USCIS Stakeholder’s Meeting – Source and Path of Funds

February 27th, 2015 by Anu Nair

On February 26, 2015, USCIS held a Stakeholder’s Meeting to discuss EB-5 source of funds issues. The speakers included Ebony Turner – Relations Officer, Julia Harrison – USCIS Deputy Chief, and several USCIS EB-5 SPOF adjudicators. I appreciate USCIS taking the time to hold the meeting and listen to the questions posed by Stakeholders and hope that USCIS considers the feedback received from Stakeholders seeking consistent adjudication of I-526 petitions.

USCIS focused on three major sources of funds: (i) income accumulation (salary, bonuses, dividend distribution); (ii) personal property (using sale of property or home equity loan); and (iii) company equity. For each of the three sources of funds listed above, the officers reviewed the type of documentation generally required, major issues, and possible RFE triggers. There was little mention of path of funds.

For the most part, USCIS did not deviate from the document checklist and RFE triggers that our firm has been providing to our clients for years. But there were three interesting points where USCIS was clearly deviating from their previous adjudications:

1.  According to USCIS, administrative fees do not need to be sourced as USCIS does not have a “legal basis for requiring the . . . administrative fee . . . [to have] a lawful source.” Instead, USCIS only requires proof of administrative fee payment as confirmation that the administrative fee was not deducted from the $500,000 or $1 million investment.

This is a clear change from previous USCIS adjudications and policy. In a prior Stakeholder’s Meeting, Alejandro Mayorkas, then director of USCIS, confirmed that the administrative fees must be sourced. More importantly, in cases where the administrative fees were not sourced, USCIS has routinely issued requests for evidence requiring investors to source the administrative fees.

Our firm has previously argued that the regulations do not require administrative fees be sourced. So while this is a welcome change, it highlights a bigger issue that EB-5 attorneys and investors face every day: USCIS deviates from long-held policy and adjudication practices with no prior notice. Accordingly, until there is clear guidance from USCIS in writing, our firm will continue to recommend that administrative fees be sourced.

2.  USCIS noted that it was re-visiting its current policy on personal loans. Specifically, in cases where the investor uses private property as collateral for a personal loan from a family member, friend, or business associate, USCIS is debating whether to require the private lender to source the funds of the loan in addition to the source of the investor’s collateral.

Currently, USCIS only requires the investor to source the funds used to purchase the collateral and does not require the private lender to source the loan proceeds. If there is to be a change in policy, we hope USCIS will issue a public notice confirming the change in policy and, more importantly, not apply the new standard to pending cases.

3.  For property cases, USCIS noted that the collateralized property/sale of property must either be owned by the investor or the proceeds of the sale/loan must be gifted by the owner to the investor.

It is common practice in Asian culture, especially in China and India, for parents to purchase a property and register it in the names of their children. Subsequently, when making an EB-5 investment, one parent will obtain a loan using the property as collateral and use the loan proceeds as the source of the investment funds.

Over the past several years, USCIS has routinely approved these types of cases. However, USCIS recently began issuing NOIDs and denials on exactly these types of cases – again with no prior notice to the public.

Without set guidance from USCIS, we rely on previously approved petitions to determine whether a source of funds for subsequent petitioners will be successful, with the expectation of USCIS deference for adjudication of such cases. Conversely, USCIS appears to be applying new guidelines to pending petitions, without prior notice of policy change.

These inconsistent adjudications are causing uncertainty in the EB-5 space at a time when, with the establishment of the new IPO, it is reasonable to expect more transparency and consistency with no drastic changes in policy. We hope USCIS takes note of Stakeholder’s concerns in the February 26 call and offers clear and timely responses to the questions raised.

Preview of the Invest In America Summit

February 25th, 2015 by H. Ronald Klasko

Many readers of this blog are considering whether to sign up for the Invest In America Summit, which this year will be held in Shanghai (March 14 & 15), Shenzhen (March 18) and Beijing (March 21). At several levels, this is a very worthwhile event. As the largest annual EB-5 conference and trade show held in China, it brings together regional centers, developers, attorneys, economists, over 100 migration agents, large numbers of individual Chinese investors and Chinese government officials involved with the EB-5 migration program. For this reason, many of our clients will be exhibiting in one or more of these three cities, hoping to capitalize on networking opportunities with investors and agents.

In addition, I believe this year’s program will be the best ever. By way of full disclosure, I do not state that as an impartial source. This year, I have been asked to prepare the program, together with two other well-known EB-5 immigration lawyers (Steve Yale-Loehr and Bernie Wolfsdorf). I want to take this opportunity to highlight the topics we have chosen for the program and the reasons for choosing those topics.

  1. Impacts of Quota Retrogression – This is perhaps the hottest topic, since quota retrogression will likely occur for Chinese investors in the summer of 2015. We will be discussing the impacts of quota backlogs on investors, investors’ children, project developers and agents, as well as strategies for lessening the impact of quota backlogs. We will also discuss prospects for legislative or other relief.

  2. Choosing a Project – Due Diligence Issues for Agents and Investors – We will be discussing who should perform due diligence, which issues affect approvability of the I 526, which due diligence issues affect condition removal and due diligence issues affecting marketability of the project. This topic is especially critical given the increased scrutiny being given to projects by the SEC and other U.S. government agencies.

  3. What Investors Need to Know About Permanent Residence Status – We have included this topic because it is among the most frequently asked questions that we receive from investors. Investors want to know how much time they need to spend in the U.S., the impact on other family members if the investor abandons permanent residence status, the benefits granted by permanent resident status and possibilities of becoming a U.S. citizen.

