May 15th, 2013 by H. Ronald Klasko
Having returned from my second trip to China in the last five months (and my first since the SEC investigation of the Chicago Convention Center EB-5 project became public), I am struck by the two key words that were pervasive in my discussions with investors, agents and the Chinese media. Those two words are “due diligence.” Especially since the Chicago allegations became public, investors and the representative had a fresh appreciation of the importance of having due diligence review of potential investment projects.
I emphasized during my presentations in China that three levels of due diligence review are necessary. Since obtaining US permanent resident status is generally the prime motivation behind an EB-5 investment, immigration due diligence is critical. This is a service that we provide to investors, investors’ representatives and agents. We have a thirty plus point proprietary immigration due diligence checklist that we have created for this purpose. This is also the checklist that we use when we are the immigration attorney for the regional center or the project developer.
The second level of due diligence is financial due diligence to be conducted by a qualified investment advisor, accountant or similar financial professional. This person does not necessarily need any EB-5 background. The financial due diligence covers issues such as financial risk of the investment, exit strategy, rate of return, financial solvency of the project developer, sufficiency of collateral for any EB-5 loan and similar financial issues.
The third level of due diligence is business/common sense due diligence. Does the project make sense? Has the project developer successfully completed similar projects? Are the timelines, occupancy rates, revenue projections, expenditure projections reasonable and in conformity with industry standards. If the business plan does not seem credible to a layman, it may not be credible. If it is not credible, it likely will not withstand USCIS scrutiny. Even if it did withstand USCIS scrutiny, the project may never go forward as planned.
We have long provided investors with a due diligence list of questions to ask when considering a project for investment. In light of recent developments and changed USCIS standards, we have revised the due diligence list. For more information, visit our EB-5 Resource Center at www.eb5immigration.com.
May 8th, 2013 by H. Ronald Klasko
As discussed in my last blog, the pace of I-924 adjudications for new regional centers has accelerated substantially in the last few months. Over 40 regional centers have already been approved in 2013. Despite that, because of the huge backlog created by the lack of adjudications in 2012, many applications still remain pending beyond one year.
From my perspective, the long-term future looks brighter, although the short to midterm future has a more cloudy forecast.
Things are clearly changing, hopefully for the better. The transition of EB-5 adjudications from California to Washington is in progress. The new facility housing the EB-5 unit in Washington is open. Adjudicators of I-924s and EB-5 projects will be handled not by traditional CIS adjudicators but rather by newly hired economists. Some of the economists have already been hired, and some are being actively recruited. The DC unit, staffed by GS15 economists (very high level government employees) will first handle I-924s, then I‑526s and then I-829s. For some period of time, the DC unit and the California Service Center EB-5 adjudicators will work concurrently. Eventually, the California Service Center will be phased out, and all of the applications will be handled by the EB-5 unit in Washington. This unit will be headed by Dan Renaud, Acting EB-5 Program Chief, and Robert Cox, the Acting EB-5 Deputy Chief.
The new EB-5 office in Washington will be staffed solely or mostly by new hires. The good news is that adjudications in the new office will be handled by economists rather than USCIS adjudicators and generally higher level economists than those previously hired into the EB-5 program. The bad news is that these new hires will be new to the EB-5 program, will have to be trained and likely will take some time to be completely up to speed. In my experience, new hires tend to be slower in making decisions and often wary to issue approvals until they are secure in their positions. Hopefully, this either will not occur or will be a short transition period. Also, new economists may have new positions on economic methodologies, which could be good or bad news.
The decision to run the new unit in Washington and the existing unit in California concurrently appears to be a wise one. It is illogical to ask the new unit to take a backlog of cases that have been pending 12 to 18 months and somehow expect them to magically bring the backlog down to 4 to 6 months. Hopefully, running 2 units concurrently will result in the backlogs being at far more manageable levels before the Washington unit takes over completely.
Several new initiatives will hopefully help with the backlog. I will name a few.
Electronic filings are expected to be implemented as soon as this summer on a non-mandatory basis. The key to the success of this program will be enabling regional centers and project developers to provide one set of documents that are used for the petitions of all of the investors in the project.
Hopefully, the regional center amendment process will be streamlined. Presently, regional center amendments often take longer to adjudicate than new regional center applications. I expect that some guidance will be issued that will limit when amendments will be required.
Readjudicating decisions that have already been made has been another problem area. USCIS is serious about its deference policy and has stated that in any situation where deference will not be applied, the project developer or regional center will be provided the opportunity to appear in person to discuss a decision.
