USCIS Policy for EB-5 Redeployment and “At-Risk” Issues Discussed at IIUSA Conference

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

At the October 2016 IIUSA Conference, I was on a distinguished panel of practitioners discussing the topic of redeployment issues. The panel focused on the current USCIS Guidelines that sets forth the concept of “at risk,” which is pursuant to the draft policy statement issued on August 10, 2015 and was discussed at both the August 13, 2015 and July 28, 2016 USCIS Stakeholder’s meetings.

The panel first discussed the “at risk” issues and comments, including the following:

  1. USCIS has indicated that a loan can be repaid after the jobs have been created providing the funds remain “at risk.”
  2. It was clear that the “at risk” definition has not been defined by USCIS, who indicated during the July 28 Stakeholder’s call that it would eventually issue guidelines in its upcoming manuals.
  3. Certain practitioners have taken the position that once the jobs have been created the EB-5 funds do not need to be retained “at risk,” but that position at this time would be contrary to USCIS policy guidelines. USCIS has stated that the “at risk” requirement applies all the way through the I-829 process.
  4. USCIS has indicated that in its opinion money sitting in escrow, that is invested in a certificate of deposit, money fund accounts in U.S. government T-bills would not qualify as an “at risk” since there is really no risk of loss. Generally, pursuant to USCIS guidelines there must be a risk of gain and loss in the investment in order to qualify and meet the “at risk” requirements.
  5. It is noteworthy that at any point in time USCIS can issue its policy memorandum and establish to the “at risk” guidelines so that any offering documents and corporate documents should reflect the fact that there is an “at risk” requirement that has yet to be determined, but will otherwise be established at some point in time in the future. Therefore, the manager/general partner must have the right to re-invest proceeds that are redeployed in accordance the “at risk” requirement that have yet to be determined.

The next item discussed was the securities and corporate issues related to redeployment:

  1. The primary corporate issue is providing the manager/general partner proper authority in the offering documents in the applicable operating/limited partnership agreement to redeploy funds in accordance with USCIS guidelines. It is our practice to not only provide that provision, but to list the types of investments that would be considered, such as marketable securities, marketable bonds, REIT shares.
  2. To the extent that funds are being managed in accordance with a portfolio type situation, the party managing the funds must be a registered investment advisor to comply with the securities law rules and regulations.
  3. To the extent that funds are redeployed in another real estate project, the issue here is whether that is a new securities offering and how to deal with same in the initial securities offering. Where there is a phase project it is much easier to define the redeployment in continuing phases of the project since all of the project information would have been disclosed in the offering documents. The best example would be a phase condominium project whereby funds repaid on a loan on one phase could be redeployed on similar terms and conditions on another phase. To the extent that the investment is not in the same project, but with the same developer, it is advisable to at least describe the nature of the investment and the parameters related to the investment such as limitations on loan to cost or loan to value and the amount of the developer equity that would be deployed. Again, the more information provided in the PPM, the less concerns there are that a new securities offering or investor consent would be required.
  4. To the extent that the funds are redeployed in a totally separate transaction involving real estate, then it is advisable to have an information statement sent to investors and have their approval in accordance with the provisions of the operating/limited partnership agreement. Usually a majority consent of investors would be required.
  5. In addition to the above-referenced complications, compliance with the Investment Company Act of 1940 needs to be addressed. This deals with the concept of trading in securities, which the SEC has indicated is applicable to EB-5 offerings. The common exemption is the so-called C(1) exemption where there are 100 or less investors. That would apply to the redeployment of funds in a securities portfolio fund. However, if there are more than 100 investors, then the original offering exemption would have probably been the C(5) exemption which is based upon mortgage backed collateral (which has been interpreted to include a first lien mezzanine loan). In connection, where there are more than 100 investors and the money is redeployed in a securities fund, the SEC has taken the position that there is a flow through rule that would apply, this requiring another exemption or registration of the 1940 Act. There is a liquidation concept whereby funds would be invested in a short-term manner based upon liquidating the proceeds until an I-829 adjudication is finalized as to each applicable investor. There are SEC “no action letters” dealing with this issue, and this potential exemption will need a thorough review on a case by case basis.
  6. In addition to immigration and securities/corporate issues, the other key issue is marketing.
    1. It is noteworthy that when funds are redeployed there are four (4) different parties that generally would share in the income earned. First would be the investor; next the agent; then the manager/general partner and the regional center. Each of the parties except the investor may be providing continuous services that otherwise requires some continuous compensation. From a marketing point of view, the key issues are what amount of the income is allocated to the investor and what amount to the agents. This is now a new negotiation issue with the agents, since once the loan is repaid (or with respect to a certain time period), the agent may or may not share in the income to the same degree. Another factor to be considered is the concept with a risk/return analysis. The investor makes one (1) “at risk” investment initially for which he or she receives a fairly nominal return. If the funds are redeployed in another higher risk transaction such as a real estate loan, then the question becomes whether the investor is being rewarded for taking a second risk. If the funds are invested in a securities portfolio, it would be presumed that the risk factor is less. In this regard, it would be interesting to analyze how the income would be distributed and to what extent income can earn a rate comparable to EB-5 loan rate while limiting the risk factor and providing for liquidity over time since the I 829 approval process is not fluid, but is totally dependent upon the timing of each investor’s status. This is especially true if the investors are from countries other than China whereby retrogression will not apply and therefore those investors would receive I-829 adjudication much faster than a Chinese investor based upon the current status of the visa backlog. To the extent funds are invested in securities and the potential for capital depreciation or capital appreciation, it would seem logical that if the investor is subject to the depreciation of the capital account, then the investor should receive all of the appreciation with respect to same.
    2. In conclusion, the whole concept of redeployment is relatively new and will be evolving over time as parties become more familiar with the related alternatives.

