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.

USCIS Mandates New Petition Filing When H-1B Employees Move

April 13th, 2015 by William Stock

Last Friday, the USCIS Administrative Appeals Office (or AAO) issued a precedent decision in a case called Matter of Simeio Solutions, LLC.  The decision involved the revocation of an H-1B petition for an employer which had failed to list the locations of actual employment of an information technology consultant on its H-1B petition.  The AAO used its decision upholding this revocation to enunciate a broad rule applicable to all H-1B employers: “A change in the place of employment of a beneficiary to a geographical area requiring a corresponding LCA be certified to DHS with respect to that beneficiary may affect eligibility for H−1B status; it is therefore a material change” that requires filling a new H-1B petition.

As a decision designated as precedent, this new rule is “legally binding on the DHS components responsible for enforcing immigration laws in all proceedings involving the same issue or issues,” as explained by the USCIS website, and therefore future adjudicators will have to regard the movement of any H-1B employee to a new geographical area as requiring the submission of an amended H-1B petition, even if there are no other changes in the terms and conditions of employment, and regardless of whether the employer’s salary exceeds the required wage in the new geographic area.

Employers should review their practices with regard to H-1B employees, including tracking when they are assigned to new worksites not previously covered by a Labor Condition Application, and how many geographic locations of potential employment they identify in their H-1B petition filings.  To comply with the new rule, it is not clear whether it is enough for an employer to have a pre-existing LCA covering the location of employment, and pay the H-1B employee in accordance with that LCA.  Having such an LCA and paying the employee under it would satisfy the Department of Labor regulations on LCAs, but it may no longer satisfy USCIS, given the broad language of this precedent decision.

H-1B employers and their H-1B employees may wish to challenge this rule.  If challenged in court, USCIS will likely assert that the Simeio decision merely interprets an existing regulation.  Employers can point to cases in which courts have distinguished between “interpretations” (which do not require advance notice to the public) and “substantive rules” (which require notice and public comment according to the Administrative Procedures Act).  Where a formal, binding decision like this one changes an agency’s policies, courts have held that notice and comment by the public is necessary for the rule to be valid.

Employers who would like a review of their H-1B practices should feel free to contact a Klasko Immigration Law Partners attorney.

China EB-5 Market: 2015 (Part 2) – What’s New and Hot in the China EB-5 Market

April 1st, 2015 by H. Ronald Klasko

In my last blog, I discussed a number of factors that are having and could have an impact on the market for Chinese EB-5 investors. In this blog, I will list and discuss hot topics and new developments regarding EB-5 projects and agents in China.

  1. Types of projects – While hotels remain at or near the front of the line, the hottest projects appear to be health care-related projects (hospitals, ALFs), residential and multi-family and infrastructure projects or any projects with government money or government support.

  2. Escrow – Among the major agents, there is near-uniform understanding that traditional escrow is no longer feasible given government processing times of 14 months and higher. There is greater receptivity to release of funds upon I-526 filing or at least release of some percentage of the funds with the others held back until I-526 and/or exemplar approval. However, a credible developer guaranty of return of the funds to the investor if the I-526 petition is denied is critical.

  3. Geography – Manhattan is hotter than ever. It is followed closely by Los Angeles and San Francisco. Seattle is also very hot. The next tier includes Las Vegas, Florida (mostly Miami and Orlando), Houston and Dallas. Chicago still lags. However, most agents agree that a strong project with a strong developer trumps the lack of a first tier location.

  4. Chinese developers – Many of the major Chinese developers are getting into the U.S. EB-5 market. It is interesting that there are strong differences of opinion regarding the interest of Chinese investors in investing in projects developed by Chinese developers. Some think there is an added comfort level, while others prefer investing in the U.S. with U.S. developers.

  5. Administrative fees – Like everything else, they may be going up. While the market is still $45,000 to $50,000, some projects are moving forward at $55,000 or $60,000. It is not yet clear whether these projects with increased administrative fees will meet resistance in the market or become the new norm.

  6. Timing of EB-5 – One theme shared among many agents is a preference to have EB-5 money come into the project after construction has already started. This adds a level of assurance that the project will actually go forward. This ties into a related theme that agents and investors like to invest in projects that would go forward with or without EB-5 money.

  7. Private equity investments – Agents and EB-5 investors are more interested than ever in considering private equity investments instead of or in addition to EB-5 investments on desirable projects.

  8. Multiple EB-5s – While most of the impact of impending EB-5 quota retrogression in China is negative, one positive impact for the EB-5 market is that some investors, at the urging of agents, are filing multiple EB-5 petitions based on multiple investments where their children would likely age out because of the quota retrogression.

  9. Returning money – It is interesting that there are differing opinions in the Chinese market regarding the importance of projects returning money to the investors. Some view this as a critical element for the future of the EB-5 program, while others seem to assume that many projects will not return the money and that this will not have a major impact on EB-5. All agree that the number one priority is that investors get their conditions removed.

  10. Big name regional centers – Multiple agents commented on the decline of some of the biggest name regional centers in the China market. It’s not clear why this has occurred, whether it is related to rumors of SEC investigations or otherwise.

