Compliance – The Key to Success in EB-5

August 25th, 2015 by H. Ronald Klasko

Compliance is key to the future of EB-5. It is key to regional centers staying in business. It is key to investors being able to remain in the country. It is key to USCIS oversight of the EB-5 program. In fact, during the August stakeholders call, USCIS announced the formation of a separate compliance unit within the IPO.

The reason why compliance is so important at this time is a function both of EB-5 history and EB-5 future. Historically, only the largest and most fully-staffed regional centers have reached the I-829 processing stage. The reason is that, in order to reach that stage, a regional center must have been in business for at least 5 or 6 years. Six years ago, there were only a relatively small number of regional centers and even fewer with any active projects.

Today, with approximately 700 regional centers, many will be reaching the I-829 stage shortly and for the first time. Some of this group are not fully staffed and may not have been doing what is necessary to make certain that their investors achieve condition removal. This would be a true disaster both for the investors and the EB-5 program.

Now to the future. Pending legislation to extend the regional center EB-5 program will likely include a healthy dose of compliance requirements. Not the least of these requirements is likely to be substantially increased annual reporting by regional centers to USCIS, including annual reports on money received, how the money has been used, state of progress of the project, jobs created each year, etc. This will create far greater compliance requirements than exist presently.

These are the reasons why we created Klasko Compliance, the first full service legal compliance team in the EB-5 industry. Our team works with regional centers and project developers, not at the end of each year and not at the end of the conditional residence period, but from the time of the first investor’s investment through the time of the last investor’s condition removal. Klasko Compliance reviews the records of the regional center and/or project, spot any legal issues well enough in advance to be able to address them and eventually make the preparation of the I-829 template a straight forward process rather than a last minute panic with insufficient data or information to meet the I-829 requirements. By doing so, we will also compile the information necessary for even the most enhanced annual reporting requirements.

However, although we can provide the legal review, how is the client to provide the necessary information and track the necessary data? The answer is NES Financial. NES Financial provides the software, technology and tracking solutions to enable our clients to provide us with critical information that we need in order to perform our legal audit and to spot potential I-829 problems. NES Financial provides unique solutions in software and technology. Because Klasko Compliance provides unique solutions in legal reporting and compliance, it was only natural that we join forces in a strategic alliance to provide our clients a coordinated solution to their compliance needs. In addition to providing regional centers and project developers the peace of mind of knowing that their compliance needs are met, we believe that projects that employ our joint solution will be more marketable because overseas migration agents are very concerned that their investor clients will be successful in the condition removal process. I recently tested this hypothesis on my trip to China, and it proved to be very valid.

I recommend to the readers of this blog the following video, which outlines in more detail the reasons for the Klasko Compliance and NES Financial strategic alliance and more information about the services provided by each of our organizations: http://nesfinancial.com/ron-klasko-video/.

Why You Should Attend Our September 17 Seminar

August 20th, 2015 by H. Ronald Klasko

I would like to provide some brief highlights of our September 17 seminar in Philadelphia, which many of you are already registered to attend. The seminar is entitled “The Successful EB-5 Project: Development, Marketing and Compliance.”

We were not planning on hosting two seminars per year. However, since our February seminar sold out and so many people who wanted to attend could not be accommodated, we have done two things. We are hosting a second 2015 seminar. Also, we have arranged for the seminar to take place at the beautiful Rittenhouse Hotel, which provides double the capacity of our February seminar.

Needless to say, the timing could not be better. This seminar will take place less than two weeks before the expiration of the present regional center program. We will be providing the most updated information available about the status of the extension and any changes that are likely to occur in the EB-5 program. We will also provide our analysis of the important draft memo issued by USCIS on August 10.

Some of the topics we have chosen are similar to topics from the February seminar, but with different speakers and different perspectives. For example, we will have three panels focusing on marketing of EB-5 projects, including all different agents from China, India and the Middle East; a broker dealer; project developers experienced in marketing in the Chinese market; and principals of EB-5 Market Connect and EB-5 Supermarket. I will also provide updates on the China market from my August trip.

We will have panels focused on the lifecycle of an EB-5 project starting with strategy decisions (capital stack, amount of EB-5 funding, whether to file an exemplar petition, etc.). The next panel will discuss putting together the team of professionals to prepare the EB-5 documentation. Our panel will feature some of the top EB-5 professionals, including economist, business plan writer, securities lawyer and escrow administrator. We will have a new panel entitled “Operating a Regional Center,” which will include some of the nuts and bolts involved in regional center decision making and operations. One of our most well received programs from February, entitled “Lessons from Successful Projects,” will feature regional center operators and project developers discussing the secrets of their success.

Compliance is among the hottest topics in the EB-5 world. We recently announced that Klasko Compliance and NES Financial have joined forces to offer complete software, technology and legal solutions to regional centers and developers to comply with their annual compliance and I-829 condition removal responsibilities. Our guest speaker on our compliance panel will be Reid Thomas, Executive Vice President of NES Financial.

Also, we will have USCIS as our “special guest” on compliance. Not really, but it is true that we will have a breakout room for regional center operators who want to hear the USCIS telephone engagement on I-924A compliance. There will be opportunities to ask questions to USCIS and then to hear commentary from Klasko Compliance and NES Financial during the panel following the stakeholders call.

Our program will conclude with an “Ask the Experts” networking reception during which all attendees will have the opportunity to interact with six of the Klasko EB-5 team lawyers and our guest speakers to get any final unanswered questions answered before they head home.

September 17 will be an exciting time in Philadelphia – one week before the visit of the Pope. We suggest you make your plans quickly (click for hotel listings), and we look forward to seeing you on September 17.

Register for this seminar. For additional details, click here.

The Draft EB-5 Policy Memorandum: Some New Policy Created, Some Old Policy Sustained

August 18th, 2015 by H. Ronald Klasko

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.