Another area of possible streamlined adjudications involves hypothetical projects. USCIS has been requesting levels of detail on hypothetical projects that cannot be provided if a project is really hypothetical. Look for this to change in the near future.
Another new development expected within the next few months is the publication of the universal EB-5 memo that would incorporate all of the previous EB-5 memos in one document. A previous blog discussed the latest draft of the EB-5 memo. Some changes are expected from that draft before the final version is published. Do not be surprised to see the following additions:
- Clarification that not every criterion mentioned in Matter of Ho must be in every regional center project business plan.
- Clarification that EB-5 capital can replace bridge financing either if the deal documents show that EB-5 money was anticipated from the beginning or if capital that was originally expected to be available to replace the bridge financing became unavailable and EB-5 capital is needed to replace the bridge financing.
- More speculatively, there is at least some hope that the final memo will present an adjudication standard that will clarify the USCIS policies relating to NAICS codes and hopefully alleviate the untenable adjudications that create delays or denials in projects that will attract large sums of money and create large numbers of jobs because of issues regarding industry codes.
I expect it to be an interesting next few months on the EB-5 front. Hopefully, most of the changes will be for the better.
April 10th, 2013 by H. Ronald Klasko
This blog provides my perspective on the state of the EB-5 program based upon what we have seen in the first quarter of 2013.
For prospective regional centers, the first quarter of 2013 has been more productive than the entirety of 2012. This was both predicted and predictable. For pending regional center applications, 2012 was almost a total void. From February 2012, when USCIS announced that it was reevaluating all tenant occupancy cases, to the end of December 2012, when USCIS issued its final tenant occupancy policy, virtually all applications remained in limbo. Applications pending 4 to 6 months as of February 2012 were pending 14 to 16 months by the time the calendar turned to the new year.
However, since the start of the new year, the pace of I-924 adjudications has hastened. We have received 3 new regional center approvals just within the last 3 weeks. We have received 2 exemplar I-526 approvals in the last month.
The bad news is that there are still many I-924s pending for more than a year. We hope to see the number of approvals increasing significantly as these backlogged cases are adjudicated.
It is still too early to analyze how USCIS is implementing its December 2012 tenant occupancy memorandum. Many, if not most, of the RFEs that were responded to in 2012 relating to tenant occupancy issues still remain pending as we begin the second quarter of 2013.
While I-924 adjudications have increased, I-526 adjudications for investors in regional centers have gone in the opposite direction. The processing times have gone from 6 months to 8 months to 10 months to now, in many cases, 12 months. It is difficult to say if this is a “robbing Peter to pay Paul” phenomenon (increasing resources on I-924 applications at the expense of I-526 applications), a result of the SEC investigation in Chicago and SEC reviews of many investment projects on the market or some other reason. Certainly it is true that, with the indefinite delays in new regional center applications in 2012, far more projects were marketed through existing, “adopted” regional centers, meaning that the projects have never been reviewed by USCIS when adjudicators receive the I-526 petitions from the investors.
From our experience, it appears that USCIS will take the longest period of time to adjudicate the first investors in a project. Once a number of investors have been approved (which means that USCIS has evaluated the investment project on multiple occasions), remaining I-526 petitions generally go to the same group of examiners and generally receive much faster processing. However, for speed of processing times, it appears that direct EB-5s are presently the quickest.
Finally, there is the backdrop of the impending move of the EB-5 unit to Washington. Presumably, there is substantial pressure to eliminate a significant portion of the backlog before the files are transferred to a new unit. There is also the impact of the recent appointment of Dan Renaud as the Acting Chief of the Immigrant Investor Program. Mr. Renaud has an exemplary background in overseeing efficient petition processing in other areas of USCIS, and we hope he will bring those same talents to EB-5.
We hope that some of the favorable trends that we have seen in the first quarter of 2013 will continue in the second quarter and that some of the lingering problems will be resolved in a manner that bodes well for the success of the EB-5 program.
April 3rd, 2013 by Matthew Galati
When considering the prospects of new immigration legislation from Congress aimed to modernize the system or address legalizing the millions of individuals out of status over the past few years, many of us have felt like Charlie Brown trying to kick a field goal. Time and time again we’ve been disappointed when Lucy pulled the ball away.
Discussion of immigration reform has been incessant since the last “major” revision to the Immigration and Nationality Act in 1996. The first version of the DREAM Act was introduced in Congress in 2001, but despite reintroductions and revisions, it has never made it to the Oval Office for signature. Six years later, the Comprehensive Immigration Reform Act of 2007 was introduced in the Senate but failed to materialize support to bring about an up-or-down vote. Indeed, for the past decade, only relatively minor piecemeal legislation and Executive Branch policies revising enforcement priorities have been the headline-grabbing changes to the system.
