The EB-5 Reform and Integrity Act of 2022 brought many changes to the EB-5 program. For the latest information, please click here.
On June 14, 2017, USCIS published important revisions to specific portions of the USCIS Policy Manual relating to EB-5. The changes are highly significant, and all interested parties are urged to comment by the comment deadline of June 28, 2017. The changes are apparently effective upon publication and apparently apply to pending petitions, although changes may be effectuated following analysis of public comments.
For those keeping score, the changes include three significant wins for the EB-5 community and three significant losses. The losses are very noteworthy and will have significant impacts on many investors.
Sustainment of Investment
Let’s start with sustainment of investment. Readers of my blog are aware of two legal positions that I have long taken on the issue of sustainment of the investment. The USCIS has now accepted one of these positions and thus far rejected the other.
For reasons specified in detail in other blogs, I believe that the law requires that the investment be at risk for purposes of job creation, but there is no requirement that the investment be sustained at risk after the job creation – – just that the investment be sustained. USCIS continues to reject that position, requiring that the investment remain at risk throughout the I-526, conditional immigrant visa application and conditional residence stages of the process.
For those interested in commenting on this issue, the following are 3 paragraphs from my blog dated August 18, 2015 entitled: “ The Draft EB-5 Policy Memorandum: Some New Policy Created, Some Old Policy Sustained”:
“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”.
The biggest change in the Policy Manual – – and biggest win for the EB-5 community – – almost shockingly is relegated to a cursory footnote. In the footnote, USCIS for the first time agrees with a position that I and others have advocated that the requirement to sustain the investment ends at the end of the two years of conditional residence and does not continue until I-829 approval. In the footnote, USCIS states directly: “an investor does not need to maintain investment beyond the sustainment period”, which is specified as being the two years of conditional residence.
In my opinion, this is clearly correct. The analysis starts with the statute – – Section 216A (b)(1)(B) of the Immigration and Nationality Act requires that USCIS make a determination of qualification for condition removal as of the second anniversary of the alien becoming a conditional permanent resident and to do so based on whether, as of that time, the alien “was sustaining” – – past tense.
The regulations are consistent with the statute. Both 8 CFR § 216.6(a)(4) and § 216.6(c) require the I-829 petition to include evidence that the investor “sustained” – – past tense – – the investment at the time of filing the I-829. The regulations specifically state that “the alien will be considered to have sustained the actions required for removal of conditions if he or she has…continuously maintained his or her capital investment over the two years of conditional residence.” 8 CFR § 216.6(a)(4)(iii). 8 CFR § 216.6(d)(1) states that the approval of the conditional residence application results in the removal of the conditions on the permanent residence status “as of the second anniversary of the alien’s entry as a conditional permanent resident.” Both the statutory and regulatory language make it clear that the issue is whether the alien qualified as of the date of the second anniversary of conditional residence.
One can only speculate why it took USCIS so long to agree with this position in writing. Perhaps USCIS has now realized how unfair it is to require investors to sustain their investment almost indefinitely – – I-829 petitions are now taking 2 1/2 to 3 years to adjudicate – – and how difficult it might be for USCIS to defend that position in federal court, especially given the USCIS regulation (8 CFR § 216.6(c)) that requires an I-829 to be adjudicated within 90 days. Whatever the reason, the EB-5 community should comment in support of this important provision.
With that said, the immediate applicability of this change is subject to two caveats. First, since these changes are subject to public comment, is there any possibility that USCIS could change its position after public comment? Second, the applicability of this provision to specific investors and specific projects may be subject to countervailing language in the project documents, which may preclude return of money to investors until a time subsequent to condition removal.
Impact of Regional Center Termination
The hot issue of the impact on investors of a termination of a regional center also produced one win and one loss. It is very unfortunate that USCIS has taken the position that the termination of a regional center is a material change to an I-526 petition, resulting in any investor in a project sponsored by that regional center who is not yet a conditional resident having to file a new I-526 petition with a new priority date. I strongly believe that this position is incorrect and is subject to challenge in federal court. However, before that happens, hopefully commenters will explain to USCIS why it should reconsider its position.
