EB-5 Marketplace Measurement – China and Beyond

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

I just returned from a week in China. Along with speaking at the EB-5 Investors Magazine’s 2017 EB-5 & Investment Immigration Expo, I had the opportunity to visit with many migration agents, as well as other professionals in the EB-5 industry. My impressions of the marketplace, particularly China, are as follows:

1. Many large agents are still on the sidelines waiting for new legislation to pass in order to have more certainty as to proceeding with the EB-5 Program. These agents may still be involved in meeting funding obligations on projects in process, but they are not necessarily undertaking new projects.

2. Agents are very selective in the project choice, and it is clear that the quality of the projects available in the marketplace has elevated substantially over the past few years, thus increasing the competition to gain marketing agent support to undertake a project.

3. Individual agents seem to have their own criteria as to what type of projects they will underwrite. The following factors seem to be most important:

  1. Project Location. There is clearly a preference for certain major metropolitan areas such as New York, Los Angeles, and San Francisco and, to a lesser degree, Seattle, Dallas, Houston, Miami, Chicago, Philadelphia and Boston.
  2. The nature of the project is still relevant. There seems to be a very strong preference for multi-family developments, more in the rental framework since condominium projects have timing issues as to repayment and a market perception of uncertainty. Multi-family projects during the last recession seemed to maintain market value better than other asset classes.
  3. Continuous focus on background of the Developer and equity contribution of Developer, although agents seem to be satisfied with the 20% capital contribution.
  4. EB-5 capital accounting for no more than 30% to 35% of the total capital stack.
  5. Having the senior loan in place is an advantage, since it validates underwriting criteria satisfied by the senior lender.
  6. Capital stack can be funded independent of EB-5 funding. 

4. Many agents will not undertake a project until it is under pre-development or development activities – in order to be sure that the project will be completed.

5. The most successful projects are the ones that probably do not need EB-5 capital. Since the capital stack is completed, and no matter how much EB-5 funds are raised, the project will proceed accordingly. That again is the advantage for projects that are already under development.

6. A common model includes today, since to be the Developer obtaining bridge mezzanine financing that is taken out by EB-5 capital in order to avoid a delay in the commencement of the development. In this manner, it is very simple to substitute debt for debt, and since the bridge funding is of a short term nature, the job creation component should still be applicable with respect to the entire project.

7. The market is becoming more sensitized to the concept of redeployment, given the time table for final I-829 adjudication for Chinese nationals. Accordingly, agents are becoming much more familiar with redeployment options and are learning to adjust to that situation. I believe it is somewhat of a windfall for agents since they continue to receive compensation after the initial five year loan term – based upon the fact that loans are being extended for up to eight years in total and/or funds are being redeployed into another project developed by the same Developer or another Developer.

8. The biggest immigration issue in the market place is retrogression and the need for increase in the visa cap. Many agents say that the dollar amount of the investment is not the major issue as long as there is not a significant difference between the TEA amount and a non-TEA amount. Rather, the retrogression is estimated to be up to nine to ten years, and many Chinese investors just do not want to wait that long to gain access to U.S. residency.

9. Agents are clearly pursuing other jurisdictions, such as Portugal, Greece, Ireland and certain countries that, in effect, enable an applicant to obtain residency and citizenship status very quickly (e.g., Malta and Grenada). In some of these jurisdictions, it is the back door into the European Union which is somewhat advantageous. Clearly, Chinese nationals are looking at other options, since the U.S. market, although favored, is arduous to undertake at this time.

10. There may be another concern about the Chinese investor transfer of funds and the increase currency restrictions scheduled to take place on July 1st, 2017.

All and all, one can see that there are continuous complications in the EB-5 Program that are reducing the marketing potential of all projects. I will continue to update you on the EB-5 Program – the complications, challenges, changes, and beyond

EB-5 Update – Extension and Current Senate Bills

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

It is common knowledge the EB-5 investor program received extensions through September 30, 2017. Accordingly, until further changes happen, the existing program will remain in place.

