[FN1] that EB-5 investors’ investment be “at-risk” during the immigrant investor’s 2 year conditional residency period.
Most EB-5 deals on the market are structured with a 5 to 7 year investment horizon.
Because of the Chinese visa backlog, investors who are born in China don’t begin their 2 year conditional residency period until after this investment horizon ends.
As a result, the funds invested by Chinese investors must be “redeployed” into an “at-risk” project in order for all the investor’s to maintain eligibility for their permanent greencards.
Before the Chinese visa backlog, this requirement had cause some projects who were experiencing a return of capital earlier than the regular EB-5 project investment horizon some heartburn. For example, if the target business was bought by a new owner who didn’t want to inherit the EB-5 financing; or condo deals where the units were sold prior to EB-5 investors obtaining their permanent greencard. But the USCIS ignored multiple requests by affected stakeholders to clarify the rules on what needed to be done with the investor’s capital in these instances until the Chinese visa backlog became a real thing. and this started to affect ALL EB-5 projects across the board.
In August 2015, the USCIS released a draft policy on how they planned to address the Redeployment Issue going forward as discussed here in my article written in 2015. At the time, they had opened up a one-month comment period after which the USCIS went silent on this issue until a couple of weeks ago in June 2017. So here we are.
The EB-5 industry, has, in fact, been operating under the assumption that the USCIS would be implementing a redeployment policy similar to the August 2015 draft, and in fact it did. As such, the new policy is not that much of a surprise. However, since the August 2015 draft was released, the Chinese visa backlog has become even more serious and real life examples of deals faced with the redeployment issue have added to our collective knowledge base. So those in the industry, myself included, was expecting an opportunity to really engage with the USCIS on a policy level on what works and what doesn’t work when they were finally ready to revisit the issue. Instead, we just got the Policy Alert email on June 14, 2017 saying that the new rules were effective immediately – sigh. And for each new policy rule that was articulated, another new question is raised (as was with the August 2015 draft memo) leaving many of us scratching our heads. But enough complaining for now. Let’s take a look at what the USCIS is telling us.
1. The Redeployment Can Occur at the NCE Level
EB-5 101: The entity that the EB-5 investors invest into is called the NCE (New Commercial Enterprise). The NCE is managed by the EB-5 Sponsor (usually an affiliate of the Regional Center). The NCE’s funds are invested into a the project company which is called the JCE (Job Creating Entity).
Hypothetical: EB-5 investors invested $500K each into the NCE which is raising $50 million to provide debt financing to an apartment development project. The term of that loan is 7 years. But it is looking like, because of the Chinese visa backlog, that the funds have to be kept at-risk for 10+ years.
Most EB-5 loans have a requirement that the JCE cannot pay back the loan before all investors’ I-829 petitions (which is the petition that investors submit at the tail end of the 2 year conditional residency period) are adjudicated (i.e. either approved or denied).
Before the USCIS clarified whether the at-risk requirement meant that that redeployment could occur at the NCE level and not the JCE (project company) level, there was a lot of heartburn whether this meant that the project developer was forced to hold on to the EB-5 funds and not be able to pay back the NCE even after the term of the loan was over.
So as you can see, this clarification meant a big deal. However, as I mentioned above, since this was already articulated in the August 2015 Draft Memo, the industry has been proceeding under the assumption that this was going to be the case anyway.
2. Investor’s Fund Must Be Kept At-Risk Until the Two Year Anniversary of the Conditional Greencard (Not I-829 Approval)
The May 30, 2015 USCIS EB-5 Memo had already articulated that the investors’ funds needed to be “at-risk” during the “investment sustainment period” but had not clarified whether the “investment sustainment period” ended with the initial 2 year conditional residency period (approximately when the I-829 is filed) or the I-829 approval. In the June 14, 2017 new rules, the USCIS clarified that this period ended with the initial 2 year residency period. Given that as of the writing of this article, the average wait time for I-829 adjudications is approximately 2 years and 7 months, this is a pretty big difference.
In reality what will most likely happen is that investors will be getting their investments returned to them some time during the I-829 adjudication wait period as there will need to be some sort of capital event and/or unwinding period for the NCE to be able to repay the investors. Due to the nature of the investment products that the USCIS is requiring that EB-5 investor funds be reinvested into (see next section), it will be difficult for the manager of the NCE funds to place them into products that can be easily liquidated as each investor’s 2 year anniversary comes around. (The two-year anniversary of investors in the same deal will vary a lot depending on the length of the offering period as well as how long consulate processing takes and also how soon after the approval at the consulate the investors choose to enter the United States.)
3. What is a Permissible At-Risk Investment After the Requisite Job Creation Has Been Achieved (i.e. Redeployment) According to the USCIS? (In their own language)
The new rules say:
Once the job creation requirement has been met, the capital is properly at risk if it is used in a manner related to engagement in commerce (in other words, the exchange of goods or services) consistent with the scope of the new commercial enterprise’s ongoing business. After the job creation requirement is met, the following at-risk requirements apply:
(1) The immigrant investor must have placed the required amount of capital at risk for the purpose of generating a return on the capital placed at risk; (2) There must be a risk of loss and a chance for gain and (3) business activity must be undertaken. [Numbering not in the original.]
For example, if the scope of a new commercial enterprise was to loan pooled investments to a job-creating entity for the construction of a residential building, the new commercial enterprise, upon repayment of a loan that resulted in the required job creation, may further deploy the repaid capital into one or more similar loans to other entities. Similarly, the new commercial enterprise may also further deploy the repaid capital into certain new issue municipal bonds, such as for infrastructure spending, as long as investments into such bonds are within the scope of the new commercial enterprise in existence at the time the petitioner filed the Immigrant Petition by Alien Entrepreneur (Form I-526).
Since the release of this new language, EB-5 commentators have pointed out many areas that the USCIS could have clarified but declined (or was unable) to do so. For example:
- What does “engagement in commerce” mean (and where does this even come from)? (While the USCIS has some latitude to form and implement policy in carrying out the EB-5 laws and regulations, it does have to base its policy on something in the laws and regulations – not create things from scratch.)
- Is the USCIS implying by using the example of municipal bonds for infrastructure that the redeployed funds also need to create jobs? (I personally don’t think so.)
- What does “the scope of new commercial enterprise” mean? For example, the scope of activities in most NCE charters say the NCE “can engage in any lawful activities”. If a regional center was unlucky enough to have boxed themselves in by stating that the scope of the NCE was for making EB-5 loans, then does that mean they can now ONLY look towards making more loans while other NCEs with a broader scope can invest in, say, a REIT?
- How to define the concept that “business activity must be undertaken”?
These are only some questions raised related to the investment side of the equation. The new policy language also raises a number of quandaries related to the immigration side – such as requiring deployment information to be “adequately described in the Form I-526 record” – which opens up a whole new can of worms. There are also a litany of securities laws related questions that the new policy begs that is beyond the scope of this article.
In reality, what will happen is, as has happened with other such hot-topics of EB-5 such as whether EB-5 can be used to replace bridge financing, or the scope of the so-called tenant occupancy rules, the USCIS will figure it out on a case-by-case basis and let the industry know via disparate RFEs or through responses to questions on EB-5 Stakeholder Calls. Until then, project sponsors and Regional Centers need to make sure that their offering documents do not box them into any one position and be as transparent with the EB-5 investors as possible.