The problem stems from the fact, as so frequently noted, that there is no reliable definition of material change. I have often stated my position that a material change is one that makes an approvable petition un-approvable, or an un-approvable petition approvable, or a change that affects the two determinative issues for condition removal – – qualifying investment amount and number of jobs. Anything else – – most especially the regional center in which the investor has not invested – – should clearly not be a material change to the investor. The position USCIS has taken in the Policy Manual is yet another example of punishing a good faith investor who has done nothing wrong, who has invested the requisite amount, whose investment has resulted in the requisite job creation. Why would USCIS want to punish that investor?
I should note that this USCIS position on the change of regional center before conditional residence is likely to have a far greater impact in the future than it has had in the past. There are two reasons for this. First, USCIS is terminating regional centers at an unprecedented rate. Second, the pending EB-5 legislation will impose far greater fees, responsibilities and liabilities on regional centers, which will likely result in many regional centers voluntarily relinquishing their regional center licenses. Presumably, the policy applicable to regional center terminations would apply to regional centers that choose not to continue their regional center status, requiring far more investors to file new petitions with new priority dates even if there is no change in their investment.
The good news on this subject is that USCIS has agreed that if a regional center is terminated after the investor is a conditional resident, it has no impact on the investor. In fact, there is no requirement that the project in which the investor has invested find another regional center sponsor in order for the investor to remove conditions. This position is sensible both as a matter of law and policy.
Redeployment of Funds
Finally, the requirement to redeploy investment funds is front and center in the Policy Manual changes. Almost everything regarding the USCIS policy on this subject is problematic. In fact, unless changed, the provisions in the Policy Manual would create at least six new grounds for denial of I-526 petitions that have no basis in statute, regulation or precedent decision and which are created out of whole cloth. These changes are very significant and deserve comment from as many members of the EB-5 community as possible.
USCIS starts by restating the Matter of Izummi requirement that, in order satisfy the “at risk” requirement before job creation is satisfied, the investor’s capital must be made available to the business creating the jobs. Nothing new there. USCIS also defines “at risk” as requiring a risk of loss and a chance for gain. Again, nothing new.
After that, USCIS creates a litany list of new requirements with no basis or precedent in the law. In discussing what must happen to the investor’s capital after the job creation requirement is satisfied, USCIS reiterates its position that the capital must be maintained “at risk”. However, instead of utilizing the above noted definition of “at risk” before job creation, which is the definition in Matter of Izummi, it creates an entirely new set of requirements apparently under the guise of the requirement to keep the capital at risk. With no citation to any statute, regulation or precedent decision (because none exists), USCIS creates the following all new requirements that would apply, in the case of a loan model project, from the date the loan term ends and the loan is repaid, or in some cases from the date of loan prepayment or a sale of the project, through the end of the two years of conditional residence – – which, in the case of Chinese investors, could be a large number of years. These new requirements include:
- The funds must be redeployed in a manner “related to engagement in commerce”, which is defined as the exchange of goods or services. Not only does this requirement have nothing to do with all previous definitions of “at risk”, but it is difficult to fathom what it actually means. For example, is investment in an already constructed hotel “engagement in commerce”? How about investment in a REIT?
- The redeployment must be “consistent with the scope of the NCE’s ongoing business.” Again, this has nothing to do with the USCIS requirement to maintain the investment at risk. What if the investment is in a direct EB-5 project or a regional center project using the equity model? What would be consistent with the scope of the NCE’s business? In a loan model, does this mean that the Operating Agreement of the NCE must make reference to all possible industries for future loans? To redeployment in a specific type of project.
- If it is a loan model, redeployment is allowed for “similar loans”. What does this mean? Similar industry? Similar borrower? Similar type of project? Similar length of loan? Similar geography? Similar loan terms? None of these issues has anything to do with statutory or regulatory issues that should impact the approval or denial of an EB-5 petition.
- Redeployment can be into “municipal bonds, such as for infrastructure spending, as long as the bonds are within the scope of the NCE.” What does this have to do with the “at risk” requirement? Does the Operating Agreement have to make specific reference to municipal bonds? Infrastructure?
- Redeployment must take place “within a commercially reasonable time”. Is USCIS really going to be approving or denying investor EB-5 petitions based on whether the NCE took two months, four months or six months to find another project in which to redeploy the money? Will the NCE be in a race against the clock to redeploy without necessary diligence? What about the time it may take for investors to concur?