But this year (and this Congress) is shaping to be quite different.
News broke Friday night that the AFL-CIO and the Chamber of Commerce reached a deal on a new relatively lower-skill “guest worker” visa, presumptively dubbed the W-visa. Led by the so-called Senate bipartisan “Gang of Eight,” the two constituent groups have reached a preliminary deal which allows workers the opportunity to receive employment-authorized visas without depressing U.S. workers’ wages. For years the lack of a consensus as to a visa category which allows those to take jobs in the service industries and agriculture – which some say is a major driver of illegal immigration – has stymied comprehensive reforms notwithstanding a broader consensus on legalization and increased enforcement.
The agreement reached by the two groups sets forth the following general provisions:
- The volume of W-visas will be capped, yet fluctuate from year to year in response to the economy. The first year, slated to begin in 2015, will cap W-visas at 20,000. The numbers will then increase to 35,000 in the second year, 55,000 in the third, and 75,000 in the fourth.
- In the fifth year, the number of W-visas will be capped at a maximum of 200,000 but the actual number available to employers will be determined by a new Bureau of Immigration and Labor Market Conditions, relying upon on labor market data. For instance, if economic indicators are weak, there could be as few as 20,000 W-visas in any given cycle.
- Similar to the H-1B, W-visa employers will need to comply with wage restrictions that require them to pay the greater of 1) the actual wages paid by an employer to U.S. workers with similar levels of experience in similar positions, or 2) the “prevailing wage” determined by the Department of Labor for the occupational category in question.
- However, unlike the H-1B, the W-visa is not temporary, but transitional. Beneficiaries will have the ability to self-petition for Green Cards after a year. Furthermore, the W-visa will not be tied to a single, discrete employer, allowing workers to leave abusive businesses.
- W-visa workers will be protected by state and federal employment laws. W-visa beneficiaries cannot be used by employers who have laid off workers within the preceding 90 days, and those enduring a strike or lockout.
This new agreement, forged in principle between two groups which historically have not seen-eye-to-eye, evidences a strong break in past failures to bridge the gap between organized labor and business on this hot-button issue.
Politicians from both sides of the aisle have expressed optimism that comprehensive legislation will soon be introduced. On Sunday, Senator Chuck Schumer (D-NY) told NBC’s Meet the Press that he is “very, very optimistic” that the group of lawmakers will have a deal this week and that legislation could be introduced as early as the next. Another Member of the Gang of Eight, Senator Lindsey Graham (R-SC), told CNN’s State of the Union that “[C]onceptually, we have an agreement between business and labor, between ourselves.”
But don’t pop the champagne quite just yet. Members have cautioned that while there may be an emerging agreement for the basic principles behind Comprehensive Immigration Reform, legislation has still yet to be drafted. Senator Marco Rubio (R-FL) cautioned to the Associated Press that “[A]rriving at a final product will require it to be properly submitted for the American people’s consideration, through the other 92 senators from 43 states that weren’t part of this initial drafting process.”
February 28th, 2013 by H. Ronald Klasko
Everyone in the EB-5 world is aware of the complaint filed by the SEC against a Chicago regional center and its principal. I would like to share some perspectives.
Let me first state that I’m fully aware that a complaint involves allegations and accusations that may or may not be true.
Whether true or not, the complaint has created shock waves on an international basis. It is front page headlines in China. What are its impacts?
In my opinion, there could be some positive impacts. EB-5 will thrive only if good projects are made available by developers acting in good faith. If there are enough negative headlines, the entire program could die. Hopefully, the complaint will serve as a warning signal to stave off developers looking to lure foreign investors into untenable (or worse) investments through the EB-5 program. Developers should be more concerned if the allegations had been more nuanced. If the allegations are true, this developer engaged in outright theft of funds and blatant fraud. There is nothing borderline about these charges.
However, I am very concerned whether these headlines, and others like it, could result in the Chinese Government taking action to prevent the outflow of funds to the U.S. for Chinese EB-5 investors. Certainly, this will be yet another reminder to Chinese agents to be cautious and perform extra due diligence before encouraging investors to invest in a particular project. For investors, this is clearly a warning to retain a financial professional to research an investment project before investing. Investors need to understand the use that will be made of their money, what has to happen for the project to go forward, what milestones must be reached for the jobs to be created and whether the developers’ assumptions on which job creation projection is based make sense. The good news is that the watchdog agency did its job, stepping in quickly enough to preserve the investors’ capital before it was disbursed. However, investors and their representatives may insist on increased internal control mechanisms to enhance the safety of their investments, consistent with the legal requirement that the investment be at risk.
