On Apr 11 2016 by H. Ronald Klasko
Two of the hottest topics in EB-5 are the Chinese quota backlog and the USCIS still-unresolved position on whether EB-5 investments must be sustained at risk – or merely just sustained – after the jobs have been created.
At the confluence of these two issues is the issue of “redeployment” of the investors’ money following the repayment of the loan by the JCE to the NCE. This blog will attempt to clarify some of the issues surrounding this concept that is often discussed but not necessarily fully understood.
Let’s start with the basics. Traditionally, most loans from the NCE to the JCE have been 5 year loans. In most cases, that term of the loan was sufficient to enable the NCE, upon receipt of the repayment of the loan, to pay the investment money back to the investors in the NCE, who would normally have received their permanent green cards by the end of the 5 years. That is no longer the case for Chinese investors for whom quota backlogs will result in their not receiving their condition removals until some number of years after the traditional 4 to 5 years.
Many EB-5 projects, anticipating this possibility, have drafted offering documents to provide for longer loan terms, often with possible 1 year extensions beyond the 5 years at the option of the lender, the borrower or both. Some deals provide for multiple 1-year extension possibilities. For some developers, this is a welcome development. They are more than willing to have access to the low-cost EB-5 money for longer periods of time. From the investors’ point of view (assuming they understand the issue), there is no disadvantage to an extension of the loan term since they cannot receive any of their investment amounts during the extended time until their conditions are removed.
In other deals, either because the offering documents do not provide for extensions, or because the extensions are not exercised by one party or the other, the loan proceeds will be repaid from the JCE to the NCE long before the NCE is able to repay the investors. The issue then is what will the NCE do with the money. USCIS has been unwilling or unable to clearly articulate its position on whether the NCE can simply hold the money until the investors are repaid since the jobs have already been created with the EB‑5 money. After being asked this question many times at various stakeholders’ meetings and other forums, USCIS finally articulated a policy – or rather a draft policy – in its August 10, 2015 Draft Memorandum. This draft policy states that the NCE cannot simply hold the money since the investment must not only be sustained, but must be sustained “at risk.”
I have previously articulated my position as to why I believe this draft position is legally incorrect in a previous blog and in my comments to the Draft Memorandum. See my blog entitled “The Draft EB-5 Policy Memorandum: Some New Policy Created, Some Old Policy Sustained” (August 18, 2015). In summary, my reading of the statutory and regulatory language is that the investors’ investment in the NCE must be sustained, the deployment of the investment money from the NCE to the JCE must be at risk, but there is no requirement that the investment must be sustained at risk in the NCE after the money has been used for its job creation purposes.
Unless or until USCIS agrees with my position, we are advising both our developer clients and our investor clients to deploy the money in some manner that will meet the USCIS requirement that the funds remain at risk. Unfortunately, to this day, USCIS has not clearly articulated what would be necessary to meet this requirement after the jobs have already been created. Let’s set out the extremes. On the one hand, it would appear that putting the money into a bank account or a treasury bill would not qualify. On the other hand, there should be no requirement that the investment money be used to create jobs, be deployed to the same JCE, be used in the same geographical area, be used in the same industry. So what’s left? Presumably almost anything. The NCE can loan the money to any developer for any project in any location. It can be the same developer or a different developer. We are working on various options for investment vehicles that would be at risk, but at minimal risk.
Various other issues must be addressed. The following are some of them.
Do the investors have a right to approve the redeployment of the money? Is the redeployment a new offering that requires new offering documents? Can the general partner or managing member of the NCE be given the authorization in advance to make these decisions? What if most of the investors agree to the redeployment, but some do not? Although I have my opinions on these issues, I defer to EB-5 securities counsel to resolve these issues and to provide their opinions of the impact of the securities laws.
One issue that has come up and that will come up more frequently is the issue of whether investors who have removed conditions can have their investment proceeds returned to them even though other investors cannot. Put another way, can the loan be repaid from the JCE or the new borrower to the NCE solely with respect to certain investors at staggered times? This is especially critical in projects that include both Chinese and non-Chinese investors, since the non-Chinese investors may well be able to obtain condition removal within the traditional 4 or 5-year period. Again, I defer to securities counsel on how best to draft the documents to accomplish this purpose, but as immigration counsel we focus on making certain that this issue is addressed in each of our projects.
The issue of redeployment also creates a serious marketing issue. Let’s assume that the marketing agent and the investors have done all of the necessary due diligence that has resulted in their agreeing to invest in an NCE that will be loaning the money to a particular developer and a particular project. What good is that if, in the end, the money is going to go to a developer and a project of which the agent and the investor know nothing. This issue needs to be addressed in a manner that will satisfy the interests of the agent and the investor. For the projects we represent, we are endeavoring where possible to address the issue of where and how the money will be redeployed at the time of the original offering in order to address these concerns to the greatest extent possible.
The best solution to all of these problems would be one of two possible developments:
- Congress will address the EB-5 quota backlog problem, or
- USCIS will agree that the investor’s investment must be sustained at the NCE, but does not have to be sustained at risk.
Until one or both of these resolutions occur, the issue of redeployment will be a very significant one for developers, for general partners and managing members of NCEs, for migration agents and for investors.