Update on EB-5 Legislation

August 14th, 2015 by H. Ronald Klasko

The number of days between now and September 30 are diminishing. Meanwhile, the U.S. Congress is in recess until after Labor Day. There are scarcely double digit number of days in which the Congress will be in session until September 30, and the legislative agenda for the remainder of the fiscal year is truly daunting.

Against this background, I would like to share the perspectives that I shared on my latest trip to China from which I just returned. These perspectives were shared on Chinese television and in interviews with Chinese print and on-line media, as well as at various seminars.

My perspectives are based on more than sheer guess work. They are based on personal meetings, including a meeting with House Judiciary Committee Chairman Bob Goodlatte, as well as reports from my clients and legislative lobbyists with whom I am working. While the information I am sharing is the latest information available, I must make clear that the landscape is regularly changing; and neither I nor anyone else can state with any assurance what will actually happen between now and September 30. The only thing certain is that the prospects are uncertain.

With that said, I would like to suggest the following:

  • The chances of the regional center EB-5 program being extended are exceedingly high. There are no significant forces who are attempting to have the program sunset. However, it is very unlikely that the extension will take place more than a handful of days before September 30, and it is not inconceivable that it could take place after September 30.

  • The length of extension is uncertain, although 3 years is my best prognostication. I do not think that a permanent extension is realistic at this time. Five years has been discussed, but it would take us to the eve of the 2020 presidential election. It is not inconceivable that the extension could be for 12 months or less if no agreement can be reached on key points by September 30. Again, 12 months would expire one month before the presidential election, which makes it an unlikely result. The leaders in Congress understand that a short term extension would do damage to the EB-5 program by creating uncertainty and lack of confidence by the government in the program.

  • It is unlikely that the Grassley-Leahy Senate Bill 1501 will be the lead vehicle for the extender bill that ultimately is voted on in Congress. Many provisions of that bill have been the subject of great controversy, and the drafters of the bill have acknowledged that many of the provisions need rethinking. Rather, it is most likely that the lead bill has not yet been introduced. It most certainly will not be the Lofgren-Gutierrez Bill that was recently introduced in the House of Representatives. Rather, it is very likely to be a bill to be introduced by Republican Congressman Issa, with co-sponsorship by House Judiciary Committee Chair Goodlatte and probably some Democratic co-sponsorship (Congressman Polis and Congresswoman Lofgren being the most likely candidates). The strategy will be to have the bill be noncontroversial enough and streamlined enough that it will stand a reasonably good chance of receiving unanimous consent in both the House and the Senate. This would be somewhere between unlikely and impossible with a bill of the size and scope of the Grassley-Leahy Bill. In order to accomplish this result, the drafters of the House bill are working with key members in the Senate to ensure that any bill that passes in the House will likely pass the Senate by unanimous consent.

  • All sides are motivated to pass a bill that can avoid the Committee structure and go directly to the floor by September 30. All sides realize that such a bill could not possibly address all of the issues that concern many of the members. They also realize that, if the bill includes controversial provisions, it likely will not achieve unanimous consent and pass by September 30. In that event, since the EB-5 extension continues to be tied to extensions of the religious worker, shortage area doctor and E-verify programs, the chances would increase that there would be a straight extension of all programs with no changes, possibly for a shorter term. That is not the desired result in either the House or the Senate.

  • There are two uncontroversial provisions or series of provisions that stand a good chance of finding their way into the soon-to-be introduced House bill. One is an increase in the investment amount. At this time, the amount of such increase is uncertain. It appears to me that the most likely increase will be the amounts set forth in Senate Bill 1501; namely, $800,000 for targeted employment area investments and $1,200,000 for other investments. The $2,000,000 minimum proposed in the recently introduced Lofgren-Gutierrez bill is (hopefully) unlikely to find its way into the ultimate legislation.

  • The other set of provisions that are considered both non-controversial and critical are the so-called “integrity provisions”. These include provisions that would enhance the transparency and security of the EB-5 program. Many of the provisions of Grassley-Leahy on these subjects may well find their way into the House bill. Examples include: increased annual compliance reporting by regional centers; USCIS site visits to projects; increased disclosure of parties receiving compensation from transactions; barring regional center and project principals with criminal or securities violation backgrounds; increased ability of the government to terminate offending regional centers; and other measures to protect investors against fraudulent projects.

  • It is very possible, but at this time uncertain, whether changes in the definition of targeted employment area will be included in the new legislation. Key members in the House and the Senate are unhappy with the present TEA system. They are uncomfortable with state involvement, and they are uncomfortable with the fact that census tracts and other political subdivisions can be “gerrymandered”. The problem is that there is no uniform solution agreed to by all. There is almost uniform agreement that the limitation to one census tract in Senate Bill 1501, which would eliminate almost all urban TEAs, is not the answer. Many different possibilities are presently being discussed and debated. If agreement among key leaders in the Senate and the House can be reached in the days before the House bill is introduced, some TEA language could find its way into the bill. If not, it may be left for another day.

  • Although it is possible that changes in how job creation is determined may be in the bill, in my opinion such changes are likely to either be minor or nonexistent. Again, there is broad agreement that the extensive changes suggested in Senate Bill 1501 are unworkable and would largely eviscerate the program. At this writing there are no clear alternatives being posed. It is likely that any attempt to make significant changes to the job creation provisions would fall outside of the “non-controversial” litmus test for a bill that would need expedited approval in both the House and the Senate.

  • That leaves the critical — and perhaps the most difficult — issue of effective dates and grandfathering. As of the date of this blog, it is unclear how this will be dealt with in the House bill. There are two major issues: grandfathering of projects and grandfathering of investors. Hopefully, the Senate bill mechanism of grandfathering projects based on the filing of exemplar petitions before the effective date of any new legislation will be carried over into the House bill. This would enable future investors to invest at the present investment amount — usually $500,000 — as long as they invest in a grandfathered project.