  4. Direct vs. Regional Center Investment – Although regional center investments are clearly the most popular, especially in China, there are both an increasing number of investors who are interested in direct EB-5 investments and an increasing number of direct EB-5 projects, including pooled direct EB-5, available in the market. This panel will discuss the types of direct projects, advantages of direct and regional center projects, differences in each at the condition removal stage and legal issues in direct and regional center filings.

  5. Escrow Arrangements from the Viewpoints of the Investor and the Developer – Because of the unprecedentedly lengthy I-526 processing times, traditional escrow is often not an option. This has spawned various types of hybrid escrow arrangements. This has everything to do with when money will be made available to the project. As such, it is a critical issue in 2015.

  6. Source and Path of Funds – Within the last year, USCIS has faced greater scrutiny on source of funds issues. Recent media outlets have questioned EB-5 investors’ source of funds. In addition, the government of China has, within the last year, reduced the options for currency exports. For all of these reasons, this is a topical subject.

  7. Everything You Need to Know About TEAs – Unemployment rates around the country have decreased significantly within the past year. Areas that were once TEAs may no longer be TEAs in 2015. The issue of how TEA areas are determined, when they are determined and how changes in TEAs during the middle of the marketing of a project can affect developers and investors are critical issues.

  8. Securities Laws and EB-5 – Myths and Realities – One of the hottest topics of 2015 is the increased involvement of SEC in EB-5. This expanding role will be discussed in this panel. Included in the discussion will be securities issues in marketing of projects, PPM disclosure issues, accredited investor issues, broker-dealer issues and other related topics.

  9. New Developments and Hot Topics in EB-5 – This panel will be an opportunity to discuss hot topics that are not discussed in other panels. Included in the discussion is likely to be I-526 and I-829 processing times, prognosis for regional center program extension, other legislative changes on the horizon, RFE trends and anything else that is hot at the time of the program.

We think we have put together an excellent and highly topical program. I expect that I will see many of you in China in March.

The ABC Fallout – Time for the EB-5 Industry to Take the Offensive

February 12th, 2015 by H. Ronald Klasko

Once again the EB-5 industry has been slammed by a major media source. Once again the “news” is not news at all but rather rehashing of discredited stories that are years old. Once again the EB-5 industry is put in a position to react defensively to justify a program that should be held on a pedestal as a sample of how a Congressionally-established government program can really work to further a public interest at no cost to the public.

Unfortunately, this cycle will likely continue unless the EB-5 industry mounts an offensive in a concerted fashion to make the public aware how the EB-5 program has contributed billions of dollars to the U.S. economy and hundreds of thousands of jobs to the U.S. workforce. Sure, there have been some positive press in local media. However, major national and international media, such as Fortune Magazine and ABC News, feature negative stories about EB-5 that resonate with the public, with the media, with government officials, with investors overseas, with banks providing financing on projects with EB-5 money, with developers considering using EB-5 money.

I suggest that, right now, this is among the most urgent issues confronting the EB-5 community. It is past time for regional centers, project developers, local community officials, regional centers and developers to mount a major media offensive telling the easily-told stories of how EB-5 has contributed to the economy, to job creation, to community development. This may take some commitments of money and resources. It is not something that can be done by attorneys. The EB-5 industry fails to do it at its own jeopardy. Rest assured, Senator Grassley and other opponents of the program will continue their efforts to bring the program down.

The ABC “expose” focuses on allegations made by Senator Grassley in 2012 and 2013 in his ongoing attacks against then-USCIS Director Mayorkas for his support and leadership of the agency administering the EB-5 program. Senator Grassley’s allegations at that time – and ABC News’ recounting of those allegations years later – focuses mostly on the SLS Hotel in Las Vegas, one of the largest EB-5 projects. I was proud to be immigration counsel for that project for which EB-5 money was an important part of the capital stack used to build the largest new casino hotel on the Las Vegas strip.

Senator Grassley’s allegations in 2012 and 2013 – repeated almost verbatim by ABC News in 2015 – revolves around two issues:

  • That there is something somehow illicit about USCIS granting an expedite request; and
  • That Director Mayorkas forced USCIS officials to approve EB-5 investor petitions for investors with serious criminal or security problems in their background.

There is no basis whatsoever for either allegation.

First, let’s look at the expedite issue. There is nothing illicit about an expedite application being made or being approved. USCIS has long had published expedite criteria for all applications filed before it – not just EB-5. USCIS has long approved many such expedite applications for many different types of visas and permanent resident applications. In my opinion, the SLS application requesting an expedite was one of the strongest expedite applications that I have seen, and it was not at all surprising that it was approved. Senator Grassley was obviously disturbed that Majority Leader Reid actively supported the expedite. There is nothing either wrong or unusual about a Senator or Congressman supporting an expedite request.

What does an expedite mean? It means that certain applications will be reviewed in advance of other applications. It does not mean that the review will be less extensive than otherwise would be – just sooner.

It certainly doesn’t mean that security checks will be circumvented. In fact, in every expedite of every type of immigration application, full security checks are completed before adjudication.

In fact, in the SLS case, the review was very thorough. USCIS issued a very extensive RFE, which received a very thorough and extensive response. The so-called “expedite” resulted in EB-5 petitions being approved seven months after filing. Interestingly, the expedites took longer than the normal I-526 processing time only a few short years ago, which remain the USCIS target for I-526 processing time.

The ABC News account details the allegations of anti-Mayorkas “whistleblowers”, who stated that they were pressured to approve investors with criminal backgrounds, fraudulent documents and unlawful immigration histories. Again, there are at least two problems with these allegations, neither of which are discussed by ABC News.

The first problem is that these allegations resulted in scores of approved EB-5 petitions being returned from the National Visa Center to USCIS to reconsider the approvals to consider the published allegations. In 100% of the applications, a further review resulted in re-approvals of the applications.

