Having returned from my second trip to China in the last five months (and my first since the SEC investigation of the Chicago Convention Center EB-5 project became public), I am struck by the two key words that were pervasive in my discussions with investors, agents and the Chinese media.  Those two words are “due diligence.”  Especially since the Chicago allegations became public, investors and the representative had a fresh appreciation of the importance of having due diligence review of potential investment projects.

I emphasized during my presentations in China that three levels of due diligence review are necessary.  Since obtaining US permanent resident status is generally the prime motivation behind an EB-5 investment, immigration due diligence is critical.  This is a service that we provide to investors, investors’ representatives and agents.  We have a thirty plus point proprietary immigration due diligence checklist that we have created for this purpose.  This is also the checklist that we use when we are the immigration attorney for the regional center or the project developer.

The second level of due diligence is financial due diligence to be conducted by a qualified investment advisor, accountant or similar financial professional.  This person does not necessarily need any EB-5 background.  The financial due diligence covers issues such as financial risk of the investment, exit strategy, rate of return, financial solvency of the project developer, sufficiency of collateral for any EB-5 loan and similar financial issues.

The third level of due diligence is business/common sense due diligence.  Does the project make sense?  Has the project developer successfully completed similar projects?  Are the timelines, occupancy rates, revenue projections, expenditure projections reasonable and in conformity with industry standards.  If the business plan does not seem credible to a layman, it may not be credible.  If it is not credible, it likely will not withstand USCIS scrutiny.  Even if it did withstand USCIS scrutiny, the project may never go forward as planned.

We have long provided investors with a due diligence list of questions to ask when considering a project for investment.  In light of recent developments and changed USCIS standards, we have revised the due diligence list.  For more information, visit our EB-5 Resource Center at www.eb5immigration.com.

As discussed in my last blog, the pace of I-924 adjudications for new regional centers has accelerated substantially in the last few months.  Over 40 regional centers have already been approved in 2013.  Despite that, because of the huge backlog created by the lack of adjudications in 2012, many applications still remain pending beyond one year.

From my perspective, the long-term future looks brighter, although the short to midterm future has a more cloudy forecast.

Things are clearly changing, hopefully for the better.  The transition of EB-5 adjudications from California to Washington is in progress.  The new facility housing the EB-5 unit in Washington is open.  Adjudicators of I-924s and EB-5 projects will be handled not by traditional CIS adjudicators but rather by newly hired economists.  Some of the economists have already been hired, and some are being actively recruited.  The DC unit, staffed by GS15 economists (very high level government employees) will first handle I-924s, then I‑526s and then I-829s.  For some period of time, the DC unit and the California Service Center EB-5 adjudicators will work concurrently.  Eventually, the California Service Center will be phased out, and all of the applications will be handled by the EB-5 unit in Washington.  This unit will be headed by Dan Renaud, Acting EB-5 Program Chief, and Robert Cox, the Acting EB-5 Deputy Chief.

The new EB-5 office in Washington will be staffed solely or mostly by new hires.  The good news is that adjudications in the new office will be handled by economists rather than USCIS adjudicators and generally higher level economists than those previously hired into the EB-5 program.  The bad news is that these new hires will be new to the EB-5 program, will have to be trained and likely will take some time to be completely up to speed.  In my experience, new hires tend to be slower in making decisions and often wary to issue approvals until they are secure in their positions.  Hopefully, this either will not occur or will be a short transition period.  Also, new economists may have new positions on economic methodologies, which could be good or bad news.

The decision to run the new unit in Washington and the existing unit in California concurrently appears to be a wise one.  It is illogical to ask the new unit to take a backlog of cases that have been pending 12 to 18 months and somehow expect them to magically bring the backlog down to 4 to 6 months.  Hopefully, running 2 units concurrently will result in the backlogs being at far more manageable levels before the Washington unit takes over completely.

Several new initiatives will hopefully help with the backlog.  I will name a few.

Electronic filings are expected to be implemented as soon as this summer on a non-mandatory basis.  The key to the success of this program will be enabling regional centers and project developers to provide one set of documents that are used for the petitions of all of the investors in the project.

Hopefully, the regional center amendment process will be streamlined.  Presently, regional center amendments often take longer to adjudicate than new regional center applications.  I expect that some guidance will be issued that will limit when amendments will be required.

Readjudicating decisions that have already been made has been another problem area.  USCIS is serious about its deference policy and has stated that in any situation where deference will not be applied, the project developer or regional center will be provided the opportunity to appear in person to discuss a decision.