From the lawyer’s point of view, it is another wake up call to be diligent regarding review of projects in which his or her investor clients choose to invest or projects which he or she will be representing before USCIS. To a great extent, the attorney is unable to go behind the documents to ascertain definitively whether the documents or information provided are true or not. However, certain warning signs may exist.
In my capacity as Chair of the Best Practices Committee of IIUSA, I have been working with industry leaders in developing best practices for regional centers, project developers and others involved in the EB-5 industry. This development adds even further importance and urgency to this effort. We plan to release the results of our deliberations in June.
The EB-5 program clearly does not need any further negative publicity. Everybody involved in the program – from project developers to regional centers to immigration attorneys to securities attorneys to economists to business plan writers to migration agents to escrow agents – have an important role to play in making certain that the EB-5 program thrives and meets the estimable goals that Congress had in mind when it created the program.
February 25th, 2013 by H. Ronald Klasko
USCIS issued its third draft EB-5 policy memorandum on February 14, 2013. It is open for public comment through April 1, 2013.
While the draft policy memorandum technically does not establish USCIS binding policy, it is a window into its present thinking on various subjects relating to EB-5 adjudications.
This blog will discuss the highlights of the draft policy memorandum in terms of either new policies or clarifications of previously unclear policies. It is not meant to be a summary of the entire memorandum, most of which merely restates existing law and policy.
It is important to note initially that the memorandum is not an exhaustive memorandum in that it does not cover most aspects of I-924 adjudications, including adjudications of EB-5 projects. For example, it makes no reference to use of EB-5 money to pay back bridge financing; whether EB-5 loans can be paid back to a new commercial enterprise before conditions are removed; whether direct employees of the job-creating entity (indirect employees of the new commercial enterprise) must be “qualifying employees”; etc.
Perhaps the most significant change in policy articulated in the draft memorandum relates to the “material change”. The draft policy memorandum, if implemented, would reverse the policy contained in the December 11, 2009 Neufeld Memorandum, which established the material change standard. The draft memorandum appears to have gotten it right. The agency draws a distinction between a material change occurring between the filing and the adjudication of Form I-526 or the filing of Form I-526 and the approval of conditional permanent residence status), which would require a new I-526 petition, and a material change occurring after approval of the I-526 petition, which would not require a new or amended I-526 petition. The stipulations are that the changed business plan must still fall within the I-924-approved industries for the regional center and that the investment capital be “expeditiously redirected into the alternate project, such that USCIS can conclude that the full amount of capital was at risk and fully available to the job creating entities throughout the period of conditional residence.”
USCIS appears to draw a distinction between a material change to a business plan and a complete change in either the job creating entity or the new commercial enterprise. USCIS leaves that area rather ambiguous stating that it “may not comply with the requirements to invest and sustain the investment.” The meaning of that sentence is unclear and needs to be clarified.
USCIS states an intent to develop a mechanism for a petitioner to notify the agency when there are substantive material changes. This would be welcome, and it is an improvement that has been suggested on multiple occasions.
Finally, on the subject of material change, USCIS notes that it may need to revisit issues that had been adjudicated in the I-526 process when there is a material change in the business plan. Examples given are when the investment proceeds are diverted from one industry to another with different multipliers for job creation projections, when the number of investors in a project have changed dramatically or when certain assumptions made in the economic report were not satisfied.
The second area where USCIS states new policy relates to the timing of job creation, specifically with respect to adjudication of the condition removal petition. USCIS restates its position that, in the adjudication of the I-526 petition, the agency must be satisfied that the jobs will be created within 2 ½ years of the approval of the I-526 petition. This author has opined on a number of occasions that this standard is incorrect, and it may be a subject of a separate blog in the near future. For now it remains USCIS policy.
The important new language in the memorandum relates to adjudication of I-829 petitions. First, the memorandum notes that the regulations allow for “substantial compliance” with both the capital investment requirement and the job creation requirement. This is not new, but is a helpful indication that the Service realizes that its regulations do not require full compliance, but only substantial compliance.