Even more troubling is the fundamental misunderstanding of the immigration process manifested in the ABC News story. The story makes it seem that EB-5 is a convenient way to short circuit normal security and criminal processing that bars unsavory immigrants from U.S. shores. In fact, the EB-5 program has more levels of review of an immigrant’s background than any other method of immigrating to the U.S. With family and employment-based immigration, there is only one level of criminal/security review, which occurs at the time of application for adjustment of status to permanent residence or application for immigrant visa at a U.S. Consulate. For EB-5 immigrants, the security review process is far more extensive. First, USCIS performs a meticulous review of the investor’s lawful source of funds. USCIS also performs security reviews prior to approving an I-526 petition. When the I-526 is approved, the U.S. Department of State conducts extensive criminal and security checks as part of its admissibility review for issuing the conditional immigrant visa to the investor. With EB-5 – unlike with most immigrants – there is yet a further security check at the condition removal stage before the immigrant becomes a full permanent resident of the U.S.

The “expedite” only relates to the I-526 petition. There is no expedite procedure for the criminal and security checks performed by the U.S. Department of State after the I-526 petition is approved.

The allegations of the whistleblowers simply make no sense. Even if one could believe that USCIS knowingly approved the EB-5 petitions on the first level of review despite available evidence of criminal problems, fraud problems and security problems, and even if one could believe that USCIS re-approved after re-review the very same petitions, there is no conceivable way that an independent agency – the U.S. Department of State – purposely overlooked or disregarded the supposed discoveries of the “whistleblowers” in issuing immigrant visas in 100% of the cases.

It’s getting a bit old defending a win-win-win government program (a rarity in itself) and continuing to find the EB-5 industry on the defensive. It is well past the time for the EB-5 industry to tell its story loud, clear and with pride.

What’s So Special About Our EB-5 Seminar?

January 23rd, 2015 by H. Ronald Klasko

A number of our readers and clients have inquired as to how we chose the two main topics for our inaugural EB-5 seminar on February 10th in Philadelphia. The short answer is that we chose two topics that (a) are very hot and uppermost in our clients’ minds and (b) are least discussed in other seminars and other written forums. These two topics are the EB-5 marketing process, most especially in China and India, and the compliance responsibility of regional centers and project developers, most especially with respect to condition removal.

As I have written about on numerous occasions, and as I constantly discuss with my clients, the fully-compliant EB-5 project will only be successful if it is marketable. The morning of the seminar will be devoted to project marketability. Featured speakers will include prominent migration agents from China and India, as well as the General Manager of EB-5 Market Connect, which is a company (with full disclosure, of which I am a principal) that matches EB-5 projects with overseas migration agents.

The marketing panels will feature:

  • presentations on successfully marketed projects in China;
  • helpful advice from agents on the Chinese and Indian markets;
  • characteristics of a project that affect marketability;
  • how best to relate to an overseas migration agent;
  • cost of capital considerations;
  • changes in marketable escrow arrangements; and
  • other issues affecting marketability.

The afternoon will be focused on compliance, including annual reporting, condition removal and securities law compliance. Our invited guest speaker will be Reid Thomas from NES Financial. NES is the largest escrow agent in the EB-5 realm and is also the creator of the leading software product to enable regional centers and project developers to monitor investments, construction expenditures and job creation. Our firm will discuss its industry-leading compliance team, which includes a lawyer, a paralegal and an auditor for each of our client’s projects. The panelists will discuss creation of systems, databases, software, personnel needs and best practices regarding both the I-924A annual compliance process and the I-829 condition removal process.

There are three other aspects to the seminar that are worthy of note. A one-hour EB-5 fundamentals program will be offered in the morning before the regular program commences. The luncheon program will feature hot topics in EB-5, including forecasts of legislation, new regulations, regional center program renewal and USCIS policy making. Finally, the program will end with a networking reception at which our attorneys and guest speakers will be available and at which all of the attendees will have an opportunity to share questions and experiences.

We are excited to be hosting this event, and we look forward to seeing many of you in Philadelphia on February 10th. Register Now!

Open Letter to Director Rodriguez and Chief Colucci

January 6th, 2015 by H. Ronald Klasko

I was heartened by the remarks of Director Rodriguez at the recent EB-5 stakeholders engagement in which he extolled the virtues of the EB-5 program and emphasized the importance of USCIS’s role in maximizing the benefits to the U.S. economy as Congress envisioned when it created the EB-5 program.

At the same time, I was struck by the inconsistency between these laudable goals and the continuation of procedures that do not further these goals but rather, in many ways, thwart the efficient processing of EB-5 petitions.

I have on many occasions suggested changes in policy and in legal interpretation that would improve the EB-5 program. That is not the purpose of this letter. Rather, the purpose of this letter is to suggest purely procedural processing improvements that could, without expending additional resources, significantly improve the EB-5 program in ways that would benefit investors, regional centers, project developers and the U.S. economy. Indeed, I would venture to say that the suggestions below would be beneficial to all parties, including USCIS, and detrimental to none. As such, I sincerely hope that you would reconsider implementing some, if not all, of the below suggestions.

Here is my list:

  1. USCIS must reduce processing times for project applications. This is absolutely critical for the success of the program. There is no question that it is to everyone’s benefit – USCIS, project developers, investors – to have USCIS adjudicate an approved project before investors invest and file I-526 petitions. However, this goal will never be achieved if project developers have to wait 8 months, 10 months, 12 months or longer for project approvals before investors can invest and file. It is the rare project that can afford a delay of that length before bringing investment funds into the project. If project developers are not assured of a consistent 4 month processing time, USCIS will continue to double its workload by forcing project developers to proceed to market the project, resulting in investors filings I-526 petitions, while at the same time filing I-924s with exemplar petitions. USCIS then must adjudicate the exemplar projects on I-924s, adjudicate the same projects on I-526s, issue RFEs on I-924s and issue perhaps hundreds of the same or inconsistent RFEs on the project on I-526s. This is the present system in which no one wins, and everyone loses. Eliminating these multiple filings and multiple RFEs would realize a significant saving in manpower and resources, which could enable USCIS to meet the 4 month processing goal without having to add additional staffing.