The Senate bill did not grandfather investors with pending I-526 petitions. This would have lead to the anomalous result that investments that were perfectly compliant when I-526 petitions were filed 12 or 18 months ago would no longer be compliant because of USCIS delays in adjudication. The unfairness of this is manifest since, in many cases, the investors’ investment money has already been used in the project, the jobs have been created and the investors can’t get their money back. Yet, through legislative sleight of hand, such investors would no longer qualify to immigrate. Hopefully, the House bill will rectify this inequity by grandfathering investors who filed I-526 petitions before the effective date of any new law. However, a significant concern is the volume of pending petitions caused by USCIS processing delays.

Given this uncertainty, there is a limit to the advice that we can give to regional centers, developers and investors with any confidence. For regional centers and developers, the best advice is to file exemplar petitions before the effective day of any new law. There is no disadvantage to doing so. There is a potential huge advantage if all future investors are grandfathered at the lower investment amount.

For investors, our suggestion is to invest in projects that have filed or will file such exemplar petitions. If possible, file I-526 petitions before September 30. We don’t know whether such filings will grandfather the investors, but we do know that any changes will make the law tougher, not easier. Again, there seems to be no disadvantage to filing before September 30; and there may be very real advantages.

I want to emphasize that everything contained in this blog is simply my opinion based on substantial involvement in the advocacy process. Having just shared these thoughts with the Chinese public, I wanted to make certain to share them with the readers of our blog.

NES Financial Solutions Partners With Klasko’s EB-5 Compliance Practice To Serve EB-5 Regional Centers

August 4th, 2015 by DanielLundy

We are proud to announce that NES Financial named Klasko Compliance as an official NES Medallion Solutions Partner on July 29, 2015.

In response to increased government and media scrutiny of the EB-5 program, the dramatic growth of the EB-5 program and the number of regional centers and EB-5 projects that are approaching the deadline for filing I-829 petitions, regional centers must have systems in place to produce the supporting documentation needed by their investors.  Klasko Immigration Law Partners, LLP and NES Financial have each developed solutions intended to provide regional centers and EB-5 projects with EB-5 Compliance options for minimizing their regulatory risks, ensuring accurate document and data collection and retention, and ensuring that their investors successfully complete the I-829 process and obtain their unconditional permanent residence.  These solutions are particularly timely, given the anticipation of increased regulatory oversight of the program as a result of reauthorization.

Our practice group, Klasko Compliance, works with regional centers and project developers in all aspects of EB-5 immigration compliance. We provide the support, knowledge, and experience that is critical to regional centers, project developers, and investors, since it relates to the ability of the regional center to remain in compliance with USCIS guidelines and policies and maintain their designation as a regional center, and to the ability of project developers to be in a position to meet the needs of investors in the critical condition removal process.

The NES Financial EB-5 Fund Administration and Immigration Workflow Solutions facilitate the critical tracking of information and maintenance of documentation through the entire immigration life cycle to streamline the operational processes necessary for EB-5 compliance.

Together, the NES Financial EB-5 Fund Administration and Immigration Workflow Solutions and the Klasko Compliance EB-5 compliance solutions provide regional centers and project developers with a powerful tool for maintaining and documenting compliance with the EB-5 requirements.

As a NES Medallion Solutions Partner, we join with NES Financial in an effort to:

  • Raise awareness of the compliance obligations of EB-5 developers and regional centers;
  • Promote the integrity of the EB-5 Program by promoting transparency and accountability in the tracking of financial transactions and setting minimum standards for auditing and reporting; and
  • Promote EB-5 Compliance best practices.

Through our Medallion Solutions Partnership, Klasko Compliance and NES Financial are able to offer comprehensive state-of-the-art technology, financial transaction services and industry leading legal compliance experience in order to maximize our clients’ project-management capacities while minimizing their EB-5 compliance risk. In joining the technology, software, systems, and services of NES Financial with the immigration law and EB-5 compliance experience of Klasko, together we provide our clients industry best practices and the tools necessary to avoid liabilities, maintain regional center designation and secure the successful removal of conditions on investors’ green cards.

Effective Dates in Senate EB-5 Bill

June 29th, 2015 by H. Ronald Klasko

We are in the process of publishing a number of Client Alerts and blogs on the Senate EB-5 Bill. Although we do not believe that the Bill will pass in its present form, we do believe that there will be some legislative reforms to the EB-5 program before a long term extension of the regional center program is passed by Congress.

No matter what is contained in the final Bill, the effective date of any changes in the EB-5 program is a critical issue. It is certainly possible that, although the provisions of the Bill may change, the effective date scheme may remain. For that reason, and because regional centers, project developers and investors may want to take action before the effective date of any change, I have prepared this Alert to summarize the effective date provisions in the Senate EB-5 Bill.

Before doing so, however, I want to express my opinion as someone who has read and reread the effective date language many times. That opinion is that the language is at some points unclear, at some points unworkable, at some points illogical and at some points inconsistent. With that said, here is my best attempt to summarize the effective date scheme in the Senate Bill. I will divide my summary into Projects, Investors and Regional Centers.

Projects

The general rule is that the changes regarding projects are effective on the date of enactment of the law. What does this mean with respect to a project for which an exemplar is filed before the date of enactment and is still pending on the date of enactment? The Bill is at best unclear; at worst, unworkable. If the changes (for example, the job creation changes), were to apply to pending exemplar petitions, many, if not most, of them would not be approvable. At the very least, the projects would require material changes in order to comply with the new law, which could render the exemplar petitions unapprovable. Changes to comply with the new law would also make the project documents inconsistent with project documents that may have already been filed by investors in the project and for which investors may have already been approved. The legislative changes may render the project no longer approvable for EB-5, which could prevent the project from going forward, to the detriment of investors whose money has already been disbursed. It is critical that the language of the Bill be changed to have the law in place at the time of exemplar filing apply to pending exemplar petitions. Otherwise, there could be serious potential immigration and securities issues.

