On Aug 18 2015 by H. Ronald Klasko
The Draft EB-5 Policy Memorandum: Some New Policy Created, Some Old Policy Sustained
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USCIS issued a draft memorandum for public comment on August 10, 2015 entitled “Guidance on the Job Requirement and Sustainment of the Investment for EB-5 Adjudication of Form I-526 and Form I 829.” The comment period ends on September 8, 2015. Although it is just a draft memorandum, it is highly important because it sheds light on USCIS thinking — and apparent present adjudication policy — on several of the most important open issues in the EB-5 arena.
I have written this blog with the goal of inspiring readers to comment on the key issues during the comment period. I have not attempted to summarize the many aspects of the draft memorandum that repeat previous policy positions.
In summary, my opinion is that USCIS mostly got it right, with some very important exceptions. One exception is the requirement that all necessary jobs be created within 2 ½ years of the approval of the EB-5 petition. This policy — it is not the law — is based on a USCIS presumption that the investor will obtain conditional residence within 6 months after approval of the I-526 petition. However, 85% of such investors are from China and are and will be subject to quota retrogression, meaning that they will not be able to obtain conditional residence potentially for years after I-526 petition approval. Thus, the entire premise for the 2 ½ year rule collapses. It was a logical assumption that EB-5 quota retrogression would result in a change in USCIS policy rather than USCIS requiring that all jobs be created long before most investors will be able to even immigrate to the U.S. This is even more serious of a problem for direct EB 5 investors who need to come to the U.S. to manage their businesses, since all jobs will have to be created before they can immigrate.
The premise for USCIS not changing its policy — at least in the draft memo — is disingenuous. The premise is that “USCIS cannot predict when and to what extent visa retrogression will occur.” It almost seems as if this part of the memorandum were written 4 months ago before EB-5 quota retrogression for China became a reality. We now know when the retrogression will occur — now and for the indefinite future — and to what extent it will occur — the quota backlog is presently 2 years. The Department of State regularly provides the public — and presumably USCIS — updates on the likely extent of the quota retrogression. Hopefully, USCIS will relook at this policy and devise a policy more in tune with the reality of 2015 and beyond.
If all else fails, look at the law. The job creation regulation, 8CFR§204.6(j)(4), is divided into three parts – “general”, which applies to direct EB-5; “troubled business”; and “immigrant investor pilot program.” The “general” requirement (arguably not applicable to troubled businesses and regional center pilot program investors) is that the comprehensive business plan must show the need for at least ten qualifying employees within the next two years. The troubled business regulation requires that the I-526 petition include evidence that the number of existing employees will be maintained at no less than the pre-investment level for at least two years.
However, for the large majority of investors who invest in regional center projects, there is no two year job creation rule to be found anywhere in the regulations. Rather, 8CFR§204.6(j)(4)(ii) only requires evidence that the direct or indirect employment will be created from the investment, but with no time period specified whatsoever. 8CFR§204.6(m), which is the added regulatory section relating to regional centers, lists the requirement that the regional center describe how it will promote economic growth through job creation and how jobs will be created; but there is likewise no mention whatsoever of a time period. In the absence of such a two year time period for regional center investors, the only time period that exists is the requirement in 8CFR§216.6(c)(1)(iv) that the jobs be created “within a reasonable time” following the approval of the condition removal. See also 8CFR§216.6(a)(4)(iv).
The final USCIS Policy Memorandum should be consistent with the facts — including quota retrogression — and the law.
The other important provision that USCIS got wrong is the requirement that “the invested capital be ‘at risk’ throughout the sustainment.” USCIS does not provide an analysis of how it reached this result other than to state that “the statute and regulations, when read together, require [it].” I beg to differ. The statute and regulations do require that the investment be “at risk” in order for the I-526 petition to be approved. They also require that the investment be sustained throughout the period of conditional residence (or until the filing of the application for conditional residence — there is some inconsistency in the regulatory language as I have pointed out on previous occasions). However, there is no mention whatsoever of the “at risk” requirement in the statute or the regulations relating to condition removal.
Rather, the regulations (8CFR§216.6(a)(4)(iii) and §216.6(c)(1)(iii)) require proof that the investor “substantially met the capital investment requirement” and “continuously maintained his or her capital investment over the two years of conditional residence.” Two points are noteworthy. First, there is no mention of maintaining the capital investment “at risk.” The definition of “invest” in 8CFR§204.6(j) makes no mention of “at risk”; rather the “at risk” requirement is a separate regulatory requirement for the I-526 petition. Also, the regulation specifies that the “sustainment” requirement is limited to the “two years of conditional residence” – not to however long it takes USCIS to adjudicate the I-829 petition.
I submit that the only proper reading of the statute and regulations is that the investment must be “at risk” to create jobs, and the investment must be sustained through the two years of conditional residence, but the investment need not be sustained at risk.