  2. USCIS should expedite I-526 processing for investors in an approved project. In order to encourage project developers to use the I-924 process to obtain project approval, there should be some benefit to the project and its investors. A logical benefit would be to have investors in such projects receive I-526 adjudications far more promptly than investors in other projects. This not only serves the benefit of motivating developers to obtain project pre-approval. It also recognizes that the adjudication process for such investors is far more streamlined and straight forward.

    The most time consuming aspect of the I-526 processing is the adjudication of the qualification of the project. Once this is completed, a separate dedicated staff of adjudicators whose only role is to adjudicate source and path of funds should be able to complete the adjudication in 3 to 4 months. It only makes sense that these petitions should have a prompter processing time than petitions that require full project adjudication. In fact, if the only issue is source and path of funds, USCIS should be able to reconsider the availability of premium processing for such petitions. Premium processing, in turn, would increase fee revenue, which could produce funds for more adjudicators. This procedure would put EB-5 in line with other family-based and employment-based petition processing since employer I 140 petitions and family I-130 petitions are adjudicated separately from permanent residence applications of alien beneficiaries.

  3. USCIS should process all project I-526s together. USCIS has been inconsistent in its application of two different concepts. On the one hand, USCIS at various times has stated that it will process all project I-526s together as a matter of processing efficiency. In fact, there were many examples where later investors in a project were processed far more quickly than earlier investors because all project issues were resolved.

    More recently, it appears that this laudable objective has fallen by the wayside in favor of a strict FIFO processing objective. This has resulted in processing inefficiencies whereby adjudicators are looking at investors in a project over a period of many months or sometimes even more than a year. This is also detrimental to many projects which require approval of a certain number of investors before any money can be released to the project. The result is that projects may be held in abeyance until it becomes clear that a minimum number of investors have been approved and their funds released from escrow.

  4. A separate processing queue should be implemented for investors who are subject to quota retrogression. This is another change that would have all winners, and no losers. Investors subject to quota retrogression gain no benefit upon the approval of the I-526 petition. Many suffer a detriment because longer processing times could enable their children to immigrate with them under the provisions of the Child Status Protection Act.

    Investors not subject to quota retrogression would also win because their petitions could be adjudicated far more expeditiously, and they can actually benefit from the adjudications of the petitions by being able to immigrate to the U.S. sooner.

    USCIS would benefit by devoting its resources in a manner that maximizes benefits to its stakeholders without any need to expand its resources. Such a procedure would not be novel since USCIS has long delayed processing of family-based I-130 petitions in categories with long quota backlogs simply as a matter of allocation of resources.

  5. USCIS should have a separate processing line for direct EB-5 investors. Up until the last year, when USCIS has tried to implement a straight I-526 FIFO processing scheme, direct EB-5 petitions were adjudicated far more promptly than regional center applications. This system made a lot of sense for some of the same reasons mentioned above with respect to I-526 petitions for investors in approved projects. Why should a direct EB-5 investor have to wait in line behind hundreds of investors in projects that require complex adjudication? By contrast, most direct EB-5 projects involve far fewer issues for the adjudicator to deal with.

    There is another reason why direct EB-5 investors should be in a separate – and shorter – queue. Unlike regional center investors, whose presence in the U.S. is not necessary for the development of the investment project, often the direct EB-5 investor is the hands-on manager of the investment project. As such, his presence in the U.S. is critical on a far more expeditious basis.

  6. The attorney for the investment project or the regional center should be recognized by USCIS. There are clearly two parties to an I-526 petition – the project developer and the investor. In many cases, the attorney for the project developer is different than the attorney for the investors. USCIS’ present modus operandi, which recognizes only the investor’s attorney on an I-526 petition, creates various anamolous results. The attorney for the investor has to file a petition consisting mostly of information about a project for which the investor’s attorney is not responsible and often has no knowledge of its veracity. If USCIS has questions about the project, it is in the anamolous situation of issuing an RFE to the investor, who does not know the answer. The project developer is in the anamolous situation of having to hope that the investor or the investor’s attorney sends the information to the project developer. The project developer is reliant on the investor’s attorney to submit its response, unaltered, even though the attorney does not represent the project developer. The present procedure invites different responses from different attorneys to the same RFE about the same project.

    Of course, this result would be obviated if USCIS adopts the earlier suggestions in this letter that would result in project issues being dealt with at the I-924 stage – a petition for which the developer’s attorney has filed a G-28. However, unless and until that happens, USCIS should act consistently with other employment-based petitions. In all of the employment-based petitions, USCIS recognizes that the employer may have different counsel than the employee. The I-526 petition is the only example in which USCIS forces two completely independent parties to have the same attorney, to the detriment of everyone.

    If USCIS recognizes the project developer as a separate party in the I-526 process, it would only be required to issue one RFE for the project instead of, for example, one hundred RFEs for one hundred investors in the project. This is clearly lose lose.

  7. ELIS is an example of a laudable goal with a seriously flawed implementation. ELIS should be implemented in such a manner that there is one set of project documents available to investors and their attorneys online. The almost total lack of usage of the system as implemented is proof positive of the user-unfriendly nature of the system as presently implemented. USCIS should work together with stakeholders to develop a system that meets the needs of USCIS and stakeholders. In this situation, those needs should be co-existent.