China Premier Li Keqiang discusses trade and economic issues in NY

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

I had the privilege of attending the New York Economic Club Dinner on September 20, 2016, for Premier Li Keqiang of the People’s Republic of China. The Premier held this position since March of 2013 and has been very active in the Chinese government since the 1990s. He was extremely engaging and articulate in his speech and responsive to the questions posed to him. This blog summarizes some of the key points he raised involving U.S./American trade and the economic issues, as well as the current economic climate in China.

Investment and Regulations

Under the Premier’s leadership, he claims he has abolished 40% of the regulations that have restricted foreign investment and has improved and encouraged more responsibility with respect to investment in China. He indicated that 90% of American companies made profits in China last year and that Chinese company investment in the U.S. has increased dramatically in the first half of 2016 compared to 2015. He credited Dr. Kissinger, who introduced him at the conference, with opening up trade to China, and he confirmed Dr. Kissinger’s resolve to expand common grounds and resolve differences among China and the U.S.

Economic and Social Progress

The Premier indicated that China is making enormous economic and social progress to have peaceful solutions which are based upon international engagement and a stable environment. He revealed that China will follow the path of peaceful development and that China is still a developing country in the less developed regions in the South and West and working on stabilizing its growth. He indicated China is responsible for 50% of the world’s growth. He signified that China is willing to uphold its internal order to uphold the United Nations Charter. He hopes China has a greater voice in developing countries and continues to promote economic balance and social progress. He specified that his country needs to work together and treat everyone as equals; a world of cultural differences, but with mutual respect.

He indicated the necessity of a win-win relationship with the United States and continuing a strategic policy in the following decades where China becomes more modern and developed. He also quoted the famous Biblical statement that states “no country should do unto others that they would not do to themselves.” That got a laugh from the audience.

Response to Some Panel Member Questions

  1. In response to questions from panel members, the Premier indicated that China has made $1.7 trillion dollars of foreign investments and is now one of the largest investors in foreign countries in the world. He emphasized that China has advanced technology and expertise. He indicated there is a process to open up and seek wider cooperation. He again emphasized mutual respect rather than distrust and, in particular, with respect to currency rate issues.
  2. In response to a political question about the current election, the Premier indicated that media coverage tends to sensationalize stories. He stated that China has no basis to devalue the currency since that is not good for growth. He said their current valuation was not intended to increase exports. He emphasized the number of Chinese tourist trips to the United States per year which numbered 2.6 million last year and the fact that 600,000 Chinese students study in the United States.
  3. In response to questions about unfair trade agreements, he responded that no matter who is elected to the United States presidency, his goal is to have positive growth in relations and an increase in globalization which would benefit both the United States and China. He indicated there is an important issue regarding mutual dependence with the United States and China needing to reverse the trend of trade conflicts. He also emphasized China’s involvement in the Paris Treaty for climate change and the commitment to likewise try to overcome global warming.

He emphasized drivers of the economy such as infrastructure development, underemployment and the streamlining of administration and relaxing regulation. He indicated the number of new businesses in China that are being opened every day have increased dramatically. He specified that China should continue to maintain at least a 4% to 5% growth for the coming years.

How to follow USCIS policy when investor is a minor

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

There has been a lot of recent discussion on an investment by a minor and how it is treated by USCIS, in addition to the corporate issues related. The key factors to be considered are the following:
  1. A minor can be an investor. This was verbally confirmed by one of the Deputies of USCIS to me personally at the Miami Stakeholders Meeting on July 28, 2016.
  2. The key component of a minor Subscriber is USCIS’s concern that the investment is not voidable or void.
  3. Generally, the state law stated in the Subscription Agreement and/or Operating Agreement would apply as to what law would determine the enforceability of the investment contract. This will be discussed below. Independently, I checked with Chinese counsel who acknowledged that a minor is generally under the age of 18 and that a parent can sign for a minor as a guardian providing there is proof of the parent’s capacity. 

In analyzing the minor investment, there are two (2) types of minor investments:

  1. A gift by a parent to a minor under the Uniform Gift to Minors Act where the parent actually gifts money to the minor, but has the investment be a custodian investment held by the parent for the child.
  2. The child actually makes the investment directly, since some minor children have their own bank accounts and can fund moneys directly. In this case, the guardian/parent would be the authorized party to bind the child to a contract under most state laws. 

In order to handle both of these situations, we have created a signature page for the minor subscriber and custodian/guardian, along with an acknowledgment of custodian and/or guardian to verify the investment. You can access it by clicking here. We also advise that the minor likewise sign a subscription agreement as a subscriber even though the parent’s signature is required to bind the minor to the contract.

For purposes of reference, we have included links to the Uniform Gift to Minors Act legislative pages for the states of Florida (PDF version), Texas (PDF version) and Delaware (PDF version). We believe New York is very similar as well as California. The three (3) states referenced define a minor as under the age of 21 and not 18.

