Redeployment of EB-5 Capital
Robert Divine: An important question in an EB-5 project is how investors can 'maintain their investment' in the entity they’re investing in and in the job creating enterprise (JCE), in order to have I-829 approval for permanent green card. To some extent the issue puts the immigration interest at odds with the economic interest of the issuer and the JCE who wants to liquidate as early as possible, pay everybody off and have a profit, and even of the investor, who wants an early exit if possible.
The EB5 investor needs to comply with the requirement that the investor maintains his investment through the end of conditional residence. Nobody knows whether that moment is when the I-829 is due two years after the investor has entered or whether it’s whatever later time when USCIS finishes adjudicating the I-829. But the Eb-5 compliance is guided by USCIS, where it says that ‘to make the investment’ means that the capital has to make its way to the JCE, all of it. And it would seem that USCIS believes that ‘to maintain the investment’ means to keep it at the JCE level, all of it.
So the worry is, if there is a liquidity event that typically would be either a sale or a refinancing of the JCE, then the investor’s money won’t be there; it will be paid back through distribution or loan repayment to the new commercial enterprise NCE. There are quite a few risk management tools to deal with this.
Option 1; The documents don’t allow redistribution
One is for the documents to just say that that can’t happen, that there will be no liquidity event before the end of the conditional residence and to be super safe, before the adjudication of the I-829’s of all the investors. But that can be a long time. It's unpredictable and a lot of borrowers, in particular, won't necessarily put up with it.
Option 2; A carve-out
Thus as a part of eb5 process other strategies are deployed. One would be kind of a carve-out where the JCE could be sold to somebody else but, the loan from the NCE stays in place with the buyer so the foreign investor's money is still at risk in that enterprise and they just have new owners of the JCE to depend on to repay that loan.
Option 3; Hold money in NCE
Another strategy is to hold the money at the NCE level and not distribute it to the investors. Just as it's not good enough to just put the money in the NCE and leave it there-- it has to get to the JCE-- it might be ultimately required by USCIS that it stay there to the end of conditional residence. We do know, though, that there have been a few cases where that is what happened and to my understanding, USCIS has approved many of the I-829s that were affected. I think those were really kind of unpredictable events that led to the liquidation and USCIS was merciful. Unfortunately, USCIS doesn't write opinions when they approve. They just do it. So nobody has anything to hang their hat on and USCIS has not made public pronouncements about this.
Option 4; Reinvest somewhere else; Redeployment
Another EB5 strategy is for the NCE to plan to receive the liquidation and to reinvest it somewhere else, essentially a redeployment of capital in another job creating enterprise, to create the argument that the funds remain "at risk" in job creation. That dovetails nicely with what documents often include to meet cautiously the requirement that the NCE be an "ongoing business" -- they say if and when money is repaid to the NCE, the NCE could, with the agreement of whatever investors want to stay around, redeploy that money in another project. The language often gives the investor the choice whether to join in the reinvestment, but if the liquidation from the JCE precedes that investor's end of conditional residence, ostensibly he will choose to try to protect the green card and stay in for another round.
Of course, it is not clear whether USCIS will find a redeployment sufficient, and even if it could be sufficient it is not clear what conditions the reinvestment would need to meet -- i.e., within the same or another regional center, within the same or another TEA, etc. To avoid a problem of making a material change through the reinvestment, the documents could say from the beginning that this is the plan: if the money gets repaid, the NCE will be redeploying.
Shared Risk Management
What ultimately I want to mention is that the question here is how to write eb-5 business plan documents in the beginning that best deal with those issues at the end or what might come in the middle. And the investor who is evaluating these offerings has to realize that he (the investor) is participating in a risk management exercise that the issuer is leading. The issuer is deciding whether it is going to limit itself to not have a liquidity event before the end of conditional residence or whether it is going to allow itself to be more flexible. If the issuer takes the more flexible path, then the issuer is sort of foisting onto the investor a risk management approach that is not risk avoidance. The investor just needs to evaluate what kind of immigration risk he or she is willing to be involved with.
A USCIS Solution on the Horizon?
USCIS has repeatedly avoided addressing this issue publicly even though they recognize that it's a major issue. They say they are in the process of addressing it in the context of looking at the retrogression issue that makes this more poignant, because there will be a bunch of Chinese investors who take longer to get over here so that the end of their conditional residence is later in the project than it would otherwise have been, creating more chance for an early liquidation from the JCE.
And it's entirely possible that USCIS will come up with a really reasonable rule like this: if the jobs have been created for two years at any point in the process, then the investor's interest can be liquidated. Or they might pick a narrower position. There's no way to know until we actually see what they write down.
Rupy Cheema: So you're saying that it could be determined on an investor-by-investor basis? Because some investors may choose to have their EB5 capital redeployed, some may not. I remember talking to you earlier regarding loan documents that say the loan will be repaid back in tranches if the investor’s I-829 is approved and you mentioned that USCIS could say that it is essentially a loan?
Robert Divine: This is tricky. If you craft documents so that an investor can choose to pull out the minute he gets I-829 approval, you run the risk that USCIS will say that it's tantamount to a loan by the investor to the NCE, when the investor is supposed to be making an equity investment. But I think a lot of issuers have been saying the loan is for five years or some other period of time unless the investor has not yet reached the end of their I-829 in which case it will be later, as necessary. And I think those kinds of provisions have fared well even though arguably it's just a more clever way of saying the same thing.
Robert Cornish: People need to understand what redemption rights mean and what the terms of redemption are in the EB5 funding documents. Read them carefully because a lot of times, just because somebody says you're in a liquid investment, doesn't necessarily mean that you get your money right away. Most bonds, especially in a real estate context, will add certain provisions which provide for the liquidation of an interest, probably within 180 to 240 days. Even then, they're only obligated to give you some percentage of that within a certain period of time and then the rest whenever they get it. And then there's the provision of whether the manager can freeze redemptions or not, notwithstanding everything that Mr. Divine just talked about.
Michael Homeier: Another thing to keep in mind; investors want to know what the issuer's policy on redeployment is. Robert mentioned redeployment that would be essentially at the agreement of the investors. We believe that's a favorable provision over a provision that says that management will redeploy the funds at its own discretion into whatever investment it believes is appropriate.
We've seen documents that have been drafted where the investors have no voice in the redeployment investment decision. It's one thing to put 50 pages out describing what the EB-5 investment terms are going to be, but then if you have a provision where management can decide to redeploy into an investment of its own choosing without investor buy-in, then you've got a huge risk that you're going to have to address with investors, warning them that they have no idea what the follow-up investment is going to be.
But if we don't have details to disclose, maybe that's because we haven't picked an investment yet; we don't know what it's going to be and you're essentially along for the ride. We've given you all this detail about the EB-5 investment but we don't know what investment we would redeploy into, and financially everybody could do fine on the EB-5 investment and then run into difficulties on the redeployment investment.
So I believe it to be strongly best practices for the investors to be given the opportunity to have a voice in not only whether a redeployment would take place, but also into what investment.
Robert Cornish: Investors and funds ought to be careful of using the language, "in the manager's sole discretion." That is a Pandora’s Box of issues that in the due diligence process really needs to be flushed out. If you're running an EB-5 program, you need to be prepared to tell your investors exactly what you're planning to do or what your processes and procedures are.
Darren Ofsink: I think that with many limited partnership agreements or operating agreements, in any context, you're going to want to have a list of things that the manager can't do without at least getting a consent from the majority of the members and redeployment should definitely be one of those things. At the very least, there should be disclosure to all the members of some kind of vote or written consent where at least the majority approves.
Michael Homeier: We certainly agree.