It is fairly clear that a project for which an exemplar is filed before the effective date of the law would be grandfathered at least with respect to the amount of the investment and the definition of Targeted Employment Area in effect on the date of filing. Note that this does not mean that the project would be considered to be in a TEA if it is in a TEA on the date of filing. Rather, the same definition of TEA as exists today would be applied at the time a future investor invests in the project. If the project qualified under the present definition of a TEA – presumably including census tract aggregation and state certification – the $500,000 investment level would apply to future investors in the project. The new, far more restrictive definition of a TEA would apply to investors investing in projects that were not grandfathered by the filing of an exemplar petition.

The Senate Bill would require that a project be pre-approved – through an equivalent of the present exemplar system – before any investor could invest in the project. This provision would be effective on the date of enactment and apply to any petition filed after the date of enactment.

How does this fit with the concept of a grandfathered exemplar petition? Again, the language and the intention are not clear. However, the language in the Bill seems to indicate that the requirement for the exemplar petition to be approved would apply to all investors after the effective date of the law, even investors in a grandfathered project. Therefore, investors in a grandfathered project would have to wait for the approval of the grandfathered exemplar – perhaps many months or even years after the effective date – before being able to file an I-526 petition in the grandfathered project. However, once the grandfathered project is approved, the investor – even if many months or years later – would still be able to invest at the present investment levels.

Investors

An investor’s I-526 petition does not grandfather a project – only an exemplar petition filed by the regional center grandfathers a project. Although the law in effect when an investor files an I-526 petition should be applied to that petition, it is not at all clear that the statutory language produces this result. Rather it appears that changes in the law would apply to pending petitions. This could lead to completely anomalous results whereby investors invest in a project – often with no ability to get their investment money back – that was approvable when filed but could become unapprovable as a result of a change in the law. If, in fact, that is the result of the present language, it would appear that it is not the result that Congress could have or should have intended. A change in the language of the statute to make it clear that this result is not intended is critical.

The Bill also changes what is considered to be a proper source of capital for an investment. As indicated in our prior Client Alerts, many sources of capital that are acceptable under the present law would not be acceptable if this Bill were to become law. The language of the Bill seems to indicate that these changes would apply to all I-526 petitions pending on the date of enactment. Again, this would be an unacceptable result since many of the financial transactions – gifts, loans, etc. – cannot be reversed just as the capital investment cannot be reversed. This would render many investors unable either to get their money back or to get their petitions approved. It is critical that the language of the Bill be amended to clarify that changes in the law relating to an investor’s source of funds apply to petitions filed after the date of enactment. Unless and until that happens, the prudent course is to comply with the language of the Senate Bill for all newly-filed I-526 petitions.

The Bill provides some benefits to investors, such as the ability to concurrently file an I-526 petition with an I-485 adjustment of status application and the ability to take advantage of Section 245(k) which allows for the approval of an adjustment of status application even if the investor has been out of status for up to 180 days. These provisions apply to pending I-526 petitions.

Finally, the Bill would require Government site visits prior to approval of an I-829. This provision would go into effect two years after the date of enactment of the law.

Regional Centers

There are many changes affecting regional centers and their principals. There are changes in the compliance requirements, when an amendment must be filed, regional center site visits, regional center principal requirements, securities issues, rules affecting marketing of regional center projects and various other provisions. All of these changes apply to all new regional center applications that are pending on the date of enactment. However, they will not apply for one year after the date of enactment for any regional center that is approved before the date of enactment. This means that already existing regional centers will have one year to meet the far more rigorous standards contained in the Senate Bill.

Given this amalgamation of different effective dates that are inconsistent and in many cases illogical, the only advice that can clearly be given is for regional centers to file exemplar petitions before the effective date of the change in law and for investors to file I-526 petitions avoiding the use of loans and gifts that would be prohibited if the new law were to pass.

All of these effective date issues will be the subject of significant amounts of advocacy that will hopefully result in a workable scheme before any bill is signed into law.

Detailed Analysis of EB-5 Reauthorization Bill: Source and Path of Funds

June 10th, 2015 by Anu Nair

On June 3, 2015, Senators Charles Grassley and Patrick Leahy introduced a bi-partisan bill to extend and amend the Immigrant Investor Program. As part of a multi-series examination of the bill, below is detailed analysis of how the bill will change key aspects of the program as it relates to source and path of funds.

  1. Administrative Fees Must Be Sourced

    Current: In a 2012 Stakeholder’s meeting, Alejandro Mayorkas, then director of USCIS, confirmed that the administrative fees must be sourced. In its February 2015 Stakeholder’s meeting, USCIS indicated that administrative fees do not need to be sourced as USCIS did not have a “legal basis for requiring the . . . administrative fee . . . [to have] a lawful source.”

    Proposed Changes: Under the proposed legislation, USCIS will have a “legal basis” for requiring investors to source the administrative fee. Proposed INA 203.5(b)(5)(L) states in pertinent part that the investor must show that “any funds used to pay administrative costs and fees associated with the alien’s investment were obtained from a lawful source and through lawful means.”

    As currently written, the proposed changes leave open the possibility that investors may have to source legal and filing fees in addition to the investment and administrative fees.

  2. Tax Returns: 7 years of tax returns prior to I-526 filing tax returns mandatory for investors

    Current: Filing tax returns as part of I-526 documentation is not mandatory as tax returns are included as one of several options to document source of funds, as supported by the use of a disjunctive “or” in the regulations.