City of Miami EB-5 Regional Center 2016 Conference Update

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

The City of Miami Regional Center held a regular presentation on “The Present and Future of the EB-5 Regional Center Program.” The uniqueness of the program involved the presentation of certain public/private partnership transactions being considered which were quite unique and exciting. These projects included the following:
  1. Miami Marine Stadium. This is an old, cherished relic of the City located on Key Biscayne that is in the process of being renovated and that will potentially utilize EB-5 capital up to $40 million.
  2. VA Facilities Near VA Hospital. A VA affiliate is in the process of undertaking a VA Village that is to provide for housing and other benefits to veterans. That is being highly supported by all government agencies and is likewise seeking EB-5 capital to fund the development of the project.
  3. The 10-Mile Underline Project. Miami has a Metrorail system that travels down U.S. 1, and like other cities, it is exploring the utilization of the land which has 100-feet width to develop various opportunities in the 10-mile stretch in a primary section of Miami-Dade County. This project potentially could involve capital expenditures in excess of $100 million and again, EB-5 capital is being considered in connection with this project.
The City of Miami Regional Center will be sponsoring these projects and the Mayor and two commissioners spoke about the City of Miami and its current situation.

The guest speakers discussed various matters that were of interest.
  1. Reid Thomas of NES Financial Services discussed the various best practices concerning the escrowing, distribution and monetization of EB-5 funds in order to ensure integrity that is consistent with current USCIS policy and will be eventually contained in the new integrity bill.
  2. Mark Virkstis of Greenberg Traurig spoke about pending legislation and his take on the current status of legislation. Obviously, the Program has had significant negative publicity and the current legislation position will probably result in a continuing resolution that will defer the sunsetting of the Program to December 9, 2016, at which time Congress may attempt to negotiate a compromise bill, although it would seem that to accomplish same by that date would be unlikely. Mark discussed in detail the various political issues involving both integrity measures and the immigration issues. It was noted that the Grassley Leahy Bill will still be the main template for reform and there will be strong negotiations addressing the following:
    1. The grandfathering of 526 petitions filed before the effective date of any new legislation.
    2. Census track utilization to determine TEA classification and whether more than one census track can be counted.
    3. Set asides for special situations involving rural and urban matters (up to 4,000 visas a year) and well as manufacturing and infrastructure projects. This would only leave 6,000 visas for other projects that would further backlog retrogression in China.
    4. Increasing the visa count to cut back to regression backlog. 3. 
  3. I presented on SEC investigations and the necessity of much stricter loan administration standards.
With respect to SEC matters, it was noted that the SEC has pronounced that EB-5 is a priority for the year 2016 and that the SEC will be undertaking spot audits and investigations of regional centers and projects. Furthermore, the SEC reacts to information provided and complaints raised and are taking a much more active role in connection therewith. They have even conducted random inquiries with regional centers and are doing spot unannounced inspections as well. Furthermore, the SEC has taken a far more active position in trying to prevent fraud, escrow violations and broker-dealer violations and is still consistently bringing actions against parties to avoid the payment of unlawful commissions for transaction-based compensation to unlicensed broker-dealers in connection with their referring of investors to a project.

I noted that Director Colucci in his July 28, 2016 stakeholder announcement at the Miami Stakeholders Conference stated as follows:
This seems like a clear departure from prior policy in that there is a formal statement that regional centers are being held responsible for the integrity of the EB-5 projects, including both financial and immigration matters. This is a heightened responsibility that will eventually be contained in the new integrity measures being undertaken by Congress but USCIS’s has in fact dictated that their position is similar to the proposed legislation.

I discussed in great detail the necessity of having independence in the loan administration and/or fund distribution process to ensure that money is properly applied both from a financial and immigration standpoint. The program’s integrity is based upon making sure that funding by investors is monitored in the same manner as a bank loan would be monitored to ensure proper treatment and credibility of the program.

The next speaker, Helio Carrasquillo, discussed EB-5 and tax credits and the benefit of EB-5 projects using tax credit benefits to add to the capital stack.

The next speaker, Edward Brashera, spoke of the pending legislation and the integrity measures that are proposed to be adopted, many of which have already been commented on by the EB-5 securities roundtable as specific securities law issues.

In connection with the overall theme of the regional center program and the regulation thereto, it is noteworthy that the Government Accountability Office (GAO) issued a report on September 13th that dealt with “progress made to detect and prevent fraud, but additional actions could further agency efforts.” 

The report indicated that the agency needs to do additional risk assessments to mitigate against any potential fraud in the program. Recommendations were made in connection thereto, which included the following:
  1. More procedures in verifying that funds invested were lawfully obtained from investors. Linked to this blog is a chart [see page 8 – Figure 1 of GAO report] developed by GAO which, in a very detailed fashion, explains the entire EB-5 funding process, together with the procedures necessary for governmental approvals.
  2. The GAO report discusses the fraud risk framework and identifies leaving practices for agencies to manage fraud risks, a copy of which list is partially included.
  3. Site visit pilot. According to the agency’s statements, the concern is that the goal is to have random site visits that will improve the assessment of fraud and the risk related thereto, since the unannounced random investigations will provide some degree of comfort, and also have a chilling effect on those parties trying to undertake fraudulent projects, given the fact that there will be a screening process in place.
  4. Additional information from the immigrant investor and regional center program participants is being sought. Updated forms will be issued and will be in process for fiscal year 2017. These forms will apparently capture additional information about petitioners and applicants that could be used to be identify fraud.
As noted, the immigration program is garnering significant attention from both a congressional and agency standpoint.

USCIS Stakeholders Meeting Report – July 2016

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

This is a follow-up to the USCIS Stakeholder Engagement held in Miami, Florida on July 28.