  8. USCIS should create an I-829 exemplar process. Less attention has been paid to the I-829 process, largely because only a small percentage of investors have reached the point of I-829 filing. As more and more such applications are being filed, the same kind of processing inefficiencies that have reared their ugly heads in the I-526 process are manifesting themselves in the I-829 process.

    Take a project with 100 investors. 100 different petitions with possibly 100 different attorneys are filed containing documentation of which the investors and their attorneys know very little and cannot certify the veracity. Virtually 100% of the I-829 petition involves documentation that is only available to the regional center and the project developer. Hopefully – but not definitely – all 100 I-829 petitions will contain the same information about the project and its job creation. If USCIS has questions about the job creation or the issue of whether the investors have sustained their investments, USCIS would need to issue 100 Requests for Evidence. Is all of this necessary? Does it really make any sense?

    This writer believes that the answer to both questions is in the negative. What makes more sense is to have an I-829 exemplar process whereby USCIS can adjudicate all issues relating to the project. This would be filed by the project and its attorney. Any issues specific to the investor could be filed on the I-829 by the investor’s attorney when his filing window is reached. Any issues relating to the project should be adjudicated before most investors file their I-829 petitions.

    Of course, there may be some instances in which there are enough jobs for the early investors at the time they file their I-829 petitions and then more jobs are created by the time later investors file their I-829 petitions. This can be dealt with through a procedure to update or supplement the I-829 exemplar petition.

  9. USCIS should provide a procedure for an I-829 exemplar petition to be filed immediately for projects that have been subject to material changes. When there is a material change in a project after the approval of conditional residence, the investor has to wait 21 to 24 months to learn whether the changed project will be sufficient for condition removal. A more efficient system for all concerned would be to have a procedure whereby USCIS could adjudicate the new materially-changed project for EB-5 compliance. If necessary, this would give the investor the opportunity to make a different investment or effectuate whatever changes would be necessary to enable him to remove conditions.

  10. USCIS should make information available to the public. Although this doesn’t clearly fit within the rubric of increasing processing efficiency, it does fit within the theme of no cost win-win fixes. USCIS is rightly concerned with protecting the public against investing in fraudulent projects. Why, then, would it deny the public necessary factual information that would enable investors to make a more informed decision regarding an investment project? Why would USCIS deny investors information regarding which projects have received approvals, and which projects have received denials? Why would USCIS deny investors factual information regarding how many investors have filed I-526 petitions in a project, how many have been approved and how many have been denied? Information could also be supplied regarding regional center statistics, although there is a possibility that such information could be misleading since investors invest in a project and not in a regional center.

I appreciate your consideration of these suggestions to make the EB-5 program a more efficient one, a more user-friendly one and a program that is more responsive to the public policy goals of Congress when it enacted the program, all without sacrificing any of USCIS’ important anti-fraud and national security concerns.

Respectfully yours,

H. Ronald Klasko

The Evolving Landscape for EB-5 Escrows

December 11th, 2014 by H. Ronald Klasko

An important part of my responsibility to my regional center and developer clients is to keep up to date on prevailing trends among migration agents, especially in China (since China represents over 80% of the EB-5 investor market). In doing so, I have noted that one of the biggest changes in the marketplace in the last year involves the escrow account.

A year or two ago, the standard in the marketplace was a “traditional escrow” whereby each investor’s invested funds remained in escrow until that investor’s EB-5 petition was approved. This worked relatively well when USCIS processing times were six months. As processing times increased to 12 months or 18 months, or in some cases even longer, traditional escrow has been eliminated as an option for many developers who simply can’t wait that long for EB-5 capital to be made available to the project.

As a result, although some projects still proceed with traditional escrow, most agents and investors now realize that traditional escrow is not feasible for many otherwise very desirable EB-5 projects. Three forms of escrow have evolved in its place.

The most favored escrow by many agents is the “early release” escrow. This escrow provides that all of the investors’ funds will be released from escrow when an exemplar I-526 project pre-approval is approved or when one or more investors’ I-526 petitions are approved, or a combination of both. These events mean that USCIS has approved the project, leaving the approval of the investor’s source and path of funds as the investor’s sole risk. However, the disadvantage of the early release escrow is that it may take 12 to 18 months to get the first petition, or exemplar petition, approved, which can be an unacceptable length of time to the developer. This process can be speeded up by filing an exemplar petition before the marketing process even begins, which would likely result in an exemplar approval long before any investors are approved. Another strategy is having one or two investors ready to file before the full marketing effort commences.

The “holdback escrow” results in substantial investment dollars getting to the project much quicker. The concept of the holdback escrow is that most of the investment dollars are released to the project upon the filing of the I-526 petition. However, a certain amount (often 20%, sometimes more or less) is held back in escrow until the investor’s I-526 petition is approved. This concept is premised on an approximate 20% denial rate of I-526 petitions. However, it does not address the concern of agents and investors regarding the prospect of all petitions being denied if the project is found non-compliant.

The structuring of the holdback in the offering documents is critical to make certain that all of the money can be traced to the investor and to make certain that none of the investor’s money is held back once that investor’s I-526 petition is approved. The holdback escrow has been approved for many hundreds of investors. However, without warning, USCIS started challenging holdback escrows on various regional center and project applications. The challenge was based on the issue of whether any of the held back money from earlier investors could be used to repay any future denied investors and not go into the project. This position of USCIS failed to take into account the fungibility of money.

