On Jan 04 2016 by H. Ronald Klasko
EB-5 Legislation: Retrospective and Prospective
I’ll be right up front with my opinion. I believe the EB-5 industry narrowly averted disaster in the EB-5 legislative reform process at the end of 2015. While any legislation, by the nature of the process, will have provisions that anyone on the political spectrum will both like and dislike (and certainly the final draft form of the Senate bill is no exception), the key is to guard against poison pills. In looking back on 2015, no matter what position you may take on the most controversial issue – urban vs. rural TEAs – in the end the poison pill was a new proposed system of “reserved visas”. Introduced for the first time in December, it would have resulted in most investors competing, not for 10,000 numbers, but for 4,000 numbers, which would have resulted in backlogs estimated by most observers to be at least 10 to 15 years. With the spectre of that provision in mind, the passage of a 9-plus month extension of the program with no changes was as good a result as could have been hoped for.
Although some may feel that the 2015 battle was won, we all know that the major war is still to be fought in 2016. With that in mind, I offer 10 perspectives – some retrospective and some prospective – that hopefully will guide us in the coming year:
Transparency, and lack thereof: If there is one thing that doomed the EB-5 legislative process in 2015, it was the lack of transparency on the part of the key legislators. Throughout almost the entirety of the legislative process, the drafters of the bill held the language so close to the vest that, not only was it not available to the EB-5 industry for comment, but it was not even available to members of the Senate and House until the eleventh hour. Because the drafters did not want to give the industry a chance to complete a full vetting process on the language of the proposed legislation, they created a last minute crisis that in the end doomed the chances for passage of comprehensive reform. Opponents of the bill in the Senate – and ultimately the Senate leadership – rebuffed the lack of transparency of the process and the attempt to legislate in a crisis mentality. Hopefully, this will be a lesson learned for the 2016 legislative process.
We are better united than divided: In 2015, the EB-5 industry was divided. This division was actively used against us by leaders in the House and Senate. We are a small enough industry that we should never let this happen again. It is critical that all key industry groups work together. While there may be one or two issues on which groups may disagree, as someone who was intimately involved in the process working with several groups, I can tell you that we are in agreement on 90-plus percent of the issues. We need to actively present a united front on the issues on which we agree, even if we must advocate different positions on one or two issues.
- Not just active – proactive: We now have a road map. It is the Senate bill. It is highly likely that the 2016 discussions will start where the 2015 legislative process ended. We should be proactive in pushing our reform agenda at the early stages of 2016. This includes proactively suggesting changes in language, proactively advocating for positive reform not included in the draft legislation and proactively explaining why certain of the proposed changes are inadvisable. Part of this process includes choosing our battles – agreeing on the critical positive reforms and agreeing on the poison pill deal killers.
- It wasn’t all bad: The last draft of the Senate bill contained a number of helpful provisions that we would like to advocate for inclusion in 2016 legislation. Here are some of the key ones:
- Eliminate the requirement that each investor file all of the documents regarding the regional center and the project if the investor certifies that such records are incorporated by reference;
- Allow for a somewhat expanded use of tenant occupancy jobs;
- Positive language regarding the binding nature of an exemplar approval;
- Allow for investors in a terminated or debarred RC, NCE or JCE to make an investment in another project within 180 days. In such event, the conditional residence period is 2 years after the date of the subsequent investment;
- Allow for an investor to be admitted as a permanent resident, rather than a conditional resident, if conditional residence is delayed by, for example, quota backlogs;
- Provide for TEA designations to be valid for a 2 year period;
- Provide that a position or job that is filled by more than one employee may be considered full-time employment;
- Allow for a child who has reached age 21 at the time the conditional residence of a parent is terminated to continue to be treated as a child for purpose of a subsequent petition if the child remains unmarried and the subsequent petition is filed within 1 year of the termination of conditional residence status;
- Provide for concurrent filing of adjustment applications;
- Provide for target processing times; and
- Provide for premium processing.
Proceed with integrity: The last salvo of 2015 should be the first on the docket in 2016. The “EB-5 Integrity Act of 2015”, sponsored by Senators Cornyn and Flake, was introduced at the end of the 2015 legislative process. Its two sponsors proved to be key in their opposition to the Grassley-Leahy-Goodlatte proposal.