The key language relates to the regulatory requirement at the I-829 stage that the jobs be created “within a reasonable time”. USCIS for the first time establishes a one year period after the I-829 filing deadline as generally being considered a “reasonable time” (Director Mayorkas, at various public meetings, had previously advocated 6 months). The draft memorandum states that jobs that will be created within a year of the I-829 filing deadline will “ordinarily” be considered to be created within a reasonable period of time, whereas jobs projected to be created after that timeframe usually will not be considered to be created within a reasonable time (absent extreme circumstances, such as force majeure.)
Various parts of the memorandum deal with geographical areas, either for purposes of a regional center or for purposes of determination of a targeted employment area. The memorandum iterates the standard that the new commercial enterprise must be “principally doing business” in the TEA and adds that a majority of the required jobs must be created in the TEA. The memorandum provides more detail than previously available regarding factors used to determine where businesses “principally do business.”
Helpfully, USCIS reiterates its deference to state determinations of the appropriate geographical area that has been designated as the TEA. This had previously been clarified after USCIS had earlier challenged state geographical TEA determinations.
Another area where USCIS has, at different times, taken varying positions is the issue of whether indirect jobs can be created outside the geographical boundaries of a regional center. In its most recent prior iteration of policy, USCIS had indicated that these jobs can be counted subject to case by case determination. In this draft policy memorandum USCIS eliminates any conditions whatsoever and simply states that indirect jobs can qualify even if they are located outside of the geographical boundaries of the regional center.
The least helpful language related to geography relates to the determination of the geographical boundaries of a new regional center. Those of us who work with developers in creating new regional centers are very aware of USCIS’ restrictive policies in recent times on this subject. USCIS states that the supply chain, as well as the labor pool, for proposed projects will be important in determining the reasonableness of a proposed regional center’s geographic boundaries. The most disturbing language relates to the regional center having to prove that the proposed economic activity “will substantially promote economic growth in the proposed area as a whole.” Does this mean that every project in the regional center must impact every area of the regional center? This is particularly problematic with respect to previously-approved regional centers with a broad geographical area.
The memorandum clarifies some previously-held agency positions relating to the requirement that the investment be “at risk”. Significantly, USCIS states that if an investor is guaranteed the right to eventual ownership or use of a particular asset, including a real estate interest, the value of the guaranteed ownership or use of such asset will be subtracted from the amount of the investor’s capital contribution in determining how much money was placed at risk. The draft memorandum also states a previously-stated, but rarely- used, position that the investor’s money may be held in escrow not only until approval of the I-526 petition, but also until the investor becomes a conditional permanent resident. Finally, the memorandum confirms that an investor can receive a return on his or her capital during or after the conditional residency period, so long as the return was not previously guaranteed and so long as the funds are not a return of the investor’s principal (but rather a return on principal; namely a profit).
The draft memorandum reiterates some helpful language from the previous draft memorandum regarding the so-called fund model of investments across a portfolio of businesses. In summary, USCIS states that the investment must be made into a single commercial enterprise, but that commercial enterprise can deploy the capital among various wholly owned subsidiaries (in the case of a direct EB-5) or unrelated entities (in the case of regional center EB-5s). Left unstated is the agency position on the extent to which a specific investor’s funds must be traced to a specific job-creating entity and the impact if one of several job-creating entities does not create sufficient jobs.
Briefly, the following are other points of note in the draft policy memorandum:
Converting a restaurant into a nightclub or adding substantial crop production to an existing livestock farm are cited as two examples of a restructuring or reorganization that would be sufficient to establish a new commercial enterprise.
Where a new commercial enterprise has owners who are not seeking to enter the EB-5 program, the source of their capital must be derived by lawful means.
The EB-5 investment can be used for non-job-creating purposes as long as it helps the new commercial enterprise create 10 jobs. Examples are purchasing land, obtaining licenses, staffing a hotel, etc. The memorandum also includes in this list of examples “paying financing costs to unrelated third parties”. It is not clear if this is meant to expand or liberalize the agency’s previous policy on using EB-5 funds to repay bridge financing.
USCIS states: “In general, multiple EB-5 investors petitioning through different regional centers or on a standalone basis may not claim credit for the same specific new job.” This, of course, is not controversial. However, it is interesting to speculate whether this is meant to articulate an agency position that multiple regional centers can be used for the same project as long as there is no double counting of jobs.
The draft memorandum references regional center amendments. It does not reference the need for an amendment to change industry code. Is this intentional? It does not clearly indicate whether a change in economic methodology requires an amendment (the Service has taken different positions on this at different times).
Finally, the policy memorandum discusses the agency’s “deference” policy. Deference will be provided to a determination in an approved I-924 or I-526, but will not apply to a different project or the same project with material changes to the project plan.