Our office represented the regional center in the application that went to the Decision Board for review of the holdback issue. We presented substantial proof of both the large number of applications that have been approved using the exact holdback language that was utilized in this regional center application and the even larger number of applications that were pending using this same language that had already been approved so many times. After a lengthy delay, the USCIS Decision Board approved the application. Since no written decision was issued in connection with the approved application, we do not know the ultimate reasoning of USCIS and whether the approval was limited to the language that we carefully crafted in our application. At a recent stakeholders engagement meeting, USCIS indicated that approval of holdback escrows would be case-by-case depending upon the specific language of the holdback escrow agreement.

Some agents are becoming receptive to a full release from escrow when the investor’s I-526 petition is filed. This is usually accompanied by a guarantee from the developer to return the investor’s money in the event of an I-526 denial within a defined period of time. This option is only available to developers who have a certain credibility in the marketplace and whose guarantee is deemed to be credible. Usually the guarantee is not triggered until some months (often 3) have passed, during which the agent will attempt to replace the failed investor in the project.

An interesting phenomenon is how agents who previously insisted on traditional escrow now sometimes push for holdback escrow or escrow release on I-526 filing. The reason for this is that agents are generally compensated when the money is released from escrow. As a practical matter, agents may be more likely to promote a project that will result in compensation to the agent more quickly. However, this has to be balanced against the likelihood that the project may be more difficult to sell to investors, who seek the most protection for their investment dollars.

This is one of many issues that I monitor closely in my ongoing dealings with agents on behalf of my clients.

Surviving and Thriving in Times of EB-5 Quota Backlogs

November 6th, 2014 by H. Ronald Klasko

I have written several blogs on the anticipated EB-5 quota backlog, what it means and what it does not mean. This is a different blog. This blog is focused on how regional centers, project developers and migration agents can prepare for – and maximize opportunities during – times of quota retrogression.

First, let’s discuss where we are today. The chances of EB-5 quota retrogression in 2015 for investors born in China remain very high. It is likely that the quota retrogression will commence in the April to July 2015 timeframe. The cutoff date will likely be sometime in 2013. Once a cutoff date is set, it will likely move slowly month to month – perhaps two to three weeks per month. This means that the quota backlog will continually get longer. That will continue indefinitely unless and until either the Congress or the President takes action to increase the numbers.

The chances of the Congress increasing the numbers are not good. Most likely, EB-5 numbers will not be increased until quotas for all other immigration categories – employment and family – are addressed. Quotas for all categories likely will not be addressed outside of comprehensive immigration legislation. The chance of comprehensive immigration legislation in the near future is highly speculative at best.

There are two possible presidential executive actions that could address the problem. One is removing family members from the worldwide quota. This author believes that such presidential action would be justified based on the existing language of the Immigration and Nationality Act, but the politics behind taking such action relating to EB-5 and other immigrant quotas are complicated at best. The other possibility – which might have a greater chance of happening before the end of the year – is presidential action to “recapture” unused visa numbers. This would not be as good of an administrative solution as removing family members from the quota, but it would provide at least a short term fix that would likely eliminate EB-5 quota backlogs for at least a year or two. The prospect of a presidential decision to recapture unused visa numbers is also speculative, but perhaps better than the chance of removing family members.

So what actions should be taken in the short term to prepare for the onset of an EB-5 quota waiting list for China? Here are some thoughts:

  1. Encourage investors who are interested in the EB-5 program to invest now. It is almost certainly already too late to avoid the impact of the quota backlog. However, there is no doubt that investors who invest in 2014 and 2015 will have far shorter waiting lists than investors who invest in subsequent years.
  2. Explain to investors that what looks like a two year backlog is really less than one more year than the current wait. Let’s assume that in the middle of 2015 a cutoff date of June 2013 is established. This looks like a two year wait for investors. However, the current I-526 processing time is approximately 14 months. This means that investors currently have a 14 month waiting period. In this example, the additional waiting period would only be 10 months.
  3. Encourage investors with children to invest sooner than they otherwise would have. The prevailing wisdom has always been that it is sufficient to file the I-526 petition before the child turns 21 in order to prevent the child from aging out. As explained in previous blogs, this will no longer be the case when quota backlogs set in. Investors with children who are approaching age 18 should be encouraged to invest now in order to maximize the chance that the child will be able to immigrate with the family.
  4. If the child is already over age 18, consideration should be given to having the child be the investor, which eliminates any concern about the child aging out. If the entire family wants to immigrate, two $500,000 investments would be the safest course.
  5. Explain to investors that the quota backlog in the EB-5 category is likely to be far shorter than the quota backlogs in almost every other category of family and employment-based immigration for people born in China.
  6. Encourage investors to invest sooner rather than later to avoid an increase in the investment dollar amount. Through either administrative action or Congressional action, it is certainly possible that the minimum investment amount could be increased within the next year or two. Although this is far from a certainty, an investor who invests while the level is $500,000 will be grandfathered, even if there is a subsequent increase in the minimum investment amount. Also, it should be noted that the $500,000 investment amount – while it still exists – is lower and often substantially lower than investment amounts required in other countries with investment immigration programs.
  7. Explain to investors that the waiting lists actually provide increased safety and somewhat less risk relating to the condition removal and ultimate permanent residence process. Here is why: the key to the condition removal process is jobs. The delay in the onset of the investor receiving conditional residence will mean a delay in the ultimate filing date of the condition removal petition. This means that the developer will have more time to create the necessary number of jobs. This can be very important in projects with unexpected delays. In addition, many projects previously counted only construction jobs because operations – or at least stabilized occupancy – would not occur until after the condition removal process. With the delay in the condition removal window, developers will now be able to include operations jobs, thereby potentially increasing both the number of jobs and the potential EB-5 capital raise.
  8. Another silver lining for the regional center and project developer is that EB-5 quota retrogression will not delay the availability of investment funds coming into the project. Since quota retrogression does not delay EB-5 petition approval, and since funds flow to the project on or before EB-5 petition approval, the delay affects only the dates that the investor can immigrate to the U.S. It does not delay the availability of EB-5 investment funds to the project.