In attendance from USCIS were the following personnel:

  • Nicholas Colucci, Director
  • Jan Lyons, Economist
  • Lori McKenzie, Deputy
  • Julia Hanson, IPO Deputy
  • Danielle Scott, Chief Intergovernmental Affairs
  • Eddie Pearson, Division Chief
  • David Leckenby, Division Chief
  • Steve Koch, Deputy Director of Miami District Office

Director Colucci gave a general report on the industry and the policy and performance guidelines and compliance issues that were being undertaken by USCIS. From a statistical standpoint, he indicated the following:

  1. A total of $15.5 billion of EB-5 funding has been deployed through Fiscal Year 2015, creating an estimated 84,400 jobs.
  2. There are currently 83 Regional Centers in Florida, which is an increase of 13% just during Fiscal Year 2016, and an increase of 26 total commencing Fiscal Year 2015. There have been 521 I-526 approvals granted in 2015 for the state of Florida, all involving a variety of projects.
  3. There was a notation that the press office involved in legislative affairs could be contacted at (202) 272-1200.
  4. It was noted to the audience that, to the extent there are suspicious activities noted, that the agency will review and coordinate with other agencies, including the SEC, ICE, etc. on investigating any red flags that come to anyone’s attention. There will be regular site visits involving interviews for conditional releases.
  5. There is focus on integrity and transparency, and that the program is scheduled to sunset on September 30, 2016.
  6. The number of investors in Regional Centers has increased dramatically from approximately 200 Regional Centers five years ago to approximately 850 Regional Centers now. There were approximately 21,000 I-526 petitions filed for the last six months of Fiscal Year 2015 and the first six months of Fiscal Year 2016.
  7. In the last 18 months, approximately 11,900 I-526 petitions have been approved, involving $5.9 billion of new capital. During that time, approximately 2,300 I-829 petitions were approved.
  8. Economics and statistics for the years 2012 and 2013 are currently being evaluated by the Department of Commerce, who will issue a release in the near future. It was noted that evaluations may produce higher numbers given the methodology utilized in connection with the formula applied.
  9. He indicated there are challenges to the program based upon issuers and underwriters pocketing money for personal gain, rather than having money properly employed as the program mandates. There has also been movement of money between different projects without notice or consent of investors. It was noted that it was the Regional Center’s obligation to conduct due diligence, and provide proper oversight on the job creation factors, and monitor the project. This is kind of unique, given the fact that in many cases, as a practical matter, the Regional Center right now sometimes does not assume those responsibilities, but USCIS has taken the position that, ultimately, the burden falls on the Regional Center. If there are problems, the Regional Center may receive a NOIT and needs to submit information that confirms that it is either promoting economic growth, or confirms the potential concern by USCIS as to improprieties that may be cause of the NOIT. It was noted that self-policing is vital, and that many government organizations are involved in pursuing cases for malfeasance and fraud.
  10. It was noted that if any participant in the program perceives any fraud, then there should be notification, either on the website, or by calling a fraud alert number at (202) 357-9326.
  11. It was noted that the good outweighs the bad, i.e., the good parts of the program outweigh the bad, but many of the bad actors overshadow the program in general.
  12. There are currently 142 staff members with three currently being employed, and another 15-16 being interviewed. The goal is to have 171 employees by the end of the calendar year.
  13. It was noted that the backlog of I-526 petitions has been reduced by 12%, and the backlog of I-924 filings for new Regional Centers has been reduced by 8%.
  14. There are now two auditors on board that will audit Regional Centers, and site visits will be done either with or without notice. The site visits will be focused on the job creating entity (JCE) in an attempt to detect fraud based upon unannounced visits to project sites. The auditing process will be directed by a letter to the Regional Center that will be issued an engagement letter. It is anticipated that an RC audit could take up to one week.
  15. Forms I-924 and I-924(a) will be updated based upon the close of comments on July 6, and that the new Form I-526, With the period for comments closing out on September 9. It is also noted that a new data system is being analyzed for publication, and the data system may be translated into foreign languages.
  16. It was noted that there are new proposed draft regulations being proposed, along with the potential change in the law that is being considered by Congress.

Deputy Lori McKenzie spoke next, addressing the issues of TEA, Regional Center designations and dollar amounts, and policy issues related thereto.

  1. She noted that the forms, as noted above, are being revised and should be accessed since the formats are published of record. She went through briefly the differences in the new proposed forms compared to the current forms, with the understanding that the new proposed forms are much more extensive in providing information.
  2. It was also noted that the policy chapters are being amended and expanded, and will be published sometime, although no commitment was made as to when the same will take place.

Eddie Pearson, division chief, then talked about I-829 interviews, and the situation where if a spouse dies, the investment can be transferred to the beneficiary’s spouse and children who will be interviewed in the I-829 process. Evidence is required to show the investment has otherwise been sustained and the jobs have been created. It was noted that the interest could not otherwise be distributed or transferred, or have assets distributed that would violate the at risk rules of the EB-5 program.

  1. She noted that with respect to transfers to family members upon the death of the applicant, there would need to be proof, either by will or by operation of law, as to the rights of inheritance.
  2. It was noted, based upon a question asked, that if the EB-5 capital was provided by a loan, there was no requirement that the loan would otherwise have to be paid off for the I-829 to be issued.

Following Pearson was Economist Jan Lyons. He discussed the benefit of feasibility studies, which are helpful although not required. The standard is contained in Matter of Ho evi. In addition, it was important to tie in cash flow statements to the business plan to prove feasibility.