In summary, there are some useful clarifications or expansions of previous policy in this third draft policy memorandum. Subject to clarifying or changing a small number of policy statements, the publication of the memorandum as a final policy document will be a step forward. The next step would be a separate policy memorandum covering many of the issues not covered in this draft, especially relating to I-924 and project adjudications.
January 8th, 2013 by H. Ronald Klasko
In advising regional centers and EB-5 project developers, I often find myself providing advice something like this: “that’s perfectly legal under EB-5 law, but it will never sell.” Even though my clients are hiring me for EB-5 legal advice, I feel that I am doing less than a complete job if I don’t provide the benefit of the marketing knowledge that I have gained over the years. As I advise my clients, it does nobody any good to prepare an approvable regional center application or project template if no investors will be interested in investing.
In my experience, the investor’s primary interest is that the investment project will result not only in getting the conditional permanent residence but most importantly the permanent green card. Of secondary importance is the likelihood of getting the principal amount of the investment back in a defined period of time. Of far lesser importance is any return on the investment.
Especially in the China market, where most investors are working with agents, many of them have developed a level of sophistication regarding EB-5 legal issues. A project that meets the bare minimum legal requirements may have little chance in the marketplace. Projects relying on challenged economic methodologies (tenant occupancy or visitor spending as examples) may have difficulty finding investors. Investors like to see a “job cushion” (job projection in excess of the amount required for the number of investors) – the more, the better. Some EB-5 professionals – immigration lawyers, economists, business plan writers, securities lawyers – have reputations in investor communities that add credibility to the projects.
Although it may not be first priority, investors generally do want to know that they have a reasonable chance of getting their investment returned in a defined period of time. This is the reason that the loan model has become more popular than the equity model. Loan models with a 5 or 6 year term of the loan have better success in the marketplace than loans of a longer term. It is for this reason that investors generally prefer to be in first position among creditors.
Having the investment money placed in escrow pending the approval of the I-526 petition adds a level of security to the investor. However, it also adds a lengthy period – approximately 8 months – to the date when the developer will receive the EB-5 capital. As a result, various hybrids have developed, including “early release” (money sits in escrow until a certain number of I-526 petitions have been approved and is then released to the project) and “holdback” (an amount remains in escrow to cover the possibility of 10% or 20% I-526 petition denials and the remainder of the money goes directly to the project). These hybrid escrow arrangements have met some resistance in the investor marketplace and are generally considered only if the project is otherwise viewed as very desirable.
Other factors also play into marketing success. Investors generally do not like to see a project where EB 5 makes up virtually the entire capital stack. Investors like to know that the developer has some “skin in the game”. Related to that is the reputation of the developer and/or the regional center. A regional center with many successful projects (especially condition removals) or a developer with a very high level reputation and many successful development projects is clearly a plus. The administrative fee charged to the investor – often in a range between $35,000 and $60,000 – can be an issue to some investors. Finally, various subjective factors play a role. For example, investment projects in certain cities are more popular than those in other cities. Investment projects in certain industries may be favored by certain investors, while others may prefer other industries.
Technically, a client who retains an immigration lawyer to provide EB-5 immigration legal services is not contracting for marketing advice. However, in my experience, the two are so interrelated that, by necessity and as a matter of client service, sharing my accumulated knowledge of the EB-5 investor marketplace becomes a critical part of my advice to clients.
December 18th, 2012 by H. Ronald Klasko
Slowly but surely, there has been an increased interest in direct EB-5. By direct EB-5, I mean EB-5 investments outside of the context of a regional center.
Traditionally, the choice has been an investor investing in his own business, which requires producing 10 direct and full-time jobs for U.S. workers, or investing in a regional center, which allows for indirect and induced employment creation. Regional center investments have been of more interest to developers and businesses because far more investment capital can be raised based upon the increased employment numbers that come from indirect and induced jobs. Investors, too, and their agents, have preferred regional center investments because of the aura of government approval of a regional center and, in some cases, USCIS approval of an exemplar I 526 petition for the project.
So what changed? For the project developer and the business, it has become far more difficult to create a new regional center and even then only at great expense and great delay. If a regional center already exists, the timing to amend the regional center to add industry codes or geography may be unrealistic. The alternative always exists of having a business or project sponsored by an existing regional center, but that action comes at a cost that may be prohibitive and potentially a loss of control of at least some aspect of the project.