    8 CFR 204.6(j)(3) states in pertinent part:

    To show that the petitioner has invested, or is actively in the process of investing, capital obtained through lawful means, the petition must be accompanied by:

    1. Foreign business registration records;
    2. Corporate, partnership and personal tax returns of any kind filed within 5 years;
    3. Evidence identifying any other source(s) of capital; OR
    4. Certified copies of judgments or evidence of all pending governmental civil or criminal actions.

    Proposed Changes: Under the proposed bill, the following language, reproduced in pertinent part, would be added under INA 203(b)(5)(L):

    1. The Secretary of Homeland Security shall require, as applicable, that an alien entrepreneur petition contain:
      1. Business and tax including:
        1. Foreign business registration records;
        2. Corporate, partnership and personal tax returns of any kind filed within 7 years with any tax jurisdiction;
        3. Evidence identifying any other source(s) of capital; AND
      2. Certified copies of judgments or evidence of all pending governmental civil or criminal actions.

    Accordingly the new proposed changes to the INA appear to make mandatory the filing of 7 years of corporate, partnership, and personal tax returns for all investors.

  1. Identity of Intermediaries

    Current: Currently, neither the regulations nor the INA requires any identity documents of intermediaries used by the investor in the exchange of funds into USD and transfer of USD funds into the U.S.

    Proposed Changes: Investors will have to provide the identity documents of all intermediaries used in the exchange and transfer of the investment funds as well as administrative fees and costs.

  2. Restrictions on Gifts: Must be gifted by a close family member and giftor may be required to provide tax returns

    Current: Currently, neither the regulations nor the INA place any restrictions on gifted funds as the EB-5 investment. Instead, under USCIS policy, investors simply had to document the source of the gifted funds and provide an affidavit confirming the gifting of the investment funds with no obligation or expectation to repay.

    Proposed Changes: An investor may only use gifted funds for EB-5 investment if the funds are gifted by a spouse, parent, child, sibling, or grandparent. Further, the gift must be made in “good faith” and not used to circumvent any limitations on permissible sources of income.

    Additionally, if a “significant portion” of the EB-5 funds are gifted, the giftor must also provide 7 years of tax returns prior to the I-526 filing and documentation of any monetary judgments against the giftor. The amount of funds that would constitute a “significant portion” of EB-5 funds is not defined.

  3. Restrictions on Loans: Must be secured by assets owned by the investor and lender must be a “reputable” bank or licensed lending institution

    Current: Based on 8 CFR 204.6(e) and USCIS’ May 30, 2013 EB-5 Policy Memorandum, investors have the option of depositing cash, equipment, property, or indebtedness (a promissory note) as capital; the regulation only requires an investor who uses indebtedness as capital to secure the capital on assets owned by the investor.

    Prior to December 2014, USCIS was routinely approving cases wherein the investor obtained a home equity loan using a third party’s property as collateral. In most cases, the third party was the investor’s minor child. Beginning in 2014, with no statutory or regulatory authority and no prior notice to stakeholders of a change in policy, USCIS began denying such cases. As the basis for the denials, USCIS argued that such loans were not appropriate for EB-5 investment under the regulations as 8 CFR 204.6(e) required indebtedness to be secured by assets owned by the alien entrepreneur.

    Categorization of capital in such an instance as “indebtedness” is incorrect. The investor is not investing indebtedness as capital as there is no debt arrangement between the investor and the NCE; that is, no promissory note exists between them. Instead, the investor obtains a home-equity loan, secured by lawfully obtained and owned assets, and then uses the cash proceeds from the loan as the EB-5 investment. Thus, under 8 CFR 204.6(e) the investor is investing “cash” as capital; the regulations do not require the underlying home-equity loan to be secured by any personal assets.

    Proposed Changes: Under the proposed legislation, “[c]apital that is derived from indebtedness can only be counted toward the minimum capital investment requirement only if such capital is (i) secured by assets owned by the investor.” Additionally, the lender must be either a “reputable” bank or licensed lending institution.

    First, it appears that the legislation is allowing for a scenario wherein USCIS has the power to determine the reputability of a bank after I-526 filing, when the investor has already obtained the loan and invested the capital.

    Additionally, if this legislation passes, it appears that investors would no longer be able to use a company equity loan as the source of their funds unless the company issuing the loan happens to be a licensed lending institution.

    Finally, if passed, the new law may provide USCIS with statutory authority to deny cases where the investor uses loan proceeds from a home equity loan using a third party’s property as collateral.

  4. Changes to Investment Amount

    Current: Investment amount is 1 million or $500,000 in a TEA.

    Proposed: Investment amount is 1.2 million or $800,000 in a TEA. Investment amounts are subject to increase every 5 years (starting January 1, 2020) by the amount of the cumulative percentage change (CPU).

Brief Analysis of EB-5 Reauthorization Bill

June 5th, 2015 by H. Ronald Klasko

Senators Charles Grassley and Patrick Leahy have introduced a bi-partisan bill to extend and significantly amend the Immigrant Investor Program, which is currently set to expire on September 30, 2015.  The bill would extend the EB-5 regional center program for a period of five years, but changes many key aspects of the program.  We will provide in depth analysis of the Bill at a later date, but the following is a summary of the proposed changes.
 
Investment Amount

  • The minimum investment amount will increase to $800,000 for investments in a Targeted Employment Area (TEA), and $1.2 million for investments not in a TEA.

  • The minimum investment amount can be amended by regulation, and will automatically adjust in proportion to the Consumer Price Index every five years.

  • The minimum investment in a TEA cannot be less than half, nor more than three-quarters of the non-TEA minimum.

Targeted Employment Area

  • The definition of a TEA has been amended to include an area consisting of a single census tract that has 150% of the national average unemployment rate, a closed military base, or a rural area.  The definition of a rural area has not changed.