There are currently two (2) key bills that have been presented. One is the Grassley Bill, which is a modification of the old Senate 1501 Bill proposed back in June of 2015 by Senators Grassley and Leahy. The active call “American Job Creation and Investment Promotion Reformat to 2017.” The other bill was proposed by Senator Cornyn of Texas, which has also been submitted in the Senate. Basically, the two (2) factions which represent rural/urban interest are negotiating immigration points that in effect include the following:
  1. The actual definition of the TEA. This will relate to the applicable census tract to be used. Obviously the Grassley Bill has a very restrictive approach and only includes the existing census tract and possibly contiguous ones. The Cornyn Bill is more expansive.
  2. Minimum Investment Amount. The Grassley Bill has $800,000 minimum for TEA and $1,000,000 for non-TEA. The Cornyn Bill has a different amount and phase in.
  3. Set Asides. One of the big issues is that the Grassley Bill has set aside to rural and poverty, but also takes into account infrastructure and military, which would therefore leave a lesser number of visas for the non-TEA designation and greatly disrupt the program. The Cornyn Bill does not have the details of set aside. It is noteworthy that the Cornyn Bill excludes derivatives thus increasing the visa count by almost 3 times, which would be a major benefit to the program, but unlikely to get passed.
  4. Current Situation. Given the current situation, especially after the marketing fiasco in China last week involving the project involving Kushner, Grassley has kicked back and indicated that he fully intends to adopt the proposed regulations that were proposed by DHS under President Obama that would create a minimum threshold to $1,350,000 for TEA, $1,800,000 for non-TEAs. That would almost end the program itself. Grassley is using the regulations with a threat to negotiate with the Cornyn faction in order to get a compromised bill.
With respect to integrity measures, there is general agreement that the program does have degree of fraud and that integrity measures are necessary to police against this. Integrity measures include matters such as the following:
  1. Higher burden on regional centers to review projects from both an immigration and financial standpoint and issue annual certifications.
  2. Grassley Bill actually provides for an independent fund administrator to administer funds with joint check signing authority.
  3. There are various restrictions on who can participate in the regional center as well as who can participate in a JCE if they have certain backgrounds.
  4. Foreign enterprises are prohibited from participating in the regional center and the NCE and providing capital to the JCE, with certain exceptions for governance of fact organizations.
It is difficult to predict the timing of all of these working, although it is expected if by September 30, 2017 a new bill will be passed. Likely, the deal will not have retroactive effect so that those investors that file their I-526 petitions prior to the passage of the bill will be grandfathered. Challenging to determine is if there will be any grandfathering of projects with phase in as otherwise being proposed by Cornyn. Grassley has no concept of phase in, but does allow for grandfathering of I-526 petitions.

From a market standpoint, it is tough to predict the effect of all these recent undertakings except that there is another push to get I-526s filed in order to be grandfathered under the system. Grandfathering should also apply to TEA designations. In addition to the above, the following is worth noting:
  1. There seems to be a heightened emphasis on redeployment of funds since projects are reaching their term as far as the loan repayment is concerned and those funds are repaid, they need to be redeployed to maintain the “at risk” requirement of Izumi. I have commented on this several times. As noted, USCIS has yet to determine what it means to be “at risk”, but it is clear that a redeployment of funds back into a loan program or equity program involving a real estate project would for sure qualify since that is generally the original intent of the initial investment. Accordingly, we are seeing many redeployment programs with the same developer on different projects with a detailed due diligence process accompanied by a very extensive investor where they have most of the exhibits.
  2. It is also noteworthy that the SEC has been very active enforcing claims against bad actors. The promoter of the Chicago Convention Center, LLC just got sentenced to a three (3) year term. The SEC just settled on a multi-million dollar judgment against Sima Muroff involving the Idaho State Regional Center, LLC’s EB-5 projects in Idaho. The receiver just settled with Raymond James for a reported $150,000,000 as a result of alleged mishandling of funds by Raymond James on behalf of one of the promoters.
  3. USCIS has announced that it will undertake regular compliance audits of regional centers to ensure that they are complying with elements of the program. The SEC still intends to do spot audits in checks of projects. We are advising clients to make sure that all records are properly downloaded and available for review, including not only the immigration documents, but the corporate security documents and the loan documents.
It will be very interesting over the next several months to see how things unfold, but the industry is definitely going through a degree of stress that will hopefully get resolved with an extended bill which properly vets all the various interests.