From the investor’s point of view, fewer and fewer exemplar I-526 “project preapprovals” are coming to market because the timeframe to obtain the project preapproval has become unrealistic. In addition, USCIS has backed off of the original concept of project preapproval and has stated clearly that it does not consider itself bound by such a “preapproval”. The net result is that regional center projects have lost some of their luster.
As a result, we now regularly factor into our advice to project developers and businesses seeking capital the option of the pooled investor direct EB-5. And, in our discussions with agents, we now see more willingness to consider the direct EB-5 option.
Obviously, the option only exists to the extent that direct W-2 jobs will be created through the investment. If so, the direct EB-5 option allows the business or developer to market the project to investors virtually immediately without having to obtain any USCIS preapproval. Another advantage is the elimination of the need for an economic report to project indirect and induced jobs. However, the need for a comprehensive business plan to present direct job creation projection in a credible manner is still critical.
There are some advantages and disadvantages from the investor’s perspective. Unlike with the regional center loan model, the investor must be an equity investor in the job-creating enterprise. This could be common shares or preferred equity. In either event, the investor’s chances for a more substantial return could be enhanced but at the expense of a less certain exit strategy.
Another issue is the need for an investor to be something other than a purely passive investor. This legal obligation is met in the regional center context by granting the investor all of the rights and responsibilities of a limited partner under the Uniform Limited Partnership Act. In the context of a direct EB-5 investment, if the investor is not going to be employed by the investment enterprise, at the very least the investor should be placed in an advisory capacity similar to the capacity he would have as a limited partner. The USCIS training materials for EB-5 make clear that USCIS is very flexible in adjudications relating to this requirement.
One of the attractions of the direct EB-5 is the elimination of the plethora of issues that have arisen recently in the adjudication of regional center applications and regional center project adjudications. Tenant occupancy jobs, guest expenditure jobs, NAICS codes, bridge financing…these are just some of the issues involved in regional center project adjudications that do not have to be surmounted with a direct EB-5.
However, while there may be fewer issues, the I-829 condition removal process may be more problematic. Whereas there may be no need to count actual workers in regional center I-829 adjudications, there is a need to do so with direct EB-5 adjudications. This means that the business or developer must document, through W-2 forms, I-9 forms and quarterly tax returns, the actual number of employees. In addition, unlike with indirect and induced jobs, there is a need to prove that each employee is a U.S. citizen or a permanent resident or other qualifying employee. This requires obtaining documentation not normally obtained in the I-9 process, which could put the commercial enterprise at risk of a national origin or citizenship discrimination charge if not handled properly.
In a number of our client representations, we have recently advised of the benefits of a hybrid solution. If there will be direct job creation, but insufficient direct job creation for the number of investors required, or if future projects are envisioned that would benefit from indirect and induced employment projections, the optimal solution may be to proceed concurrently with direct EB-5 for the first group of investors while concurrently filing a regional center application for future investors in the same project and/or for future projects. For example, if there will be 200 direct employees, the first 20 investors could invest $20 million (or $10 million if it is a TEA) before a regional center is approved, while the remainder of the EB-5 investment money will come along at a later date once the concurrently-filed regional center application is approved.
Of course, all of this may change if USCIS actually successfully implements its proposed new EB-5 office in Washington, DC and, in fact, adjudicates regional center applications in the targeted 90 to 120 day time period.
December 11th, 2012 by H. Ronald Klasko
Please note this blog post is a republication of a post that was published last week. Due to a technical problem, the text of the post was deleted during transmission.
The adjudication of I-924 applications for regional center designation, amendments of regional center designations for geography or industry code and exemplar I-526 (project pre-approval) has, for all practical purposes, ground to a halt. This is not news. Its roots can be traced to the months preceding the February 9, 2012 announcement by USCIS of the implementation of its new policy on “tenant occupancy methodology.” Many I-924 applications were pending for lengthy periods of time – sometimes one year or longer – at the time the new policy was announced. Those applications, as well as virtually all of the applications filed in the intervening months, have remained pending. One RFE on these applications is a minimum. Many have been the subject of two or three RFEs. Virtually all such applications have one thing in common – they remain pending. Approvals or denials are a rarity.
There are various speculations as to the reason that USCIS refuses to adjudicate these applications. Perhaps we will explore some of the possible theories in a future blog. Suffice for now to state that I believe the number one candidate is the failure of USCIS after nearly one year to formulate its policy on tenant occupancy coupled with the fact that most I-924 applications either have some element of tenant occupancy contained within them or the Service believes that its policy on tenant occupancy could ultimately affect its adjudication of the remaining petitions.
