Repayment of EB-5 Funds
Let's assume that the borrower has an opportunity to repay the EB5 loan to the NCE; that the job creation requirements have been met; but not all the I-829s have yet been adjudicated.
What are the Manager's options?
Carolyn Lee: The starting point is to determine what ‘investment’ means from USCIS statute, regulations, and precedent decision standpoint. The essential transaction that's regulated by immigration statute, regulations and precedent decisions is the transaction that is between the EB5 investor and the new commercial enterprise (NCE). That is the sole transaction and relationship that the term 'investment' refers to.
The problem is that USCIS compliance in adjudication has tended to apply the standardgoverning that fundamental relationship to other relationships that are present in an EB5 case like transactions between an investor and lenders to obtain lawful source of funds to be used for investment or the transaction between the NCE and the (JCE) job creating enterprise either in the form of a, EB5 loan, as is typical, or an equity investment. So that is a challenge we're dealing with.
The options I discuss with clients in this context
I start with what I think of as the proper interpretation of the relationship between the investor and the NCE. I lay out the confusion in adjudication that we see and how we manage that risk. And of course we’re talking about how we manage these risks during this time when we have visa backlogs, where I-829 adjudication could be delayed a year or perhaps longer.
- Option 1: transplant the model that we know is currently working, which is having a loan term that contemplates repayment once the I-829s are all adjudicated. Right now, we see 5-7 year loan terms and that should cover investors. So what we could do is calculate out what we think the backlogs will be and simply tack onto that period, so we can be assured that that term won't mature until the I-829s are all adjudicated in an era of backlogs. I expect we're going to hear from the commercial lawyers where they say this is not really workable or commercially feasible, but this is an option.
- Option 2: find ways to keep the funds from coming back into the NCE or lender even at maturity because the confusion has been how USCIS might view the scenario when the funds come back into the NCE or lender before I-829s are adjudicated. Importantly, just because we have a repayment to the new commercial enterprise, that that does not mean that we have had repayment or redemption of the investor out of the NCE in that investment transaction. But the concern USCIS has expressed appears to be that the funds are sitting with the NCE, so there's a risk that there may be an impermissible redemption. So in order to manage that risk, keep the funds from coming back into the NCE, and there are a number of different ways to achieve that.
- Option 3: stick to what I think the law says and the way USCIS compliance should apply that law such that the money can come back to the NCE at maturity, notwithstanding the fact that not all the I-829s are adjudicated and held there until the I-829s are adjudicated at which point the investors may be redeemed.
- Option 4: in the same vein, allow the funds to come back to the NCE and then be redeployed. Now, it’s important to state that what I think the law says is one thing, and that is not necessarily what I advise clients.
Robert Divine: I start from the premise that it doesn't really matter what I think the law is because I'm not making the decisions about whether to approve people's petitions. We can try to change the Government's mind on whole process, but until then what matters is what the decision maker thinks the law is.
We should be able to look at the regulations and follow them, but they are not clear or complete, and some of them are blatantly wrong, because the statute has changed since some of the key regulations were written. So it's confusing.
What the law says about the I-526 processing stage is that the EB-5 money has to be invested into the NCE. But in 'Matter of Izummi' USCIS said that in the context of indirect arrangements under regional center sponsorship, the full amount of the capital must be made available to the businesses most closely responsible for creating the employment on which the petition is based. I take that to mean the JCE: the job creating enterprise. EB-5 funds cannot be dissipated or reserved and not made available to that JCE and placed "at-risk" there. At the I-526 stage the EB-5 investor has to be in the process of making that investment. So you have to show that the money is going to end up at risk in the JCE.
Then at the end, at I-829 time, the regulation literally says, "the investor sustained the actions described in [the two paragraphs above]." The first paragraph above refers to a requirement that the NCE must have been established by the Investor in EB-5 process. Well, that requirement was removed in a statutory amendment in 2002. So ignore that.
But the second paragraph requires "evidence that the alien was actively in the process of investing the requisite capital." I think the government essentially thinks that "invest" still means the same thing it did at the I-526 stage, which is that the money has to remain at the JCE level and "at-risk" there, and not just in some sort of reserve parked beside it or anywhere else such as back up at the NCE level.
And in kind of an unpredictable part of that the May 2013 memo on pages 25 and 26, USCIS finally said what they mean: that the funds have to be placed "at-risk" throughout the petitioner's residence; that the required amount of capital has to be made available to the businesses most closely responsible for creating employment, that this "at-risk" investment was sustained throughout the petitioner's residence, and that the jobs were created.
So I read that to mean that they think the money has to remain "at-risk" in the JCE through the end of conditional residence.
When is the end of EB5 conditional residence?
By the way, when is the end of conditional residence? Is it when the I-829 is due, which is the date of the expiration of the two-year green card that the investors receive when they come in? Is it when the I-829 is filed (during the 90 days leading up to the end of the two years)? Is it when the I-829 is adjudicated, which could be two years after it was filed?
I think, and I've heard the immigration service attorneys recognize, that they might not be able to maintain a position that whatever the requirements are, they have to continue to be met throughout the period that the I-829 is pending. It's probably good enough to meet the requirement through the end of the two years. But who knows? The safe bet is to wait until adjudications, but we hope to get some clarification on that at some point.
Carolyn nicely walks through some of the ideas of how to mitigate the risk that is created by the prospect of money being liquidated out of the JCE early, because there's risk in that happening, and now you're in risk management mode. The safe thing to do is to make arrangements that keep that from happening, and if you can’t because, for instance, you've got a borrower who just refuses to agree to that and it's too good a deal to pass up, then you've got to disclose the risks to your EB-5 investors, which is very awkward when you have the immigration service reviewing the very document where you disclose the risk. So you consider these different options and try to figure out what's best and see what people can live with.
It's not clear if any of those risk management options will work or all of them will, but one thing we do know from Matter of Izummi is that just because somebody may have gotten away with something before doesn't mean that in your case you'll get away with it. We've been trying to get USCIS to find a more business friendly position on this for years, and each time they say, "That's a good question, we need to think about it and come up with something," but they have not done it yet.
Carolyn: And that's exactly why I think Robert and I have just slightly different perspectives on our tolerance level for USCIS positions where we think they may depart from what we think the law says. Let's assume that we agree on what the law says. Robert takes the very practical view that it doesn't matter what we think, it matters what USCIS thinks, and that's absolutely true to responsibly advise clients.
Having said that, I think it's very important to assert at every opportunity and to advocate for what we believe is the correct interpretation of the law because I think ultimately that's how we achieve greater predictability in EB5. We can't have predictability when we have the Service changing its mind and in ways not well grounded in the law.