute material change, suffice to say that competent immigration counsel should be consulted in making this determination. If the change does constitute a material change, the investor would have to refile a new I-526 petition, which would have a new priority (quota) date.
Investors with approved I-526 petition:
The issues are the same as with the pending I-526 petition. However, even though USCIS’s present policy is that a material change that occurs after I-526 petition approval requires the filing of a new petition, it is this author’s position that this policy is not legally correct and subject to challenge in the appropriate case.
Investors who have obtained conditional residence status:
These investors are in the same position as the previous two categories except that USCIS policy dictates that a material change occurring after conditional residence status is obtained, does not have any negative impact on the investor as long as the investor’s investment is sustained, the initial I-526 petition based on a job creating project were filed in good faith, and the necessary jobs were created. Therefore, especially if the necessary jobs were created, these investors do not want their money returned until their conditions are removed.
If the necessary jobs have not been created, the main goal of the investor is to have the receiver take whatever action is necessary to create the requisite number of jobs. In the event that this will not occur before the investor has to file the I-829 petition, the investor must still file the I-829 petition and, in most cases, argue that the jobs will be created “within a reasonable time” (which USCIS interprets as being one year). Such investors presently have the benefit of USCIS’s unprecedentedly long processing delays for I-829 petitions (presently close to 19 months or more). This provides more time for the receiver to take the necessary action to create the jobs.
If the jobs are not created before the adjudication of the I-829 petition and the petition is subsequently denied, the investor remains a conditional resident, potentially for a very long period of time. Specifically, he retains his conditional resident status until U.S. Immigration and Customs Enforcement (“ICE”) initiates removal proceedings; he retains conditional resident status until the immigration judge approves or denies the I-829 petition on a de novo review; if denied by the immigration judge, he retains conditional resident status during the pendency of an appeal to the Board of Immigration Appeals. Only if the Board of Immigration Appeals then denies the appeal would he lose conditional resident status. This process, from the date of denial of the I-829 petition until the date of denial by the Board of Immigration Appeals, could very well take many years. If the necessary jobs are created before the end of that process, the investor may be able to remove conditions. However, that assumes that the investor has not had his investment funds returned during that entire period of time.
Investors with I-829 petitions pending:
Everything stated in the previous paragraph regarding investors with conditional resident status applies equally to investors who have already filed I-829 petitions. However, there is a strong cognizable legal argument (supported by the regulations but not presently accepted by USCIS policy) that the investment no longer needs to be sustained after the filing of the condition removal petition. Investors in this group who receive their investment funds through the actions of a receiver or litigator should have experienced EB-5 counsel advising them on proper advocacy to USCIS and, if necessary, federal court litigation if USCIS denies the condition removal petition.
Investors with approved I-829 petitions:
These investors have completed the immigration process. It is perfectly appropriate for them to receive their investment proceeds.
Four other points are worthy of note:
- There may well be conflicts between the interests of investors in each group specified above. For example, if some jobs have already been created, but not enough jobs to remove conditions for all investors, jobs will need to be allocated among the investors. This would create variant interests among these investors. It is important to look to the project’s offering documents to determine what job allocation procedure was initially contemplated.
- If a project can be salvaged through a different regional center, this may or may not be consistent with the interest of the investors. Although USCIS policy in this area remains unclear, it appears that USCIS considers a change of regional center to be a material change. If so, as explained above, the impact would be different for different groups of investors.
- What if the best option is bankruptcy? If the necessary jobs are created, even though this would not be a good result with respect to the financial interest of the investor, it may not have a negative effect on the investor’s immigration status. The issue is whether the bankruptcy changes the “sustainment” of the investment. In its draft August 10, 2015 policy memorandum, USCIS tentatively agreed that bankruptcy does not change the fact that the investor has sustained his investment. The caveat, however, was that any repaid funds would have to be redeployed in an “at risk” activity during such sustainment period.
- Everything in this blog is subject to changes that could occur either in USCIS policy, USCIS regulations or legislative action. All of these avenues are presently being pursued by this author and others in the EB-5 community. As of the date of this writing, no change is imminent. Therefore, unfortunately, the advice contained in this blog is likely to remain viable for the indefinite future.