This state of affairs raises two issues. First, what to do about it. Second, how it changes strategies for regional centers and project developers.
Regional centers and project developers have two choices:
- Be patient and hope that some action is imminent even though no signs presently point in that direction; or
- File a mandamus action in federal court.
For those unfamiliar with mandamus, it is the procedure established by Congress to empower federal courts to force government agencies to adjudicate – approve or deny – pending applications for which adjudication has been unreasonably delayed. The procedure is relatively straightforward and often results in prompt adjudication of the pending application. In almost all cases, USCIS adjudicates the petition prior to the court order because USCIS is responsible for paying the legal fees of the petitioner if the court grants the mandamus and determines that the USCIS inaction was not “substantially justified.”
The last time we experienced pervasive USCIS delays was when large number of applications for adjustment of status to permanent residence and applications for naturalization were held up pending indefinite delays in the FBI issuing security clearances. Many hundreds of mandamus actions were filed, resulting in USCIS not only taking action on the pending applications but also revising its procedures so as not to delay such applications in the future.
So how has the USCIS inaction changed the strategy for developers with projects seeking EB-5 capital? Unless the developer is willing to wait an indeterminate amount of time – probably at least one year or longer – for approval of a new regional center application, an amendment or an exemplar I-526 petition, the strategy of choice is to find an existing regional center that is approved for the geographical area and the industry code of the project and negotiate an arrangement whereby that regional center will “host”, “sponsor” or “adopt” the project. Such an arrangement allows the developer to market the project immediately rather than waiting a year or more to begin marketing for investors.
This strategy may be implemented in conjunction with filing of an I-924 application. The I-924 application could be based on a hypothetical project, which will enable the developer to market future projects under its own regional designation assuming that the I-924 is eventually approved.
Another option that we have advised developers to consider is a direct EB-5 proceeding concurrently with the adjudication of the I-924 application for regional center designation. If the project will have enough direct employees to raise sufficient capital to move the project forward, the project can be marketed to direct EB-5 investors with future investors relying on indirect and induced employment once the regional center is approved.
One of the indirect results of the I-924 stalemate is the realization by investors and investors’ agents that looking for projects that have been “pre-approved” is no longer an option. Since the project pre-approval requires the filing of an amended I-924, since the quoted processing time for amended I-924s is ten months and since all of these applications get at least one RFE, investors and their agents are coming to realize that investment opportunities being offered in the marketplace are likely not to be pre-reviewed or pre-approved by USCIS.
Finally, one last strategy being considered by developers is purchasing an existing regional center that has an approval for the desired geographical area and industry code. Unfortunately, this is not a complete solution to the problem. USCIS takes the position that a change of ownership requires an I-924 amendment filing. Although it is unclear whether the amendment filing is more in the nature of a notification or a request for approval, it is possible that USCIS will take the position that I-526 petitions filed while the amendment application is pending are not approvable and may even have to be refiled after the amendment is approved.
This entire scenario is indeed unfortunate. An exemplary government program that brings foreign direct investment to the U.S. and creates countless numbers of jobs is being thwarted by government inaction. The purpose of this article is to clarify that some options may be available to counteract this dilemma and hopefully to once again put the EB-5 program in motion, so that it can achieve its laudable goal.
August 14th, 2012 by Matthew Galati
Human Resources personnel possessing that keen eye for detail required for properly completing Form I-9 might have taken note that the current version of the form (Rev. 08/07/09 Y) contains an Office of Management and Budget control number expiration date of August 31, 2012. Yet to date, the Department of Homeland Security has not finalized a replacement form. In an announcement made yesterday on I-9 Central, USCIS has directed all employers to continue using the current version “until further notice.”
USCIS has directed employers to continue to use the Rev. 08/07/09 Y version even after the OMB control number expiration date of August 31, 2012 has passed, signaling that a new form will probably not be available for public consumption within the next two weeks. Back in March, the government proposed changes to the I-9 and created a draft two-page document with expanded instructions, subject to notice and comment from the general public. As we await the government to review its feedback and weigh its options for revision, yesterday’s announcement clarifies that employers should continue to use the current form and follow the current instructions until a new version is finalized.
We will continue our coverage of this issue as it unfolds. In the meantime, you can head over to our Worksite Compliance web site for our coverage involving issues relating to employment of work-authorized individuals, the latest developments in I-9 audits, E-Verify, and general immigration-related employment guidance.
If you have any questions regarding your company’s Form I-9 procedures, contact your Klasko Law attorney for specific guidance.