This is significant because it leads to the USCIS conclusion in the draft memo that when a loan is repaid by the JCE to the NCE, the NCE cannot keep the money in an investment account, which arguably would not be at risk. Rather, the NCE must redeploy the investment capital into some “at risk activity” for the remainder of the sustainment period.
It is a positive development that USCIS has for the first time blessed the concept of redeployment, which our firm has been counseling our clients to utilize for quite some time. However, redeployment is at best problematic for investors, who presumably approve the loan to the initial job creating enterprise but who may not agree to redeployment to another activity or entity that may be riskier or that may provide an insufficient return. It is also problematic for the general partner or managing member of the NCE. Does he/she have to seek approval of the investors for the redeployment? What if they do not approve? How long can the loan repayment proceeds sit in an account before they are redeployed?
The root of the problem is that the requirement for redeployment is based on a misconception of the “at risk” requirement, which applies to the investor, and not to the NCE. If there is an “at risk” requirement at the I-829 stage at all, it applies to the investor’s investment in the NCE. It does not apply to the NCE’s activity after using the money for a job-creating purpose.
I was gratified to read that the USCIS agrees with a position that I have advocated both to my clients and publicly for quite some time. That relates to approving job creation at the I-829 stage. Specifically, what happens if the jobs were created but no longer exist by the time of the I-829 filing? The I-829 regulations require proving that the jobs were “created” — past tense — not that they presently exist. For the first time, USCIS agrees. Specifically, “USCIS will not require that the jobs still be in existence at the time of the Form I-829 adjudication in order to be credited to the petitioner.” This is true as long as “such jobs were considered to be permanent when created.” In other words, if the jobs are qualifying jobs — direct jobs, indirect construction jobs, etc. — and if the construction is completed or even if the direct employees are no longer needed, the condition removal can be approved as long as the original intention was that the jobs would last a sufficient period of time.
The draft memorandum contains some potentially significant language when it states that “the full-time employment criterion focuses on the position, not the employee.” This is also consistent with the position we have taken for many years, but not necessarily with the position that USCIS has taken in some of its decisionmaking. For example, in the direct EB-5 context, what if an NCE has 10 full time employees, but 2 of them are not qualifying employees? If the focus is on the position and not the employee, the I-829 should be approved. Unfortunately, USCIS adjudications have been to the contrary. It will be interesting to see if this foretells a change in adjudication policy.
A favorable clarification in the draft memorandum is the articulation of the policy that the investor can meet the “sustainment requirement” and have conditions removed even if the JCE goes bankrupt and will never be able to pay the loan. Actually, this conclusion makes perfect sense since the investor’s investment in the NCE was at risk and remains at risk, which includes the risk that it will never be returned. USCIS adds the caveat that, if the NCE has a claim in the bankruptcy that results in the repayment of a portion of the loan proceeds to the NCE, such amount must be redeployed in another “at risk” activity for the remainder of the sustainment period.
The draft memorandum concludes with a section on material change that repeats positions taken by USCIS in the May 30, 2013 Policy Memorandum but adds some new and potentially important gloss.
First, USCIS articulates perhaps more clearly than previously that a material change is a change that “will have a natural tendency to influence or it is predictably capable of affecting the decision.” Presumably, this means that even potentially significant changes to the project — changes that would increase the job creation, for example, or changes that could significantly alter the original business plan but in ways that do not affect job creation or anything else relevant to the immigration decision process — should not be considered material. This is significant.
Some of the most ambiguous language in the draft memorandum relates to whether there are different standards for material changes that occur after the adjudication of the I-526 petition but before the investor obtains conditional residence (the May 30, 2013 memo articulated that material changes after approval of conditional residence do not affect condition removal as long as the necessary jobs are created). I have previously advocated that material changes after the approval of the I-526 petition should not be disqualified under Matter of Izummi and Matter of Katigbak, which cases are cited for the proposition that a petition must be approvable when filed and that a material change to make an unapprovable petition approvable is not acceptable. Clearly, the fact that the petition was approved shows that the petition was approvable; and, therefore, the material change prohibitions should be inapplicable. It is not clear whether and to what extent the draft memorandum may be agreeing with this position or laying the groundwork for agreeing with this position.
For example, the memorandum states that if the organizational documents for an NCE contain a liquidation provision based on repayment of a loan from a JCE, the documents may be amended to remove such a provision in order to allow the NCE to continue to operate through the period of conditional residence. This appears to relate to investors with approved I-526 petitions who have not yet obtained conditional residence. This is clearly a material change occurring after the approval of the I-526 petition, and it would not be considered disqualifying.
In summary, there is much in the draft policy memorandum to be commended. Interested parties are urged to comment during the comment period on the key provisions that need some rethinking. Hopefully, some of the contents of this blog will find their way into these comments and into the final policy memorandum.