EB-5 Investment Funds – Standards and Guidelines for Redeployment

WHITE PAPER: STANDARDS AND GUIDELINES FOR REDEPLOYMENT OF EB-5 INVESTMENT FUNDS

Prepared by:
Arnstein & Lehr LLP
Klasko Immigration Law Partners, LLP
Jeffer Mangels Butler & Mitchell LLP

The EB-5 investment community is now facing a new challenge, as many of the more seasoned EB-5 investment projects begin to mature and the original investment capital is returned by the project owner to the new commercial enterprise. USCIS has clearly stated its policy that EB-5 investment capital is required to remain “at risk” in the new commercial enterprise until each EB-5 investor’s I-829 petition is adjudicated. However, USCIS has provided no guidance on what requirements that new investment is required to meet, other than that it must meet the definition of “at risk.”

As the authors of this linked White Paper, we have undertaken the task of proposing a set of standards and guidelines for redeployment of EB-5 investment capital. It is our hope that the principles of redeployment stated in this White Paper will be accepted by USCIS and by the EB-5 investment community. We believe that the standards expressed in this White Paper should meet the “at risk” requirements established by USCIS, and it should also meet the requirements of federal securities laws and the fiduciary duties of the general partner or manager of each new commercial enterprise when making a decision to redeploy their investment capital in a new investment. We acknowledge that this is an evolving issue and that new developments may occur that require changes in these proposed standards and guidelines. At the same time, we believe it is important to the EB-5 community that these standards and guidelines are offered as a model now, so that new commercial enterprises have a basis for analyzing their options when the need to redeploy their investment capital becomes a reality.

EB-5 Program – Updated Statistics and Information

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

USCIS recently published a statistics report on the impact of the EB-5 Program for the fiscal years 2012 and 2013 (downloadable on the Economics and Statistics Administration’s website by clicking here). Furthermore, IIUSA has published statistics on various performance factors concerning the EB-5 Program. Both are summarized below, since the results are quite interesting.

USCIS Report

  1. The national estimates are that more than 11,000 immigrant investors provided $5.8 billion dollars in capital, roughly 35% of the total investment in the applicable projects ($16.7 billion dollars). Projects operated through Regional Centers generated an estimated 170,000 jobs based upon the total investment. The balance of the project costs came from non-EB-5 sources. The aforementioned USCIS statistics report includes a chart (on page 15 of the full report PDF) showing total investment and job creation from active EB-5 projects for the fiscal years 2012 and 2013.
  2. For number of jobs created, the states, in order of priority, were California, New York, Florida, the District of Columbia and Maryland. California accounted for the 30% of the jobs. 

IIUSA Report

IIUSA also issued comprehensive data reports of the Program updated through the 4th Quarter of 2016. The reports show charts with the statistical results related to I-526 receipts, I-526 approvals and denials, and the number of pending petitions, as well as I-829 Petitions. It is noteworthy that the number of I-526 receipts in the 4th Quarter was down, the number of approvals was up, and the number of denials was down. For informational purposes, the USCIS I-526 summary for fiscal years 2008-2016 can be viewed on the USCIS government website by clicking here. With respect to I-829 Petitions, it is also notable that the backlog keeps increasing so that there are more petitions pending as a result. Therefore the number of receipts has increased dramatically and the number of approvals has decreased significantly.

NES Innovation Summit – Miami, FL

As a separate matter, I attended the NES Financial Annual Innovation Summit held in three different cities – Los Angeles, Miami and New York. León Rodriguez, the former director of USCIS, was the featured speaker. Some of his takeaways included the following:

  1. The key states were Florida, California, New York, Pennsylvania and Texas, with Ohio being a relevant state as well.
  2. He saw the focus more at the local level and the energy level of trying to attract foreign investment and create jobs for the local areas. The EB-5 Regional Center Program supports this movement. The capital expenditures in particular location not only create jobs, but increase the tax base and economic productivity and stimulate further development in certain sectors.
  3. He indicated that the government can be strategic in stimulating development. Local and state governments are providing incentives, including favorable zoning, tax breaks, etc., in order to stimulate jobs and enhance development. The EB-5 Program fits into the same format of targeting high employment areas, either directly or through the creation of jobs for employees, which may be located at a reasonable commute distance to the applicable project. Mr. Rodriguez noted that not only is there stimulation in job creation, but also stimulation in the overall economy.
  4. He indicated that it was very important to get the message out to the public that the program helps local governments stimulate development and create jobs and that there are other important effects in these developments, since it stimulates additional commerce in the applicable area.

EB-5 2017 – Where Are We Now?