- Redeployment “must be adequately described in the I-526 record.” What could this possibly mean? Does it mean that, unless the Operating Agreement and PPM make specific reference to redeployment, the I-526 petition will be denied? Does the I-526 record have to reference a specific type of redeployment or just redeployment generally? Will an amendment to the I-526 be required? Will it be a material change?
Unless reconsidered following public comments, these six new requirements have the potential to wreak havoc on pending and future I-526 petitions, given their breadth and ambiguity. These requirements seem to have been formulated for regional center loan model projects and have no logical applicability to either direct EB-5 projects or regional center equity model projects. Since these requirements have never appeared before in the public realm, if USCIS does not reconsider them, it should certainly apply the requirements prospectively and not retroactively. More appropriately, since these are new substantive requirements, they should be published as proposed regulations requiring notice and comment and without immediate effect pursuant to the Administrative Procedure Act. This is especially critical given that many I-526 petitions – – and previous redeployments – – would not contain the requirements that USCIS is now specifying.
On this issue, the good news pales in comparison to the highly troublesome changes. USCIS states that, if the redeployment occurs during the investor’s conditional residence, the redeployment does not affect the investor’s petition even if the jobs were not created pursuant to the original business plan and even if redeployment was not contemplated in the I-526 petition, presumably as long as the redeployment creates the necessary number of jobs.
An analysis of the “at risk” requirement is in order to see how far off target USCIS has veered in the new Policy Manual requirements on redeployment.
The only reference to “at risk” in the statute or regulations is in 8 CFR §204.6(j)(2),which requires the investment to be “at risk for purpose of generating return on the capital placed at risk.” 8 CFR §204.6(j)(4) creates a separate requirement that the at risk investment must create 10 jobs. Matter of Izummi defines at risk as requiring a chance of gain and risk of loss and requiring the capital to go to the job creating entity to create the jobs. Nothing in the statute, regulations or precedent decisions requires the capital to be at risk after job creation. If USCIS wants to create an at risk requirement after job creation, there is no basis for utilizing a different definition of “at risk” than is contained in 8 CFR § 204.6(j)(2) and Matter of Izummi.
In addition to the legal deficiency, there is a serious issue of securities law (which I will leave to others to explicate) as well as an issue of policy and transparency for investors. Investors certainly should be encouraged to do thorough due diligence on any job creating project before investing. However, as a practical matter, at the time of investment, neither the investor nor the NCE into which the investor invests will know of any future project into which the money may be redeployed. There is therefore no way that the investor can exercise due diligence with respect to the redeployment being required by USCIS. This requirement contravenes the policy of transparency for investors, whose money will ultimately be required to go to projects that neither they nor any government agency will review or monitor. This can lead to great levels of investor dissatisfaction and lack of controls over redeployment of investors’ money.
In order to alleviate this problem, if USCIS is going to require that the investment be sustained at risk, it should use the normal definition of at risk as being an investment with a chance of gain or a risk of loss. This would allow for the redeployment to be into marketable securities or any investment vehicle that is not guaranteed by the government. Such at risk investment vehicles can be articulated in the offering documents, which the investor can review in advance, enabling the investor to make a rational and knowing decision on whether to invest. Clearly, this would not subvert Congressional policy, since the investment would have already been used by the job creating entity to create the statutorily-required number of jobs. Since job creation is no longer an issue, the only issue would be sustaining the investment in a non-guaranteed, at risk investment vehicle.
In summary, the changes to the Policy Manual regarding redeployment require the following:
- The investment must be at risk until the end of the two-year conditional residence At risk means “engaged in commerce” and many other new requirements.
- Redeployment is not a material change as long as the jobs are created pursuant to the business plan and the six new criteria specified in the Policy Manual are met.
- Redeployment after conditional residence is not a problem even if the jobs were not created pursuant to the business plan as long as the redeployment creates the jobs.
- The redeployment period ends at the end of the two years of conditional residence, at which time the investor can get his money back.
I urge my fellow members of the EB-5 community to comment on these changes. In the meantime, we recommend two action items:
- Review all project documents for language relating to when investors are eligible for return of the proceeds of their investments. Following this review, determine whether to consider returning investment proceeds to the investor, factoring in the needs of the NCE and JCE for the funds and the possibility – – hopefully small – – that USCIS might change its position.
- Review all project documents regarding compliance with the new redeployment requirements. Based on that review, make appropriate revisions to documents before filing. For pending applications, determine whether amendments to documents are advisable.