Another area of possible streamlined adjudications involves hypothetical projects.  USCIS has been requesting levels of detail on hypothetical projects that cannot be provided if a project is really hypothetical.  Look for this to change in the near future.

Another new development expected within the next few months is the publication of the universal EB-5 memo that would incorporate all of the previous EB-5 memos in one document.  A previous blog discussed the latest draft of the EB-5 memo.  Some changes are expected from that draft before the final version is published.  Do not be surprised to see the following additions:

• Clarification that not every criterion mentioned in Matter of Ho must be in every regional center project business plan.
• Clarification that EB-5 capital can replace bridge financing either if the deal documents show that EB-5 money was anticipated from the beginning or if capital that was originally expected to be available to replace the bridge financing became unavailable and EB-5 capital is needed to replace the bridge financing.
• More speculatively, there is at least some hope that the final memo will present an adjudication standard that will clarify the USCIS policies relating to NAICS codes and hopefully alleviate the untenable adjudications that create delays or denials in projects that will attract large sums of money and create large numbers of jobs because of issues regarding industry codes.

I expect it to be an interesting next few months on the EB-5 front.  Hopefully, most of the changes will be for the better.

This blog provides my perspective on the state of the EB-5 program based upon what we have seen in the first quarter of 2013.

For prospective regional centers, the first quarter of 2013 has been more productive than the entirety of 2012.  This was both predicted and predictable.  For pending regional center applications, 2012 was almost a total void.  From February 2012, when USCIS announced that it was reevaluating all tenant occupancy cases, to the end of December 2012, when USCIS issued its final tenant occupancy policy, virtually all applications remained in limbo.  Applications pending 4 to 6 months as of February 2012 were pending 14 to 16 months by the time the calendar turned to the new year.

However, since the start of the new year, the pace of I-924 adjudications has hastened.  We have received 3 new regional center approvals just within the last 3 weeks.  We have received 2 exemplar I-526 approvals in the last month.

The bad news is that there are still many I-924s pending for more than a year.  We hope to see the number of approvals increasing significantly as these backlogged cases are adjudicated.

It is still too early to analyze how USCIS is implementing its December 2012 tenant occupancy memorandum.  Many, if not most, of the RFEs that were responded to in 2012 relating to tenant occupancy issues still remain pending as we begin the second quarter of 2013.

While I-924 adjudications have increased, I-526 adjudications for investors in regional centers have gone in the opposite direction.  The processing times have gone from 6 months to 8 months to 10 months to now, in many cases, 12 months.  It is difficult to say if this is a “robbing Peter to pay Paul” phenomenon (increasing resources on I-924 applications at the expense of I-526 applications), a result of the SEC investigation in Chicago and SEC reviews of many investment projects on the market or some other reason.  Certainly it is true that, with the indefinite delays in new regional center applications in 2012, far more projects were marketed through existing, “adopted” regional centers, meaning that the projects have never been reviewed by USCIS when adjudicators receive the I-526 petitions from the investors.

From our experience, it appears that USCIS will take the longest period of time to adjudicate the first investors in a project.  Once a number of investors have been approved (which means that USCIS has evaluated the investment project on multiple occasions), remaining I-526 petitions generally go to the same group of examiners and generally receive much faster processing.  However, for speed of processing times, it appears that direct EB-5s are presently the quickest.

Finally, there is the backdrop of the impending move of the EB-5 unit to Washington.  Presumably, there is substantial pressure to eliminate a significant portion of the backlog before the files are transferred to a new unit.  There is also the impact of the recent appointment of Dan Renaud as the Acting Chief of the Immigrant Investor Program.  Mr. Renaud has an exemplary background in overseeing efficient petition processing in other areas of USCIS, and we hope he will bring those same talents to EB-5.

We hope that some of the favorable trends that we have seen in the first quarter of 2013 will continue in the second quarter and that some of the lingering problems will be resolved in a manner that bodes well for the success of the EB-5 program.

Everyone in the EB-5 world is aware of the complaint filed by the SEC against a Chicago regional center and its principal.  I would like to share some perspectives.

Let me first state that I’m fully aware that a complaint involves allegations and accusations that may or may not be true.

Whether true or not, the complaint has created shock waves on an international basis.  It is front page headlines in China.  What are its impacts?

In my opinion, there could be some positive impacts.  EB-5 will thrive only if good projects are made available by developers acting in good faith.  If there are enough negative headlines, the entire program could die.  Hopefully, the complaint will serve as a warning signal to stave off developers looking to lure foreign investors into untenable (or worse) investments through the EB-5 program.  Developers should be more concerned if the allegations had been more nuanced.  If the allegations are true, this developer engaged in outright theft of funds and blatant fraud.  There is nothing borderline about these charges.