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

Following the December 9, 2016 extension of the EB-5 Regional Center Program until April 28, 2017, there have been additional developments from an administrative, legislative and practical standpoint. Needless to say, the Program remains in limbo as to where it will end up and at what point in time legislation will be passed, especially considering the advent of a new administration and Congress. There could be final legislation current as of the April 28, 2017 deadline. That being said, given the change in administration and the political lobbying, related to the Program, that is taking place in Congress, there is no clear time limit as to when legislation will be finalized. What is apparent is that the situation is extremely complicated, with many political interests being represented that have yet to come to the table and resolve outstanding issues.

At a recent conference sponsored by the EB5 Investors Magazine, Senator Jeff Flake of Arizona, a very proactive EB-5 proponent, hinted that given the current political climate, it would seem realistic to assume that legislation may not be passed by the end of April and that the EB-5 Regional Center Program would, therefore, be extended beyond the upcoming deadline, until Congress and the administration can agree on new legislation. Senator Flake further stated that he is in favor of increasing the visa count given the benefits of the Program and the significant backlog that has occurred as a result of the retrogression in China.

The industry is questioning the effect that the Trump administration will have on policy-making and the operations of USCIS in the future. Overall, there are many positive signs in connection,  given the following:

  1. President Trump is obviously a real estate expert and presumably understands the benefits of the EB-5 Program to the U.S. economy.
  2. President Trump has announced his desire to reduce regulation across the board, and this may carry over into USCIS and matters related to its administration.
  3. There are many legislative competing interests in the process and it is presumed that President Trump and many members of the Congress, on a non-partisan basis, will be proactive in trying to salvage the positive components of the Program in a bid to reduce the burdensome nature of the current system. This would, nevertheless, still include a provision for increased integrity in the Program, which concept seems to be non-controversial.

In assessing the process, it is apparent that the Program is facing the following key issues:

  1. The finalization of legislation to provide certainty to the marketplace that is right now confused as to when and what will eventually happen.
  2. Revising the definition of a TEA in a manner that will not otherwise severely restrict EB-5 projects in the future.
  3. The issue of increasing the EB-5 investment amounts and to what extent that will affect the marketplace.
  4. Potential carve-outs of certain uses within the ten thousand visa cap and what affect that would have on the market. In connection therewith, potentially (a) establishing separate visa caps for rural, infrastructure and other types of programs that may spur the economy; and (b) increasing the visa cap so as not to prejudice the existing program that relies upon a large portion of the EB-5 investment capital being deployed into urban developments.
  5. Curtailing the ever growing backlog in the administration of pending petitions.
  6. The potential increase one way or another in the visa cap in order to accommodate the needs of the industry.

Clearly the Program has become more complicated, expensive, and time consuming. Such additional costs and time delays may serve as a serious detriment to the demand for EB-5 capital as compared with traditional financing sources that may become more affordable and available. I believe that the take away as to the existing marketplace reflects the following:

  1. The delay in finalizing legislation has created confusion and uncertainty. Some agents are waiting for new legislation to be passed before taking on new projects in an effort to avoid the hassle with potentially re-structuring deals that will not comply with new legislation.
  2. On a related note, some agents are taking the fire sale approach and pushing to empty their respective inventories of existing project units.
  3. The reality of retrogression has necessitated the need to undertake redeployment planning in all new projects given the predictable delay in Mainland Chinese investors receiving I-829 adjudication within what was once a five (5) to seven (7) year time frame.
  4. Increased marketing efforts outside of mainland China in order overcome the negative effects of the above referenced retrogression.
  5. The continued rise in projects going into the marketplace that creates more competition and potentially increases the cost of the financing as a result thereof.
  6. Increase in currency control restrictions in China and other jurisdictions.
  7. Developers and regional centers taking more of a boots on the ground approach to marketing to investors abroad and possibly in the United States through the use of registered broker-dealers and not just relying upon the traditional agent market.
  8. The focus of many regional centers and developers pursuing smaller agents to raise EB-5 capital at potentially more affordable rates, and the marketing of projects in multiple jurisdictions. It is noteworthy that specific markets, such as Vietnam, South Korea, India and various Latin American countries are being pursued more aggressively as potential EB-5 marketplaces in an effort to mitigate the retrogression effects in China.

This will clearly be a transition year that hopefully will end up with a resolution that results in an overall solution that is beneficial to the Program.

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.