On Jun 14 2013 by H. Ronald Klasko

New USCIS EB-5 Policy Memorandum Mostly Gets It Right

Following a long and deliberative process, including three opportunities for public comment, USCIS issued its long-awaited universal EB-5 Policy Memorandum on May 30, 2013.  For the most part, it was well worth waiting for.

The Policy Memorandum formalizes legal positions that the EB-5 community has been advocating (no questioning of geographical boundaries of a state-designated TEA; indirect jobs can be created outside of the regional center boundaries; EB-5 money can be used to pay off bridge financing; a material change after an approval of an I-526 is not in itself a basis to deny an I-829).  It formalizes and expands upon two important legal principles (adjudications are based on the preponderance of the evidence legal standard and USCIS examiners should give deference to previous decisions).  Finally, it stakes out favorable positions that are unexpected but helpful in making the EB-5 program more successful (elimination of reliance on industry codes; elimination of necessity of amendments; clarification of what is required for a hypothetical project; unconditional adoption of the fund model).

This blog, in two parts, will explore all of these concepts, as well as other new clarifications contained in the Policy Memorandum.

Let’s start with the headline.  A regional center is no longer restricted to its approved industry codes, economic methodology or even geography.  Investor I-526s can be filed for projects in different industry codes, different geographical areas and using different economic methodologies, rendering the amendment process optional if the investors want assurance that USCIS will agree with these changes.  Although the Memo does not fully explain this, I believe there are big differences between projects that use economic methodologies and industry codes for which the regional center is not approved on the one hand, versus projects that are in geographical areas for which the regional center is not approved on the other hand.  The reason is that the Memorandum expressly states that industry codes do not limit economic or job-creating activity of the regional center and are just for reporting purposes.  Given this (correct) statement, an otherwise approvable I-526 petition should not be denied for any issue relating to industry codes.

On the other hand, the Memo does provide standards for determining acceptable regional center geography (“the proposed area is contributing significantly to the supply chain, as well as the labor pool, of the proposed project.”)  Significantly, the Memorandum eliminates the disturbing language in the third draft EB-5 Memo which required proving that the proposed economic activity “will substantially promote economic growth in the proposed area as whole.”  Although not clear, it appears that the net result of these changes is that an I-526 petition filed in a contiguous geographical area outside of the approved regional center geographical boundaries would have to contain a justification for expanding those boundaries; and the investors would have to take a risk that the justification will be accepted unless the regional center files for and obtains a geographical amendment.  What is certain is that regional centers now have greatly expanded capacity to sponsor projects without extensive amendment delays and that project developers have an expanded list of regional centers with which to negotiate for project sponsorship.

The next headline relates to the fullest discussion yet of the USCIS position on “material change”.  The bottom line is that much of the policy contained in the December 11, 2009 Neufeld Memorandum, which established the material change standard, has been rescinded.  The changes are a step forward, but issues remain.  For the first time, USCIS attempts a definition of “material change”, adopting the definition of a material misrepresentation in the denaturalization context (“a change in fact is material if the changed circumstances would have a natural tendency to influence or are predictably capable of affecting the decision.”)  This standard seems to be singularly unhelpful in the EB-5 context.

Although the definition remains obscure, the result becomes more predictable.  If there is a material change between the time of the filing of the I-526 petition and the time the investor obtains conditional permanent resident status, a new I-526 petition is required (to the dismay of any child who has aged out prior to the filing of the new petition).  The major step forward relates to material changes that occur after conditional permanent resident status is obtained.  In that event, the investor can remove conditions as long as the investment has been sustained and the jobs have been created, even if there is a completely different business plan.  However, in the event of a different business plan, USCIS would examine the new facts for compliance and not defer to any approval at the I-526 stage.  This makes perfect sense and is completely consistent with advocacy efforts ever since the publication of the Neufeld Memorandum.  Cheers also to USCIS for stating that it is developing a mechanism for regional centers to notify USCIS regarding material changes (and presumably to get an advance determination of whether there is a material change).

The changes regarding bridge financing both formalize evolving USCIS policy and go a few steps further in a favorable direction.  First, the Memorandum contains a helpful statement of what appears to be current policy: “Generally, the replacement of bridge financing with EB-5 investor capital should have been contemplated prior to acquiring the original non-EB-5 financing.”  However, the Memorandum expands this policy to be responsive to realities of the business world.  No longer does the EB-5 financing have to be contemplated prior to acquiring the temporary financing.  In the final Memo, the issue is whether the financing to be replaced was contemplated as short term temporary financing which would be subsequently replaced – even if the anticipation was that it would be replaced by non-EB-5 financing which fell through.  Many existing and future projects will benefit from this interpretation.

Over the years, USCIS has taken multiple contradictory positions on the issue of whether indirect and induced jobs must occur within the geographical boundaries of the regional center.  The most recent policy seems to have been based on correspondence between USCIS Director Mayorkas and Vermont Senator Leahy, which allows counting of jobs outside of the regional center if appropriate justification is provided.  The Policy Memorandum appears to eliminate any geographical boundaries of indirect jobs whatsoever: “indirect jobs can qualify and be counted as jobs attributable to a regional center, based on reasonable economic methodologies, even if they are located outside of the geographical boundaries of a regional center.”  Presumably, no justification is required.

The Memorandum draws a distinction between two types of projects – “actual” and “hypothetical”.  A hypothetical project, which is sufficient to obtain approval of a regional center designation, must only contain “general proposals and general predictions” which enable USCIS to determine that the proposed regional center will more likely than not promote economic growth, improve regional productivity, enhance job creation and increase domestic capital investment.  It does not require a Matter of Ho-compliant business plan.  It does not require “organizational and transactional documents”, which presumably includes offering documents.  What degree of detail USCIS will actually require will become clearer as adjudications applying these standards are completed.  Hypothetical projects are not mentioned in regional center approval notices and receive no deference whatsoever in connection with the adjudication of investors’ I-526 petitions.

Actual projects, on the other hand, do require a Matter of Ho-compliant business plan and require “verifiable details” in order to be given deference in the adjudication of investors’ I-526 petitions.  If such details are lacking, USCIS can still approve the project as a hypothetical project.

Rather than treating an “exemplar” project as a third type of project, the Memorandum makes only brief reference to an exemplar as a type of actual project.  The exemplar requires submission of “organizational and transactional documents”, which apparently an actual project without an exemplar does not require.  The actual project is given deference with respect to everything except the “organizational and transactional documents”, and the exemplar is given deference with respect to all documents, including organizational and transactional documents.  In either event, the project is mentioned by name in the regional center approval notice.

The concept of “deference” appears throughout the Memorandum.  As stated above, actual projects receive deference.  Adjudication of project approvability for an I-526 investor receives deference for future investors.  Approved I-526s receive deference in connection with the I-829 condition removal petition if the business plan has been followed.

So what is deference?  It means that USCIS should not reexamine whether the business plan is comprehensive and Matter of Ho-compliant, whether the economic methodology is reasonable and whether any aspect of the project is legally sufficient.  The exceptions are if there is a material change, if misrepresentation or fraud is discovered or if there is reason to believe that there is an objective mistake of fact or law that was made in the earlier adjudication.  The problem is that this latter exception could swallow the rule.  What is probably meant is guidance to examiners not to reexamine every petition ab initio.  However, this language could be used by examiners to reexamine any approved petition based on that examiner’s belief that the law was improperly applied or that the facts were not completely understood.  Whether this deference policy really has teeth therefore remains an open question.

The next blog will discuss the remaining noteworthy provisions contained in the May 30, 2013 EB-5 Policy Memorandum.