“Every cloud has a silver lining.” EB-5 quota retrogression, without doubt, is a cloud. Hopefully, the information provided in this blog provides the silver lining.

We will hear directly the perspective of the Chinese migration agents on the impact of the expected quota retrogression at our seminar on February 25, 2015.

Update on the China EB-5 Market

October 8th, 2014 by H. Ronald Klasko

I recently completed my semi-annual trip to China. On this trip, I covered three cities, meeting large numbers of migration agents and a variety of wealth advisors, attorneys and Chinese developers.

As always, I came away with a variety of impressions that are not always consistent from visit to visit.

The prevailing sentiment is that the China market is a tough one at this time. There are two prevailing concerns among investors. One is the fear of fraudulent or unsuccessful projects. This is fueled by recent negative publicity (chief among the offending media being Fortune Magazine), as well as recent publicity regarding failed projects, such as the dairy plant in South Dakota. This creates a much more cautious and selective group of investors, who take longer to make decisions than previous generations of investors.

The other complication in the market is the fear, uncertainty and misunderstanding regarding the impending EB-5 quota retrogression for people born in mainland China. This appears to be issue No. 1 among interested Chinese EB-5 investors. The misinformation and misunderstanding that I confronted includes that USCIS will stop accepting I-526 petitions from Chinese nationals and priority dates not being established until I 526 petition approval.

I spent significant amount of time in many meetings and at five seminars explaining the realities of the likely quota retrogression, including the importance of Chinese investors getting their place in line to establish a priority date. I explained that, once quota retrogression sets in, it will likely be longer – and possibly significantly longer – for later filers than for Chinese nationals who file at the present time.

The impact on children is, not surprisingly, also a major issue, with many questions regarding whether it is already too late to protect the age of the child, whether the investor can be changed from the parent to the child and whether the child could be the investor from the beginning, as well as what age is safe for the parents to file to protect the age of the child. All of these issues will be the subject of a separate blog and will be discussed during our upcoming firm seminar.

Exacerbating these problems is the fact that the Chinese real estate market is suffering down times. This is a new phenomenon in China, which has experienced a sustained real estate boom that has created many of the Chinese millionaires and EB-5 investors. However, it is now very difficult for Chinese nationals to sell their homes at anywhere near the peak value.

Unlike six months ago, there does not appear to be a glut of excellent investment projects on the market. Many agents are looking for good projects, especially for launch in 2015 after the Chinese New Year.

As a general rule, agents in China are performing more extensive due diligence and becoming more educated and conservative in choosing projects to promote. Availability of real estate collateral is more important than ever. Increasing amounts of developer equity and decreasing amounts of EB-5 capital make projects more marketable. Agents want more assurances of the availability of the entire capital stack, which assures that the project will move forward. Likelihood of repayment of EB-5 loans is a major focus.

The types of escrow being accepted among the Chinese agent community is evolving. There is far less insistence on investment funds remaining in escrow for each investor until each investor’s I-526 petition is approved. Depending on the project, some agents will accept holdback escrow while others will only accept the release of any investment funds when the project is approved through either an exemplar petition or more often through approval of one or more investors’ I-526 petitions.

Interestingly, many agents are open to – and some prefer – release of investment funds upon I 526 petition filing. This must be accompanied by a credible guarantee from a reputable developer that the investment funds of any denied I-526 investor will be returned upon I-526 petition denial.

The issue of export of currency is hot. The negative publicity regarding the Bank of China’s Yu Hui Tong program has forced the temporary cessation of that program. Many Chinese investors are reverting to the more traditional use of ten or eleven friends and family to transfer currency. Smaller banks and other institutional entities are still engaged in a much smaller scale in the currency export transfer process. The expectation is that the cessation of the Yu Hui Tong program is temporary only.

Interestingly, with the shutdown of the Canadian program and with the Australian program requiring an investment approximately ten times the amount of the U.S. program, the chief competitive program appears to be that of Portugal. Although the amount of investment in Portugal is more than the U.S. program, entry into the EU is perceived as beneficial. But the U.S. is still the first choice for most investors, especially because of the perceived advantages of U.S. educational institutions for the investors’ children.

Things change rapidly in China. The only certain thing is that things will be different when I return six months from now than they are now.

Marketing and Compliance: Additional Services for Our EB-5 Clients

September 11th, 2014 by H. Ronald Klasko

The two core elements of our law firm’s EB-5 practice are well known to our clients and our readership. This includes our EB-5 regional center and project team, which works with regional centers and project developers in structuring EB-5 projects and preparing regional center designation applications, exemplar petitions and templates for EB-5 projects. In doing so, we serve as the quarterback of a team that includes an EB-5 economist, EB-5 business plan writer, and EB-5 corporate and securities lawyer, as well as an escrow agent and often a market study firm.

Our EB-5 team also includes an investor group, which works with investors in preparing lawful source of funds and path of funds documentation, preparing and filing I-526 petitions and assisting with the conditional immigrant visa process.

Less well known are two other aspects of our full service EB-5 practice. Our EB-5 compliance group works with regional centers and project developers “from cradle to grave” in all aspects of EB-5 compliance. This aspect of our practice is critical to regional centers and project developers, as well as to investors, since it relates to the ability of the regional center to remain in compliance with USCIS laws and policies and the ability of project developers to be in a position to meet the needs of investors in the critical condition removal process. A group of lawyers, paralegals and auditors works with our clients to develop the necessary databases relating to investors and projects; obtain access to software or otherwise develop systems to track the flow of investment funds from escrow to the new commercial enterprise and from the new commercial enterprise to the project. We also develop systems to monitor and audit all of the necessary inputs to prove job creation at the I-829 stage, including direct jobs, construction expenditures, revenues, and other inputs included in the economic report. In doing so, we train in house staff and review documentation, often on a monthly basis, with the goal of having all documentation necessary by the time of each investor’s condition removal filing. This ongoing compliance enables us to prepare the condition removal template on a timely basis and without dealing with unanticipated or emergent issues. If the project is not on track or has materially changed from the original business plan, we know of the issues at an early stage and are able to develop alternative legal strategies to maximize the chances of condition removal without problems.