  • For TEAs in a Metropolitan Statistical Area or Combined Statistical Area, at least 50% of a project’s job creation must be within that Metropolitan Statistical Area or Combined Statistical Area to be counted.  If the TEA is outside of a Metropolitan Statistical Area or Combined Statistical Area, then at least 50% of the jobs must be created within the county in which the TEA is located.  If not, the total number of jobs will be reduced until the 50% threshold is met.

Job Creation

  • An investor in a commercial enterprise affiliated with a regional center can use jobs predicted to be created indirectly to satisfy up to 90% of the job creation requirement.  It is not clear if that means that the NCE must have direct employees, or economically direct employees, as calculated by an economic model such as RIMS II or IMPLAN can be counted.  This represents a significant departure from the current law.

  • A maximum of 30% of the total jobs that are created can be created as a result of non-EB-5 investment, even if the non-EB-5 investment represents more than 30% of the project’s funding.  This is a significant change from current practice.

  • EB-5 investors can use economic models and valid forecasting tools that are accepted by the BEA.  We presume this means at least RIMS II.

Changes in Processing

  • Exemplar filings and pre-approval of projects are mandatory.

  • The Bill sets a limit of 120 days on average for the processing of exemplars, and allows for premium processing with an additional fee.

  • Processing times for an I-526 petition are limited to 150 days, on average, and I-829 processing is limited to 180 days.

Source of Funds

  • Administrative fees must be sourced.

  • 7 years of tax returns mandatory for investors.

  • Gifted funds can only be used for EB-5 investments if gifted by a spouse, parent, child, sibling, or grandparent.

  • Capital based on loans to be collateralized on investor’s personal assets. Note, the language at this section is vague and there is still some confusion on capital as indebtedness and capital as cash obtained from an underlying loan.

  • Loans must be obtained by a reputable bank or lending institution that is properly chartered of licensed under laws of state, territory, or country, or applicable jurisdiction. “Reputability” determined by consulting relevant commercial and government databases, including OFAC, TFFC, and FinCEN.

Concurrent Filing and Age-Outs

  • Concurrent filing of I-526 petition and I-485 adjustment application if a visa number is immediately available.

  • In certain cases, conditional residents who obtained such status as the derivative child of an EB-5 investor, whose I-829 is denied under INA 216A, can remain a derivative “child” of the EB-5 investor in a subsequently filed I-526 petition.

Regional Center Oversight and Compliance

  • The Bill adds major reporting, self certification, and compliance requirements, and adds a $20,000 per year fee to each regional center to support an EB-5 integrity fund, which will be used for audits, site visits, and investigations, both in the U.S. and abroad.

  • The Bill gives USCIS the authority to suspend, terminate and fine regional centers and NCEs affiliated with regional centers, and gives broad authority to permanently bar individuals from participating in the program.

  • The bill creates a registration requirement for promoters of EB-5 projects, and purports to allow USCIS to set standards of conduct, and even place limitations on fee arrangements.

  • The Bill requires compliance with securities laws, certification of compliance, and maintenance of policies and procedures for ensuring the compliance of parties affiliated with the regional center or NCE (defined broadly to include attorneys, promoters, and others).

  • The Bill provides a wide variety of grounds for the denial or revocation of a regional center approval, project approval, investor petition approval, or even permanent residence.  Almost all grounds for denial or revocation are within the unreviewable discretion of the Secretary of DHS, and many can be based on the Secretary’s reasonable belief that the affected party has committed an offense.  The broad discretion and loose standards appear to raise serious due process concerns, and threaten to undermine the predictability and stability needed for projects and developers to be willing to use the EB-5 program as a source of funding.

  • If a regional center or NCE is terminated, investors that have already obtained conditional residence can either affiliate with an new regional center, make a new investment in a new NCE, or make a new investment through an NCE affiliated with a different regional center.  The two year conditional residence program would start over.

  • If the two year conditional residence period elapses before the investor obtains conditional residence (presumably due to quota backlogs), the investor can file an I-829 and, if approved, can enter the U.S. as an unconditional resident when able.

  • Regional center and NCE principals must be permanent residents or nationals of the U.S. and are not eligible if they have previous securities violations or various civil or criminal judgments for fraud, deceit, securities violations, or have been subject to discipline as an attorney.

Effective Dates

  • The Bill appears to be effective on the date of enactment in most cases.  Certain sections relating to changes in TEA status and minimum investment amount would not apply to projects with an approved or pending exemplar on the date of enactment.  Therefore, it is highly recommended that current projects file exemplar petitions as soon as possible.

In summary, the changes to the EB-5 Program effected by this Bill are sweeping, and the Bill presents a fair level of ambiguity and uncertainty.  It is clear that projects in urban areas stand to be severely affected by the changes in the way TEAs are designated.  It is also clear that operating a regional center will require significantly more of a commitment by regional center principals if this Bill is passed as is.

For further information, please contact your Klasko Law attorney.

Changes in the EB-5 World

May 28th, 2015 by H. Ronald Klasko

The EB-5 world may be changing. The next several months will be critical. This blog will highlight some of the changes that have already occurred and others that are on the radar. Some of these changes will be the subject of separate blogs to follow.

Questions regarding Extension of Regional Center Program

The regional center program expires on September 30. This is not news, and it has been extended continuously since 2003, usually unanimously or close to unanimously. As recently as several weeks ago, there was no reason to believe that this year would be any different. However, in the last several weeks, much of the news coming out of Washington has created some uncertainty as to what an extension may entail.