The next speaker was David Leckenby, who talked about children of minority age. He discussed children under 18 that may lack capacity and have contracts that are voidable, compared to children under 14, whereby a parent/legal guardian must sign the applications, and proof must be provided related thereto. After the conference took place, I personally talked to Mr. Leckenby about the proof required for minors. I inquired regarding the following:

  1. With respect to a minor under 18 years old, the parent/legal guardian would sign all documents and the child would sign as well.
  2. Mr. Leckenby thought that was appropriate, but wanted proof that the parent had authority, and proof that under the applicable state law of the jurisdiction that applied to the Subscription Agreement and Operating/Limited Partnership Agreement that the parent could likewise sign for the minor. This would be the Uniform Gift to Minors Act, and in most cases, any child under 18 years old would need to have the signature of the parent/guardian to cause financial contracts not to be voidable. Mr. Leckenby suggested that this evidence of state law and the relationship with the parent/guardian to the child be provided as evidence, along with the I-526 filing.

I separately addressed a question about redeployment, based upon the August 13, 2015 Stakeholders meeting. It was noted in that meeting that USCIS would get back with guidelines as to what was “at risk” based upon its policy memorandum of August 10, 2015. To date, those guidelines have not been established, and it was indicated that a draft policy memorandum will be distributed sometime addressing this and many other issues.

There were some questions in the audience that were responded to related to misappropriation of funds and what effect this would have on the innocent investor. It was indicated that the policy memorandum would address these issues, but there was no response to the status of those projects as of this date.

Other questions were asked, but I think this highlights the gist of the Stakeholders’ Conference.

EB-5 Investor Funds – Merits of Early Release and Related Issues

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

It has become quite obvious that the early release mechanism for escrowed funds is becoming the norm and not an exception. The whole concept of early release arose at the end of 2011 when it became apparent that USCIS was not going to undertake premium processing for I-526 Petitions. I was one of the initial architects of the early release concept when it became obvious the developers could not wait one and half to two years to receive funds after I-526 approval given the substantial time delays in receiving adjudication.

Since that time, the industry has evolved and come up with may complicated options related to the early release concept which will be discussed below.

  1. Holdback Concept. Rather than having a complete early release of funds, a portion of the capital contribution of an investor would be held back in an account and serve as a pool to cover all denied investors so that if only a smaller percentage of investors were denied [assuming no project denial], then the held back fund would be able to fund a refund to an investor in a timely manner. This concept has taken hold with escrow holdbacks ranging typically from 20% to 50%.
  2. Interim Escrow Funding Requirements. Many escrow agent banks require a certain minimum amount of capital be funded in order to ensure that there is a sufficient amount of proceeds to fund denials based upon a percentage of the total capital raise so that there is at least few million dollars more in escrow to cover refunds to a sufficient number of investors.
  3. Investor Substitution Concept. Documents are now containing language which typically provide for a time period for the new commercial enterprise (NCE) to substitute denied investor with another investor in order to avoid having to use escrowed funds and to refund the investor except to the extent the specific investor’s holdback amount that may be maintained in escrowed. The concept would be that if the project is otherwise successful, it should not be difficult to find a substitute within a reasonable period of time (typically anywhere from three to six months).
  4. As a fallback to not having sufficient funds in escrow and not being able to substitute an investor, the backup is a developer guaranty of refund so that the loan proceeds are effectively refunded. In many cases the developer guaranty of refund is further supported by the principals or the holding company of the developer likewise guaranteeing the refund payment if it is not otherwise made by the holdback account and/or NCE based upon obtaining a substitute investor. In connection with that, escrow agents are examining the financial statements of the developer and/or of the guarantor in order to gain comfort that the ability to refund is available.

A whole new industry arose based upon the early release concept involving I-526 insurance which in a nutshell provides the immediate refund of a denied investors capital contribution amount by an insurance company who in effect takes the place of the investor in the NCE by providing funding for the investor as well as enabling the developer to receive all escrowed proceeds without any holdback fund. Of course, this insurance comes at a cost which may vary depending upon who is the provider. Typically, these insurance policies have three outs which include the following:

  1. Fraud
  2. Voluntary withdrawal of the petition
  3. Change in the law subsequent to the filing of the I-526 petition the otherwise results in the I-526 being denied due to such change.

Another seldom used concept of overcoming extensive time review process is the seeking of expedited review, which is rarely granted but has been utilized in certain cases. Click here for an article addressing one such case which had a significant governmental benefit that supported the expedited review petitions filed in order that the developer can access to funds in a much quicker basis without needing to address the early release concept.

This area has and will continue to evolve as new financial models are developed.

EB-5 Loan Administration Best Practices

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

I have always been a big proponent of loan administration as a key component of EB-5 best practices. It is essential for the integrity of the Program, given the fact that most EB-5 capital is deployed in a loan model, that the loan transaction more closely resembles a traditional loan, in order to protect the EB-5 lending company and its investors in the same manner that a lender would protect itself in a traditional loan transaction. In relation to this topic, I was a panelist on a webinar for EB-5 Diligence on June 29. As in past webinars, there was an excellent group of panel members, who dealt with the concept of loan administration and matters related to it.

The following items are noteworthy:

1. Understanding the Roles of the Various Entities and Participants. There are generally three types of issuers that undertake an EB-5 Program. One is the NCE that is formed by the Developer as an alter ego to raise capital. The next is an NCE formed by a Regional Center which takes an active role in managing the process and serves as the issuer. Finally, there are occasions when the marketing agent itself actually undertakes the formation of the NCE and oversees the entire process, and also serves as a manager or co-manager of the process. Each of these structures has different implications and need to be addressed as far as appropriate structuring.

2. In most cases, the Regional Center does not serve as a manager of the NCE and, therefore, the Developer ends up being the Manager or a third party needs to be located. It may be appropriate if the Developer is a manager of the NCE, provided that the Developer does not otherwise oversee and control the loan administration process, given the obvious and inherent conflict of interest between the Developer being the borrower and, at the same time, overseeing the lender entity.