However, I am very concerned whether these headlines, and others like it, could result in the Chinese Government taking action to prevent the outflow of funds to the U.S. for Chinese EB-5 investors.  Certainly, this will be yet another reminder to Chinese agents to be cautious and perform extra due diligence before encouraging investors to invest in a particular project.  For investors, this is clearly a warning to retain a financial professional to research an investment project before investing.  Investors need to understand the use that will be made of their money, what has to happen for the project to go forward, what milestones must be reached for the jobs to be created and whether the developers’ assumptions on which job creation projection is based make sense. The good news is that the watchdog agency did its job, stepping in quickly enough to preserve the investors’ capital before it was disbursed.  However, investors and their representatives may insist on increased internal control mechanisms to enhance the safety of their investments, consistent with the legal requirement that the investment be at risk.

From the lawyer’s point of view, it is another wake up call to be diligent regarding review of projects in which his or her investor clients choose to invest or projects which he or she will be representing before USCIS.  To a great extent, the attorney is unable to go behind the documents to ascertain definitively whether the documents or information provided are true or not.  However, certain warning signs may exist.

In my capacity as Chair of the Best Practices Committee of IIUSA, I have been working with industry leaders in developing best practices for regional centers, project developers and others involved in the EB-5 industry.  This development adds even further importance and urgency to this effort.  We plan to release the results of our deliberations in June.

The EB-5 program clearly does not need any further negative publicity.  Everybody involved in the program – from project developers to regional centers to immigration attorneys to securities attorneys to economists to business plan writers to migration agents to escrow agents – have an important role to play in making certain that the EB-5 program thrives and meets the estimable goals that Congress had in mind when it created the program.

In advising regional centers and EB-5 project developers, I often find myself providing advice something like this: “that’s perfectly legal under EB-5 law, but it will never sell.” Even though my clients are hiring me for EB-5 legal advice, I feel that I am doing less than a complete job if I don’t provide the benefit of the marketing knowledge that I have gained over the years. As I advise my clients, it does nobody any good to prepare an approvable regional center application or project template if no investors will be interested in investing.

In my experience, the investor’s primary interest is that the investment project will result not only in getting the conditional permanent residence but most importantly the permanent green card. Of secondary importance is the likelihood of getting the principal amount of the investment back in a defined period of time. Of far lesser importance is any return on the investment.

Especially in the China market, where most investors are working with agents, many of them have developed a level of sophistication regarding EB-5 legal issues. A project that meets the bare minimum legal requirements may have little chance in the marketplace. Projects relying on challenged economic methodologies (tenant occupancy or visitor spending as examples) may have difficulty finding investors. Investors like to see a “job cushion” (job projection in excess of the amount required for the number of investors) – the more, the better. Some EB-5 professionals – immigration lawyers, economists, business plan writers, securities lawyers – have reputations in investor communities that add credibility to the projects.

Although it may not be first priority, investors generally do want to know that they have a reasonable chance of getting their investment returned in a defined period of time. This is the reason that the loan model has become more popular than the equity model. Loan models with a 5 or 6 year term of the loan have better success in the marketplace than loans of a longer term. It is for this reason that investors generally prefer to be in first position among creditors.

Having the investment money placed in escrow pending the approval of the I-526 petition adds a level of security to the investor. However, it also adds a lengthy period – approximately 8 months – to the date when the developer will receive the EB-5 capital. As a result, various hybrids have developed, including “early release” (money sits in escrow until a certain number of I-526 petitions have been approved and is then released to the project) and “holdback” (an amount remains in escrow to cover the possibility of 10% or 20% I-526 petition denials and the remainder of the money goes directly to the project). These hybrid escrow arrangements have met some resistance in the investor marketplace and are generally considered only if the project is otherwise viewed as very desirable.

Other factors also play into marketing success. Investors generally do not like to see a project where EB 5 makes up virtually the entire capital stack. Investors like to know that the developer has some “skin in the game”. Related to that is the reputation of the developer and/or the regional center. A regional center with many successful projects (especially condition removals) or a developer with a very high level reputation and many successful development projects is clearly a plus. The administrative fee charged to the investor – often in a range between $35,000 and $60,000 – can be an issue to some investors. Finally, various subjective factors play a role. For example, investment projects in certain cities are more popular than those in other cities. Investment projects in certain industries may be favored by certain investors, while others may prefer other industries.