The new chairman of the Senate Judiciary Committee, Senator Charles Grassley of Iowa – never a big fan of EB-5 – has signaled that he wants changes in the EB-5 program as a condition to extending the program. Former Senate Judiciary Committee Chair, Senator Patrick Leahy of Vermont – a big fan of EB-5 – has indicated that he will very shortly be presenting an EB-5 bill that appears to align with at least some of the changes being advocated by Senator Grassley. DHS Secretary Jeh Johnson authored a letter to Senators Grassley and Leahy advocating changes in the EB-5 program (a number of which appear to be consistent with changes advocated by at least Senator Grassley). (The Johnson letter will be the subject of a separate blog.)

The result is that there are several possibilities:

    1. The EB-5 program does not get extended. The chances of this remain remote.
    2. The regional center program is extended for a short time (six months or less) while Congress debates the proposed changes. This is a very real possibility.
    3. Congress agrees in advance of September 30 to changes to the EB-5 statute and extends the EB-5 program for three years with the changes. Currently, many think this is the most likely scenario; however as we continue to move quickly towards the September deadline, the circumstance outlined above in (b) becomes more likely.
    4. The EB-5 program gets extended with no changes. This is still a possibility, albeit a remote one, especially if the September 30 deadline is imminent or has passed and there is no reasonable likelihood of debating proposed changes to the EB-5 program.
    5. Congress extends the program permanently. In the present setting, this has to be viewed as highly aspirational in the short term.

Possible Changes to the Regional Center Program

Among the many legislative changes that are possible, two stand out as having the largest impact.

The first is an increase in the minimum investment amount. Almost certainly, the next time there is a legislative change to the EB-5 program, it will include an increase of the minimum investment amount. The most likely increase seems to be at or about $800,000 for TEAs and $1,200,000 for other investments. There will likely be an ongoing inflation adjustment. Given that there has been no change in the minimum investment amount since the program commenced in 1990, many believe that such an amendment would not be controversial.

For Chinese investors, the impact would not be just investing more RMBs. Documenting 60% more invested funds may be challenging for many investors. Perhaps more significantly, the traditional method of getting 10 friends and family to transfer $50,000 each to meet Chinese currency export restrictions would now require 16. Investors will need very large extended families or an expansive circle of friends. To avoid this result, many investors may choose to invest before any change in the law occurs.

The second change, which would be more controversial, is a change in the definition of a targeted employment area. Senators Grassley and Leahy, as well as Secretary Johnson, are reportedly considering limitations to state-designated TEAs based on census tract aggregation. The Johnson letter proposes a limited number of contiguous census tracts. If there is any federally imposed limitation on state-designated TEAs, it will be critical that the language encompasses a broad enough area to cover normal commuting distances for workers coming to work at EB-5 projects, especially in urban areas. Merely picking an arbitrary number of census tracts could eliminate many or most urban TEAs even though such projects draw employees from high unemployment areas. This is perhaps the most important area for advocacy by regional centers and developers.

Other legislative changes would likely include an expansion of USCIS authority to revoke regional center approvals based on criminal or security concerns and expansion of USCIS authority to regulate regional center principals.

If some or all of these legislative changes occur, it is too soon to know how Congress will legislate effective dates, retroactive application, grandfathered applications, impact on projects that already have some investors, etc. These are critical issues for investment projects that have already commenced planning, financing and/or EB-5 capital raises. Offering documents being prepared presently should account for these possibilities.

While the impending expiration of the regional center program and the suspense involving its extension are the primary causes of consternation, other changes are or will be playing a key role in the EB-5 market:

China EB-5 Quota Regression: Since the quota backlog just started on May 1, its impact is still uncertain. Although a longer wait for Chinese investors to immigrate to the U.S. may dissuade some, the prevailing sense is that a very high percentage of the investors who would have invested will continue to invest. There is also some sense that investors realize that the quota waiting list will only become longer over time and that an investment now will result in a much shorter wait than an investment a year or two later. It is certainly possible that an indirect effect of the uncertainty in the market presently is that there may be fewer I-526 petitions filed for the remainder of this fiscal year than had originally been anticipated. In the category of every cloud has a silver lining, the silver lining in this cloud may be that fewer new petitions result in the quota retrogression being shorter than originally anticipated.

Source of Funds Issue: Within the last few months, USCIS has begun issuing RFEs, NOIDs and denials for investor source of funds in factual scenarios that have never previously resulted in denials. USCIS confirmed its present position (without acknowledging the fact it was a complete change in position) during the stakeholders meeting on April 22. Although our experience is that the change in policy affects at most 10% to 15% of the investors, some agents advise that the percentage is higher. At the very least, this will require investors to change how they document the lawful source of their invested funds. Specifically, the practice of using indebtedness on a property that is owned by someone other than the investor to fund the investment, in whole or in part, is likely to result in a denial of the I-526 petition. This will likely be the subject of litigation and is the subject of another blog.

Adverse Publicity: This is taking its toll. Fortune Magazine, ABC News and other media outlets have adopted EB-5 as their whipping boys. Until the EB-5 industry is able to counteract the impact of this negative publicity, it will continue to act as a drag on the market.

The Mayorkas Report: By itself, the DHS Inspector General report chiding former USCIS Director Mayorkas for his activities relating to the EB-5 program might not have a major impact. Added to other negative publicity, it has a cumulative effect.

SEC Investigation: It is no secret that the SEC has been investigating regional centers and immigration attorneys in connection with issuance and acceptance of finders fees and possibly other securities violations. The results of these investigations are likely to become public over the next two or three months. Whatever the result, they will not be helpful to the EB-5 industry.

GAO Report: The U.S. Government Accountability Office will be issuing its report on EB-5 most likely this summer. While its findings are not presently known, at the very least it adds more uncertainty in very uncertain times.

If there were ever a time to advocate for the EB-5 program – whether it be to media or to legislative representatives – that time is now. It is my sense that the next six months will be pivotal in determining the parameters of the EB-5 program for many years to come.