3. Many organizations do it right and take full control of the NCE through the manager entity and make sure the loan is properly administered. Some Regional Centers, agents, and professionals have established a very sophisticated model for underwriting, closing and administering an EB-5 loan. Unfortunately, that may not be the norm.

4. In reviewing the concept of the co-manager/loan administrator, the following factors should be noted.

  1. An appropriate budget needs to be prepared for the loan administration process. This is no different than a traditional lender charging the Borrower for loan closing costs and related expenses, including the title updates, loan servicing, and loan consultants who review and approve all draw requests.
  2. The actual availability or utilization of an investment committee that would undertake the loan underwriting and confirm the validity of the transaction. Some organizations who are not developers have well established investment committees that have undertaken this task, much the same as a traditional lender.
  3. Developer project budget verification.
  4. Expertise in making and administering the loan.
  5. Utilization of EB-5 lender counsel to either prepare and/or oversee the loan documentation, as well as the loan closing process in much the same manner as a traditional lender.

5. When there is an equity model, it may be appropriate that the EB-5 funding goes into a special account whereby two signatures are required to disburse monies for the development of the project, one from the developer who is the party receiving the equity contribution, and the other from a representative of the NCE, which would be the independent manager and/or funding administrator.

6. In addition to underwriting and making the loan, it is critical that after same is accomplished the loan be properly enforced. There are various procedures that are appropriate, and I have attached a schedule outlining many of the key loan administration procedures that should be considered under the circumstances.

7. As part of the loan process, it would be very appropriate to consider the following components:

  1. Creating a loan checklist that addresses due diligence and closing procedures.
  2. Performing detailed due diligence on the background of the Developer and the collateral.
  3. Negotiating and ensuring there is an appropriate Intercreditor Agreement in place with the senior lender that, at least, provides minimum protections to the EB 5 subordinate lender such as notice of default and right to cure, the right to acquire the senior loan, and the right to take certain actions that otherwise protects the EB-5 lender. Many senior lenders are reluctant to provide many rights to the EB-5 lender. One solution would be for the EB-5 lender to have the ability to retain an experienced developer who has substantial experience in the type of industry involved in the project, much the same as a traditional mezzanine lender would do, given its expertise in the lending business, and the ability to develop and operate a project, if necessary.
  4. A need to spot and address irregularities and problems. This would include lien claims, confirmation of payment of real property tax, making sure that insurance is properly maintained making sure that the senior loan is maintained in good standing, and the project proceeds to not only satisfy economic conditions, but also generate the necessary information to support the I-829 filing, when necessary.
  5. The I-829 process starts upon the loan closing, given the fact that the documentation needs to be generated on a regular basis to eventually support the job creation expenditures which, in large real estate transactions, are primarily based upon the construction expenditure model.
  6. Receiving regular financial statements from the Borrower. Ideally, they should be reviewed statements prepared by an independent certified public accountant.
  7. It is becoming more common to have live website access showing the progress of construction.
  8. The organization documents of the EB-5 company need to address the ability and authority of the independent manager to modify the loan documents, where necessary, to take into account both regular and extraordinary circumstances which require an amendment. To the extent of any material change, it may be advisable to have a provision providing for a majority consent of the investing members/limited partners, although this could be cumbersome. 
  9. In addition to the loan administration itself, the issue of redeployment needs to be addressed in the organization documents and, possibly, with the Developer, to the extent that redeployment may be undertaken with the same Developer in another real estate project that could already be completed. In this model, we have recommended the concept of a MAI appraisal, with the total debt percentage not exceeding a specific percentage of the appraised value in order to protect the maintenance of the equity in the project.

Please click here for a link of the July 29 Administration of the NCE’s loan to the JCE webinar, which includes slides used during the presentation.

Please click here for a PDF detailing an example of Loan Administration Procedures.

EB-5 Industry Update – Securities Law Issues

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

On April 21, 2016, at the IIUSA Conference, members of the panel dealing with securities law issues confirmed the following:

  1. The SEC will take a more active role in coordinating with other federal agencies, including USCIS.
  2. There has clearly been a heightened use of subpoenas to obtain information related to SEC investigations. We have been privy to subpoenas issued regularly to regional centers, marketing agents as well as investors which will assist the SEC in obtaining information on projects and/or participants in projects, including regional centers, to verify SEC compliance.
  3. At the conference the panel discussed the difference between an exclusion from registration as a broker/dealer and/or registered investment advisors compared to an exception to registration entirely. The exception generally applies to foreign agents with respect to the broker/dealer matter, and the so-called “issuer” exemption based upon certain criteria being satisfied. The head of the Alabama Securities Regulatory Agency made an interesting comment. It was his position that if a bank account for a program was maintained in the State of Alabama, then the State of Alabama would automatically have extended jurisdiction over the parties in connection with the applicable transaction independent of any jurisdiction by federal authority.
  4. The SEC representative on the panel indicated that they were actively coordinating with foreign regulators in China to police the EB-5 industry.
  5. The FINRA representative indicated that if a transaction was undertaken by a FINRA licensed broker/dealer, then the engagement would involve the following compliance issues:
    1. Suitability of the project for investors;
    2. Review source of funding;
    3. Position that the broker/dealer is the gatekeeper and supervisor of activities and all offering and marketing materials must be filed with FINRA, although there was no automatic review process in place.

IIUSA announced at the conference that it is willing to cooperate with other participants and organizations in the EB-5 industry in order to try to promote one voice and have a centralized and focused influence over the integrity and immigration issues that are being considered by Congress.