Technically, a client who retains an immigration lawyer to provide EB-5 immigration legal services is not contracting for marketing advice. However, in my experience, the two are so interrelated that, by necessity and as a matter of client service, sharing my accumulated knowledge of the EB-5 investor marketplace becomes a critical part of my advice to clients.

Slowly but surely, there has been an increased interest in direct EB-5. By direct EB-5, I mean EB-5 investments outside of the context of a regional center.

Traditionally, the choice has been an investor investing in his own business, which requires producing 10 direct and full-time jobs for U.S. workers, or investing in a regional center, which allows for indirect and induced employment creation. Regional center investments have been of more interest to developers and businesses because far more investment capital can be raised based upon the increased employment numbers that come from indirect and induced jobs. Investors, too, and their agents, have preferred regional center investments because of the aura of government approval of a regional center and, in some cases, USCIS approval of an exemplar I 526 petition for the project.

So what changed? For the project developer and the business, it has become far more difficult to create a new regional center and even then only at great expense and great delay. If a regional center already exists, the timing to amend the regional center to add industry codes or geography may be unrealistic. The alternative always exists of having a business or project sponsored by an existing regional center, but that action comes at a cost that may be prohibitive and potentially a loss of control of at least some aspect of the project.

From the investor’s point of view, fewer and fewer exemplar I-526 “project preapprovals” are coming to market because the timeframe to obtain the project preapproval has become unrealistic. In addition, USCIS has backed off of the original concept of project preapproval and has stated clearly that it does not consider itself bound by such a “preapproval”. The net result is that regional center projects have lost some of their luster.

As a result, we now regularly factor into our advice to project developers and businesses seeking capital the option of the pooled investor direct EB-5. And, in our discussions with agents, we now see more willingness to consider the direct EB-5 option.

Obviously, the option only exists to the extent that direct W-2 jobs will be created through the investment. If so, the direct EB-5 option allows the business or developer to market the project to investors virtually immediately without having to obtain any USCIS preapproval. Another advantage is the elimination of the need for an economic report to project indirect and induced jobs. However, the need for a comprehensive business plan to present direct job creation projection in a credible manner is still critical.

There are some advantages and disadvantages from the investor’s perspective. Unlike with the regional center loan model, the investor must be an equity investor in the job-creating enterprise. This could be common shares or preferred equity. In either event, the investor’s chances for a more substantial return could be enhanced but at the expense of a less certain exit strategy.

Another issue is the need for an investor to be something other than a purely passive investor. This legal obligation is met in the regional center context by granting the investor all of the rights and responsibilities of a limited partner under the Uniform Limited Partnership Act. In the context of a direct EB-5 investment, if the investor is not going to be employed by the investment enterprise, at the very least the investor should be placed in an advisory capacity similar to the capacity he would have as a limited partner. The USCIS training materials for EB-5 make clear that USCIS is very flexible in adjudications relating to this requirement.

One of the attractions of the direct EB-5 is the elimination of the plethora of issues that have arisen recently in the adjudication of regional center applications and regional center project adjudications. Tenant occupancy jobs, guest expenditure jobs, NAICS codes, bridge financing…these are just some of the issues involved in regional center project adjudications that do not have to be surmounted with a direct EB-5.

However, while there may be fewer issues, the I-829 condition removal process may be more problematic. Whereas there may be no need to count actual workers in regional center I-829 adjudications, there is a need to do so with direct EB-5 adjudications. This means that the business or developer must document, through W-2 forms, I-9 forms and quarterly tax returns, the actual number of employees. In addition, unlike with indirect and induced jobs, there is a need to prove that each employee is a U.S. citizen or a permanent resident or other qualifying employee. This requires obtaining documentation not normally obtained in the I-9 process, which could put the commercial enterprise at risk of a national origin or citizenship discrimination charge if not handled properly.

In a number of our client representations, we have recently advised of the benefits of a hybrid solution. If there will be direct job creation, but insufficient direct job creation for the number of investors required, or if future projects are envisioned that would benefit from indirect and induced employment projections, the optimal solution may be to proceed concurrently with direct EB-5 for the first group of investors while concurrently filing a regional center application for future investors in the same project and/or for future projects. For example, if there will be 200 direct employees, the first 20 investors could invest $20 million (or $10 million if it is a TEA) before a regional center is approved, while the remainder of the EB-5 investment money will come along at a later date once the concurrently-filed regional center application is approved.

Of course, all of this may change if USCIS actually successfully implements its proposed new EB-5 office in Washington, DC and, in fact, adjudicates regional center applications in the targeted 90 to 120 day time period.