The Cornyn-Flake Bill keeps most of the Grassley integrity provisions. However, it includes some key changes and deletions to make them more palatable and consistent with the realities of the EB-5 program, without reducing their impact on deterring fraud or deterring involvement in the program on the part of individuals with histories of securities, criminal or national security concerns. It studiously avoids taking on the controversial issues, most especially the 10% direct job requirement, the change in TEA definition and procedure and the increase in investment amount with its accompanying retroactivity baggage.
It will be interesting to see whether Senator Grassley and Congressman Goodlatte agree to advance this bill, which could pass by unanimous consent in both Houses, and which would address Senator Grassley’s oft-repeated concerns regarding the integrity of the EB-5 program.
- Compliance, compliance, compliance: Whether it’s the Grassley-Leahy version or the Flake-Cornyn version, there will almost certainly be a new law in 2016 containing the integrity measures. The time to develop compliance regimens to deal with these changes is now. When the changes happen, they will not be a surprise. We are working now with our clients to develop compliance procedures that will be helpful today and necessary tomorrow.
Retroactivity redux: Retroactivity was certainly one of the most controversial issues in the 2015 process. It started with an attempt to apply changes retroactively to EB-5 investors who had already invested and filed their petitions. By the end of the process, that attempt – which was patently unfair, possibly illegal and would have destroyed the credibility of the EB-5 program – had been rebuffed.
However, in the end, the legislation would have applied retroactively to most EB-5 projects, including prospective investors in those projects. This would have led to the anomalous result of projects that some investors had invested in being compliant for those investors while being non-compliant for any future investors.
Then, at the last minute, the drafters attempted to retroactively apply to pending investors a new reserved visa scheme that would have resulted in pending investors adding 10 or more years to their waiting times, which they never could have anticipated when they made their investments.
Retroactivity in all of its forms and guises must be a united area of opposition in the 2016 legislative process.
The controversy that is TEAs: We almost certainly would have had comprehensive EB-5 legislation in 2015 were it not for the rural-urban divide in the TEA controversy. Encouragement of rural investments – and concomitant discouragement of investments in urban areas – was the major issue that brought Senators Grassley and Leahy together. It is also the major issue that united Senators Schumer, Cornyn and Flake in opposition. Although the TEA provisions went through many iterations in many drafts between September and December, it was never completely resolved.
At the same time, it was the major issue that divided some EB-5 industry groups. Perhaps if the industry groups could bridge their divide, it would provide a starting point for the legislative process in 2016. This is a difficult issue, but it is not an unresolvable issue.
The numbers game: This is a serious problem for the future of the EB-5 program. With no legislative change, we are still faced with the fact that Chinese investors will have ever-increasing quota backlogs that, in the end, will make the EB-5 alternative a highly unattractive one for many Chinese investors. With all of the discussion about this problem, almost inconceivably the legislative “solution” would have been to seriously exacerbate the problem. The draft bill would have created three pockets of 2,000 “reserved visas” – rural, urban poverty and $1 million investors – that likely would not have been filled and that definitely would not have been filled by investors with pending petitions. This would have meant that a very high percentage of pending investors, as well as future investors who choose to invest in the most popular urban TEA projects, would have had to compete for 4,000 numbers (approximately 1,300 investors per year). Needless to say, this would have been anathema to the program.
There are various possible solutions that hopefully will be the subject of serious discussion in the coming year. These include: eliminating derivative spouses and children from the 10,000 numbers; “recapturing” unused EB-5 numbers; “borrowing” numbers from the diversity lottery category; removing the per-country limit for EB-5. The most obvious solution of simply increasing the number of EB-5 visas is a political non-starter.
This is a key battleground for the future of the EB-5 program.
- Advance planning is key: We are working right now to do everything possible to ensure that our regional center, project developer and investor clients are prepared for the coming changes. Projects can be structured and offering documents drafted so as to meet the dictates of present law and so as to not require amendment to comply with anticipated new laws. Regional centers can establish compliance procedures today that are valuable in the event of no change in the law, and critical in the event of changes. Investors can choose projects and structure source of funds in a way to maximize the chances of any disruption in the event of anticipated legislative changes.
The Klasko EB-5 Team will be issuing separate blogs discussing advance planning for regional centers, project developers and investors in the coming days.