Since the advent of the Jay Peak SEC action and based upon my constant communication with participants in the industry, including migration agents in China, I have the following observation:

  1. The Jay Peak matter has not had a material effect on marketing of EB-5 projects in China. This is primarily due to fact that the Jay Peak projects have apparently been sold to investors in approximately 74 countries and therefore, China represents only a minority of EB-5 investors and therefore the negative impact of Jay Peak has not been material.
  2. Jay Peak matters have clearly heightened the focus in Congress and many of the legislators ___ on integrity measures being adopted sooner rather than later as a condition to the renewal of Program. However, it is still the sentiment of the industry that the Program one way or another will be renewed in September.

With respect to marketing activities in China, the following should be noted:

  1. There was a tremendous rush for applicants last year due to the anticipated change in legislation, which, in effect “took the wind out of the sails” as a result of the degree of involvement of Chinese investors for the first half of 2016;
  2. The recognition in China of the seriousness of the retrogression issue and that the increased time delay to obtain an EB-5 visa to in excess of 5 years is having a negative impact on the marketing of interest of investments in China.
  3. Agents in China are considering other types of visa programs to either have investors migrate to other countries and/or obtain access to the United States to other visa categories.
  4. There is clearly a substantial number of projects being presented in China and therefore, this has heightened the degree of competition among the projects. Accordingly, it is anticipated that the cost of marketing has likewise increased due to the supply/demand factor and the ability of subagents to demand higher compensation based upon the excess supply of product.

There seems to be a significant push to access investors in Vietnam, which previously, had not been made significant market for EB-5 investors. Furthermore, there seems to be a heightened focus on Latin America and the Middle East as well. Statistics show that South America for the year 2015 only accounted for 2.3% of EB-5 investors.

Jay Peak Allegations and EB-5 Fallout

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

IIUSA Annual Meeting in Washington, D.C.

April 20-22, 2016

Jay Peak Fallout Discussion

This post will address only the Jay Peak circumstances, subject matter which prevailed at the 2016 IIUSA EB-5 Advocacy Conference in Washington, D.C. Additionally, this post will serve as contemplation of several of my follow-up telephone calls with immigration counsel and their investors who are investors in the Jay Peak projects.

Needless to say, the Jay Peak situation was a major topic of conversation at the IIUSA conference both formally and informally. The concerns reflected the following:

  1. The need for integrity measures in EB-5 governance both legislatively and procedurally in order to better prevent situations such as Jay Peak or Chicago Convention case that have been injurious to the industry.
  2. Attempt to create a financial model that maintains a degree of independence between the new commercial enterprise [EB-5 investor entity] advancing funds to a developer/borrower and the borrowing party. For instance, it seems it would appear to be unacceptable and not best practices to have the same party oversee the funding of money from the NCE to the project company that is under the same control as the project company. In other words, there needs to be more independence in the financing portion of the transaction.
  3. Whether another loan model or equity model is in place, there needs to be more active administration of the funds in process on an ongoing basis.
  4. There needs to be regular financial reporting that is reviewed and verified by a qualified independent certified public accounting firm.
  5. Heightened due diligence standards before projects are undertaken for the benefit of regional centers, investors and marketing agents.
  6. At the IIUSA Conference, one of the panels involved securities regulators perspective on EB-5, and a rather significant degree of focus on the Jay Peak case and the repercussions related thereto. The representative of the SEC, Stephanie Avakaian, commented on the status of the SEC case which included the appointment of a receiver, the appointment of an administrator for the project and the appointment of a forensic accounting firm to update all of the financial information involved in the Jay Peak projects. It was also noted that a website for the receiver has already been established and is accessible to the public (http://www.jaypeakreceivership.com).

As part of the panel members’ presentations and the questions and answers that took place during the presentation, there was concern addressed about the status of the EB-5 investors in Jay Peak and not only the preservation of their financial interest in the project, but the preservation of their immigration rights. It was noted that the SEC and the applicable court should take into account the immigration needs of the investors and not just focus on maximizing the return of monies to investors since the nature of the EB-5 program substantially involves an immigration component as well as a financial component. The SEC representative acknowledged that although the interest of the SEC appointed receiver is to maximize the return of capital to investors, there was also an acknowledgment that the immigration concerns should likewise play a role in evaluating the process and the decisions to be made by the receiver in the transaction.

In reviewing the current situation with multiple immigration attorneys as well as a few of their investors, it has become apparent that the following different classifications of the respective investor positions should be noted:

  1. Those investors that have not received I-526 petition approval and whose money is pending in escrow. Most of these investors will ask for a return of their funds since they are in escrow and it could be argued that the closing conditions can never be satisfied given the status of the project in question and the receivership that is now in place.
  2. Those investors receiving I-526 petition approval who have not received their EB 5 visas. This poses a much more serious problem since the investors capital has supposedly been funded for the applicable project, yet from a visa standpoint and given the status of the receivership, there may be heightened concerns about whether the investor will now be eligible to receive a visa given the material change in circumstances as a result of the Jay Peak receivership.
  3. Those investors that have received I-526 petition approval and conditional residency status. The status with respect to projects that have not been completed and are in the process of being constructed. These investors have the unique concern of ensuring that the project be completed in order to support the job creation requirements of the program when the I-829 petitions will be potentially filed. If a project is stopped in midstream, then there is a serious risk that the I-829 petition will not be approvable. 
  4. Those investors involved in projects that have been completed and by whose I-829 petitions have yet to be filed.
  5. Those investors involved in project that have been completed and whose I-829 petitions have been filed.
  6. Those investors involved in projects have already received their I-829 approvals and only want a receiver return of their capital investments in accordance with the terms of their applicable corporate documents.