An important part of our EB-5 compliance practice is working with regional centers and project developers to adopt “industry best practices” in areas such as investor relations, staffing, budgeting, project review and monitoring, tracking condition removal dates, record keeping, insurance, conflicts and dealing with agents, among others. We also work with regional centers on preparation for and filing of the annual I-924A compliance report.

Another critical part of the EB-5 process for our regional center and developer clients involves the process of finding agents overseas to market to investors. We made a decision that, while services in this regard are critical to our clients, they are not really legal services. As such, we decided to provide these marketing services through a separate entity of which I am a principal. EB-5 Market Connect is the marketing service available to our clients. It is in the business of matching EB-5 projects with migration agents overseas. Our full-time employee creates an ongoing database of agents based on categories such as preferred size of project; preferred industries; geographical areas preferred; compensation structure; capital stack requirements; types of acceptable escrows; job cushion requirements; timelines for acquiring investors; and other categories. The company prepares a marketing strategy for the project, introduces the project to targeted agents, and negotiates the terms of a contractual arrangement between the client and the agent. More recently, EB-5 Market Connect has expanded its product line to include matching projects with regional centers.

These are two examples of how our law firm’s EB-5 practice has expanded to meet the needs of our clients for full service, life cycle representation. Because of the increasing demand for these services, we will be hosting a seminar focusing on marketing and compliance in the near future. Stay tuned for details.

The Impact of EB-5 Quota Backlogs on Chinese Families

September 8th, 2014 by H. Ronald Klasko

In recent times, we have published two blogs and one Client Alert on the impending EB-5 quota backlogs for investors born in mainland China. If anyone reading this blog has not read those analyses, they can be found at www.eb5immigration.com.

The purpose of this blog is to highlight what this means to families with children and to discuss the likelihood that the EB-5 quota backlog problem will be resolved by the U.S. Congress.

In order to understand the impact of an EB-5 quota backlog for a Chinese family, it is necessary to make reference to the Child Status Protection Act. The Child Status Protection Act was passed by the U.S. Congress to prevent a child from turning 21 (and therefore becoming ineligible to immigrate with his or her parent) because of processing delays by U.S. Citizenship and Immigration Services. The law “freezes” a child’s age as of the filing date of the I-526 petition during the entire time that the petition is being processed by USCIS. Assuming the quota is current when the EB-5 petition is approved (which means that a visa number is immediately available), the child’s age remains frozen as long as the child takes action to obtain his immigrant visa (green card) within one year.

Since the Child Status Protection Act was not meant to protect against quota backlogs, once the I-526 petition is approved, if a visa number is not available because of the quota backlog, the child’s age is “unfrozen”. This means that during every day of quota unavailability, the child’s age increases by one day beyond the age that the child was when the I-526 petition was filed. For example, if the child was 20 years and 6 months old when the I-526 petition was filed, and if the I-526 petition was pending for one year before it was approved, and if the quota is backlogged upon approval, the day after the approval, the child’s age for immigration purposes would be 20 years 6 months and 1 day.

For quite some time, we have been advising that “18 is the new 21”. This means that we have been advising our Chinese clients to file I-526 petitions before their children turn age 18. Although no one knows for sure how long the waiting list will be, we are hopeful that the waiting list will be less than 3 years long. However, the best advice is to file as soon as possible before the child turns 21.

A curiosity of the Child Status Protection Act is that, in the event of a quota backlog, it is in the investor’s interest for the I-526 petition to be pending as long as possible if the investor has a child. The reason for this is that the child’s age remains frozen for a longer period of time. For the same reason, expediting the approval of an I-526 petition is not only not helpful (because the investor’s place in line is determined by the filing date and not the approval date), but can actually be counterproductive because the child commences the immigration aging process sooner than he otherwise would.

We are frequently asked to assess the chances that the U.S. Congress will take action to increase EB-5 numbers so as to avoid the quota backlog. The chances of this happening in the near future can only be described as unlikely. There are quota backlogs in many categories of family and employment-based immigration, and Congress has taken no action to deal with them. Unless and until the U.S. House of Representatives decides to act on immigration legislation more broadly, it is very unlikely that it will deal with EB-5 quota numbers as a separate legislative action. Although there is some hope that Congress could take this action at the same time as it extends the regional center program in September 2015, the chance of action on the quota is considered very slim in the opinions of most Washington insiders.

So can anything be done? There is one possibility. President Obama is presently considering executive actions that he can take consistent with the present law to alleviate problems in the immigration system. One such action that he is considering is an interpretation of the existing law to exclude the family members from the quota count. In the EB-5 context, this would mean that the 10,000 numbers would go to 10,000 investors rather than to 3,000 to 4,000 investors, with the remainder of the numbers going to family members. Many, including this author, believe that the Immigration and Nationality Act has been interpreted incorrectly for many years in that family members should never have been counted against the worldwide immigration quota. If President Obama takes this executive action, the threat of EB-5 quota backlogs for China would immediately disappear.

Anyone concerned about this issue should contact the White House directly using the following web contact form: http://m.whitehouse.gov/contact/submit-questions-and-comments. In addition, you may contact your Senator or Congressman and request that he or she advocate this action to the White House directly.

       
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