  11. Taxes – For whatever reason, Chinese agents and Chinese investors appear to be more concerned about U.S. taxation issues than ever before. The pattern of having the investment in the name of the spouse (usually the wife), having the spouse and child immigrate and having the principal breadwinner remain in China and use a multiple entry visitors visa to enter the U.S. remains a strong trend. However, some investors whose family are in the U.S. as permanent residents have had trouble obtaining B-1/B-2 visas.

I have not attempted to recount many of the developments in the China market that I have covered in previous blogs. However, many of those factors remain prevalent in 2015. I would urge the readers of this blog to refer to those previous blogs for further information.

EB-5 RFE Trend: USCIS Searches of Public Business Registration Records in China

March 31st, 2015 by F. Oliver Yang

In the December 5, 2014 USCIS EB-5 Stakeholder Engagement, Immigrant Investor Program (IPO) Chief Nicholas Colucci mentioned that one of the agency’s top priorities is to collaborate with law enforcement and regulatory organizations to help prevent fraud and develop new ways to further enhance confidence in the EB-5 program. According to Mr. Colucci, USCIS intends to strengthen program integrity by (1) conducting more site visits both domestically and abroad to validate supporting documentation; (2) utilizing new commercial and government databases; (3) expanding the Fraud Detection and National Security (FDNS) team; and (4) providing additional training to the FDNS team on combating money laundry and fraud.

While Mr. Colucci did not elaborate on the details of the new initiatives, we think they will inevitably lead to an increase of Requests for Evidence (RFE) on lawful source and path of funds documentation. In fact, investors have witnessed a sizable increase in the number of RFEs on source and path of funds since late 2014. A close look at those recent RFEs suggests that USCIS has indeed been implementing new measures to validate source of funds documentation submitted by EB-5 investors.

View rest of post »

U.S. Naturalization for the Global Traveler

March 31st, 2015 by William Stock

Many green card holders or Lawful Permanent Residents (LPRs) travel frequently for their employment or to spend time with extended family outside the United States.  We have two resources on our website for individuals in that situation, covering how to avoid losing your green card and how to be eligible for naturalization.

We get a fair number of questions from LPRs who have traveled frequently about how to calculate when they will be eligible to apply for naturalization.  In making those calculations, there are actually three separate presence-related requirements: never having abandoned LPR status, having enough physical presence (no more than ½ of the required time outside the United States), and having “resided continuously” in the US during the 5 (or 3) years of continuous residence, which is the requirement that causes the most confusion about how to calculate. 

View rest of post »

China EB-5 Market: 2015 (Part 1) – Factors Affecting the Market

March 27th, 2015 by H. Ronald Klasko

Having returned from another trip to China and having met with many of the top migration agents in China, I would again like to share my thoughts in this blog on the state of the China market for EB 5 investors at the present time. In my next blog, I will discuss hot topics and new developments regarding EB-5 projects and agents in China.

2015 is an unusually pivotal year for EB-5. Many events are expected to occur in 2015 that could significantly impact the market. Here is how it looks to me based on my many meetings with agents:

  • The single biggest issue affecting EB-5 in 2015 is clearly the impending quota retrogression. Some agents view the quota retrogression as a reason to step back until the impact becomes clear. More agents realize that it is important to get their investors to establish their place in line as soon as possible and have reported that the quota backlog is not a drag on the market.

  • The impact on children is having multiple effects. Some investors are filing sooner while their children are age 18 or younger. Some investors are gifting the money to the child and having the child be the investor. Other investors are making two investments – one for the parents and one for the child.

  • Some agents expressed concern about the expiration of the regional center program on September 30, 2015. Most agents are aware that the program has been extended many times and that the chances of extension again in 2015 are extremely good. Mostly, this is not a drag on the market.

  • There are rumors in China that the minimum investment amount will increase from $500,000 to $800,000. Most agents with whom I spoke are not too concerned with this. If anything, it would be a reason for investors to expedite their investments. Most agents believe that investors would be willing and able to invest an increased amount if necessary.

  • I discussed with a number of agents the impact of the availability of ten year multiple entry B 1/B-2 visas for Chinese nationals. Although some thought there could be an impact on EB-5 and perhaps was an impact on EB-5 in late 2014, in the end it appears to have very little impact on investors who would otherwise be interested in EB-5 investments.

  • Two items of expected bad news in 2015 are the SEC investigation of major regional centers and immigration attorneys and the expected release of the U.S. GAO report on EB-5. Of course, no one knows for sure what the impact of these two events will be, but the feeling is that, on top of a lot of negative publicity from major media sources, there could be a negative impact on investors.

  • The closing of the Canadian program has resulted in many “orphan” EB-5 investors. This has had a positive effect on the EB-5 market.

  • The Chinese real estate market has experienced a decline, especially in the four largest cities. Reactions among the agents are mixed as to the impact that this is having and will have on EB-5 investors.

  • The Chinese government has instituted an “anti-corruption campaign”. Although I had heard that this could have an impact on Chinese EB-5 investment, all agents denied that this would lead to fewer EB-5 investors.

In summary, there are signs that 2015 could be a tumultuous year for EB-5. However, the consensus is that, as long as the quota backlog does not become too long, the Chinese EB-5 market will remain a healthy one.

       
Copyright © 2015 Klasko Immigration Law Partners, LLP. All rights reserved. Review our disclaimer.
Disclosure: Law firm web sites such as this one are considered 'Attorney Advertising' by the State Bar of New York.