To complicate matters further, it is noteworthy that unlike a typical receivership case involving one project, the Jay Peak receivership involves multiple projects where there may have been the improper transfer and/or allocations of funds from one project to another project, thus resulting in a reconstitution of the balance sheets of the various projects entities in order to determine who the final funding will be reconstituted. Accordingly, in addition to the above-referenced categories of investors, each of the investors will have been involved in a different project that may have competing interest based upon the economics of the project and the potential diversion of funds from one project to another project.

As can be determined, the process is quite complicated and needs clear direction. Our firm has become actively involved in dealing with immigration attorneys and investors to assist in the process since there is an urgency in the matter.

Proposed Governmental Reforms to the EB-5 Program

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

Follow-up to EB-5 Coalition Meeting in Washington D.C. on April 13, 2016

I attended the EB-5 Coalition meeting in Washington, D.C. on April 13 and was a panel member along with several distinguished EB-5 experts. The purpose of the panel was to address the proposed governmental reforms to the EB-5 Program and what would be best for the EB-5 industry, as well as what is practical under the current climate of EB-5. It is noteworthy that the conference took place before the publication of the disastrous SEC enforcement action against Jay Peak in connection with all of their offerings.

The major takeaways are the following:

  1. An acknowledgment that the EB-5 Program does need certain reforms and integrity measures to assist in promoting the credibility of the Program given the political climate and the fact that it is very important to try to minimize the amount of bad actors in the industry, the transactions that are undertaken without proper diligence and supervision, and the elimination of projects that do not satisfy reasonable feasibility standards.
  2. Focus on solutions to the various immigration issues involving TEA designations, visa quotas and the like. It was acknowledged that there will need to be a compromise solution that will not otherwise have a serious impact on the viability of the Program, yet provide more guidance from an immigration standpoint. Many solutions were suggested that included methods of effectively increasing the visa quotas by creating special classifications of projects and/or borrowing from unused visas in other immigration categories.
  3. From an integrity standpoint, the EB-5 Securities Roundtable, for which I am a member, presented a position paper that among other things provided the following considerations:
    1. Establishing definitions for many of the generic terms that were not actually defined to provide clarity and consistency.
    2. Clarification that not every party, including the regional center, is an “issuer” if they are not actually involved in raising funds in connection with securities offering. Many regional centers do not undertake the fundraising process in connection with the Program.
    3. Regional Center Responsibilities. The Roundtable was very concerned about imposing unnecessary and burdensome obligations on the regional center that would be either expensive or even potentially impossible to comply with. It was recommended that the regional center certification should be based upon reasonable diligence and reasonable reliance on other professionals to provide guidance and assistance in the entire process. Surely the regional center should be able to rely upon professionals such as immigration counsel, corporate securities counsel, the economist, the business plan writer and the escrow administrator with respect to the various components of the offering in order to insure compliance with SEC rules and regulations. Otherwise, as currently stated, there could potentially be strict liability on the regional center for any deficiency even if the regional center acted in good faith.
    4. Promoter Registration. Confirmation that only those parties involved with the active solicitation of investors would be required to register.
    5. Registration Process of Foreign Agents. The concern here is that the new legislation would require foreign agents who are classified as Promoters would need to register with the Department of Homeland Security. It is unclear whether this registration would automatically subject foreign agents to U.S. jurisdiction. Certain of the members of the Roundtable have raised the issue that expanding the jurisdictional reach through registration that could result in foreign agents being automatically sent to service of process could have a very chilling effect on the industry, in particular in China. This is an open issue that will need to be addressed in the future.
    6. Modifications of the “bad actor” exclusion to delete from the bad actor definition:
      1. Attorneys that have been suspended and then reinstated by the applicable bar; and
      2. The provision that entering into a consent order with a government agency that provides for an order that “prohibits fraudulent, manipulative or deceptive conduct” should not be a factor since virtually every consent decree has that language. Most fraud cases involving SEC action have in part resulted from the lack of independence between the regional center/manager/general partner who controls the NCE and the funding of monies to the developer. This concept also applies to the equity model as well as witnessed by the Jay Peak situation.
    7. An addition to the proposed legislation to create a definition of “at risk” so that the industry will have guidelines to redeploy funds in a manner that is not subject to the current ambiguity given the fact that USCIS has yet to provide guidelines. The proposed definition is as follows:

“AT RISK.  The term ‘at risk’ means exposure of Capital to a chance of loss and opportunity for gain, however great or modest (so long as not nominal or sham).  A guarantee of repayment or redemption of Capital or of a return on Capital by a New Commercial Enterprise or Issuer to its EB-5 Investors shall render that Capital not At Risk.  For purposes of clarity, Capital shall still be deemed At Risk if there exists a contractual commitment, security, collateral, guarantee, or other undertaking intended to be used to fund the repayment or redemption of that Capital or a return on that Capital to the New Commercial Enterprise by a Job Creating Entity, affiliate of a Job Creating Entity or of a New Commercial Enterprise, or unaffiliated third party.” 

The day after this conference the Jay Peak bomb shell hit with the SEC action taken against the principals and their affiliated entities. This case has had an immediate impact on both Congress and the EB-5 industry as a whole, including the foreign migration agents. It is difficult at this time to predict the fall-out from this pending action.

The Jay Peak matter further supports the need for enhanced integrity measures as well as the need to have independence between the developer and the borrower and/or agent that distributes or loans investor funds to the developer.