A Critical Analysis of DHS Secretary Johnson’s EB-5 Proposals

May 20th, 2015 by H. Ronald Klasko

Much of the focus of publicity and advocacy relating to EB-5 has been with the U.S. Senate. The Administration had been largely silent on EB-5 at least in the public context. That changed on April 27, 2015 when DHS Secretary Johnson issued a letter to Senate Judiciary Committee Chairman Charles E. Grassley and Ranking Member Patrick J. Leahy. This letter sets out the Administration’s agenda on EB-5.

Not surprisingly, DHS advocates for expanded authority to monitor and to sanction regional centers and regional center and project principals for reasons of alleged criminal activity, national security concerns or fraud-related concerns.

Much of what the Administration is proposing would not likely be opposed by most in the EB-5 industry and might actually be wholeheartedly endorsed. It is in the interest of regional centers, developers and investors to have USCIS monitor regional centers and projects with the goal of weeding out and sanctioning bad actors and preventing fraudulent programs from ever being the recipient of EB-5 investor funds. For example, many or most would agree that regional center or project principals who commit criminal violations, fraud-related violations or security-related violations, or who have such a history, should be barred from the program. Many or most would agree that USCIS should have sufficient funding to underwrite audit and site visits, even if that were to require the DHS-proposed $20,000 per year fee to be charged to regional centers. While somewhat more controversial, the DHS proposal to require that all regional center principals be U.S. citizens or permanent residents has support among many in the EB-5 community.

The biggest concern with this series of proposals is if USCIS is authorized to act without due process. Any standards developed for regional centers or regional center principals, any standards developed for termination of regional centers, any standards developed for sanctions against regional centers or principals should be clearly articulated and should provide the affected parties the ability to rebut the allegations with a review mechanism in the event that the rebuttal is unsuccessful. Allowing DHS to take such actions on a discretionary, non-reviewable basis would be a denial of due process with a serious impact on individuals and companies who may have invested millions of dollars in creating and operating a regional center. Termination of a regional center can also very seriously impact investors in projects in that regional center. Based on such unreviewable action, such investors may lose their ability to remove conditions in the absence of an approved regional center.

The same caution applies to DHS’ proposal to expand its authority to deny or revoke an I-526 or an I-829 petition due to fraud, misrepresentation, criminal misuse or threats to national security. One might agree that DHS should have authority in all of those instances, but only with articulable legal standards, due process and rights of review.

Secretary Johnson urges that USCIS should be authorized to require regional centers to certify continued compliance with U.S. securities laws and to disclose pending litigation, details of how investor funds were utilized in the project, details of the direct and indirect jobs created and the progress towards completion of the investment project. He advocates that these annual reports should be publicly disclosed.

Many in the EB-5 community – myself included – consider the I-924A annual reporting to be seriously deficient. Generally, I am in favor of enhanced annual reporting proposed by Secretary Johnson. I am specifically in favor of public disclosure of non-protected and non-confidential information to enable investors to make more educated decisions. My main hesitation is with the suggested “accounting of the direct and indirect jobs created” since it is very difficult to calculate indirect and induced job creation in the middle of a project. For example, direct construction jobs cannot even be counted until a project has completed two years of construction. Revenues may be insignificant until a project reaches stabilized occupancy. Many other examples could be cited.

Secretary Johnson proposed “improving the integrity of TEAs”. This could be the most controversial of his proposals. Although he provides no specifics, he proposes “limiting TEAs to a specified number of contiguous census tracts.” As with all of these proposals, the devil is in the details. Simply picking an arbitrary number of contiguous census tracts is poor public policy. Significant studies are required to determine appropriate standards to utilize if the definition of TEA is to be changed. Rather than choosing an arbitrary number of census tracts, it would make more sense to tie TEAs to commuting distances, supply chains, possibly MSAs and CMSAs or possibly other concepts used by government agencies such as the U.S Department of Labor.

Secretary Johnson proposes that the minimum investment amount be increased, noting that there has been no increase since the inception of the program 25 years ago. He adds that, even if Congress does not do this, USCIS might exercise its existing authority to increase the minimum investment amounts. While some might balk at an increase, most would consider an increase of the minimum investment amount to be inevitable.

Secretary Johnson also requests Congressional authority to require regional centers to file “investment proposals” (presumably exemplar petitions) in advance of individual investor filings. I have previously advocated that such a change is meritorious, so that investors know that they are investing in an approved project. However, such Congressional authorization would have to be accompanied by a Congressionally-imposed time limit for USCIS to adjudicate the exemplar petition. Otherwise, it would simply add a year or more to an already unrealistically long process that puts the entire EB-5 program in jeopardy. Creating a process that simply adds time to the existing process would make the process nonviable for many, if not most, project developers.

The remainder of Secretary Johnson’s proposals relate to limitations on contact by USCIS officials with the public. While I am in favor of limitations on any activities that could create a perception of favoritism or impropriety, I do think it is important that groups such as IIUSA and the American Immigration Lawyers Association, which represent large numbers of stakeholders, should be in a position to advocate their positions to USCIS in forms that are subject to full public disclosure. The present stakeholders meeting format provides no opportunity for discussing, airing and debating complex legal issues that can only be the subject of fruitful discussion in smaller group settings. In addition, with the stakes as high as they are both for investors and the public, USCIS should create a more formal system for issuing advisory opinions, so that stakeholders can obtain necessary information to plan transactions going forward without having to resort to Congressional assistance.

In conclusion, Secretary Johnson’s letter contains a number of proposals that could improve the EB-5 program. It also contains a number of controversial proposals that should be subject to serious discussion and debate. What is not debatable is that it provides perhaps the best vision to date of the thinking of the Administration regarding the future of the EB-5 program.

       
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