EB-5 Senate Bill Controversy

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

The revised draft of EB-5 Senate Bill S 1501 (Leahy-Grassley) was released last week and is very controversial. Some organizations support passage and others do not. I see many flaws in the proposed bill that will be summarized below:

  1. The bill is generally effective upon enactment and there is no transition time allowed to enable investors to file their I-526 petitions for projects that are in active development, especially those who have received partial EB-5 funding. The securities and immigration issues are monumental. Offerings will need to be updated to in effect generate a new class of investors who will operate under different guidelines. Investors who have not filed their I-526 petitions and are therefore not grandfathered will need to invest a higher amount – either $800,000 or $1,000,000, depending on whether the project qualifies as a TEA. A lack of further EB-5 funding could jeopardize projects in development as well as those investors who have already filed the I-526 petitions. 
  2. There appears to be a limit on job creation whereby only 90% of the jobs can be indirect. That means at least 10% of the jobs must be direct. This would seem to eliminate those types of projects that rely heavily on construction jobs to satisfy the job requirements. In particular, those types of real estate projects such as multi-family, infrastructure, office buildings and other similar projects would not qualify since it would be virtually impossible to create enough jobs given the management nature of those projects. 
  3. There is a requirement that all marketing materials must be filed along with the application for approval. However, in many cases the marketing materials may not have been created at the time of filing and/or may be supplemented in the future. Furthermore, it is very difficult and maybe impossible for the regional center to monitor the marketing materials used, especially in foreign countries through agents or sub-agents. That is why most offering documents have a disclaimer on reliance on non-authorized materials.
  4. The regional center must disclose all fees and ongoing interest paid to the persons receiving the compensation. In many instances this is not known at the time of filing. Many times packages are created for filing before engaging marketing agents and finalizing an arrangement. Circumstances change over time, which dictates the need to modify the arrangements. The proposed legislation does not address these concerns.
  5. The regional center and the issuer must certify that all agents, employees, advisors and attorneys complied with all federal and state securities laws, to the best of their knowledge, after reasonable diligence being exercised. What does this mean? The provisions are very burdensome and somewhat unrealistic. How can the regional center actually investigate offshore activities of sub-agents working under agents? What diligence needs to be conducted? Why are attorneys even listed as a party the compliance? That in and of itself may be unprecedented. How does one protect itself under these broad guidelines? Doesn’t the pending SEC rules and regulations address many of these concerns? The concept of compliance and diligence is appropriate. Isn’t the hiring of the proper professional to prepare and review necessary documents the appropriate standard? I agree that many offering packages are inadequate and should never have gone to market. But the proposed legislation gas a reach that is very risky from a compliance standpoint.
  6. The new proposed legislation did distinguish the jurisdictional distinction between the 1933 Act and the 1934 Act and the applicability of the Regulation S exemption to market securities, which is a material correction from the prior bill.
  7. The I-526 petition fee increases by $1000.
  8. There are now annual regional center fees of either $10,000 or $25,000, depending upon the level of activity.
  9. Beginning on October 1, 2016, 2000 visas are reserved for rural areas, thus reducing the availability to most of the country to 8,000. The program needs an increase in the visa number to satisfy the existing demand. The backlog to obtain a visa is tremendous and continues to grow. This should have been addressed in the legislation.
  10. The Secretary of Homeland Security now determines TEA designations and can override state agencies. How does one know if the state designation can be relied upon if the determination can be overturned? What will this do to projects that require certainty when going to the market and raising funds?
  11. The TEA designation is now based upon only 12 census tracts, including the project location and all contiguous census tracks. This will now eliminate many projects from TEA designation No recognition is given to commuter patterns to determine where the likely source of employment will emanate.
  12. The non-TEA amount remains at $1,000,000 and the TEA amount increases to $800,000. This factor reduces to a large degree the difference between the two classifications.
  13. Direct and third party promoters – Now, they need to comply with rules established by the Secretary, including: a) registration with USCIS; b) minimum qualifications; c) guidelines for offering the securities; and d) permissible fee arrangements. These provisions therefore would provide significant power to the Secretary to actually regulate the activity of foreign agents with foreign citizens with respect to offerings made in the foreign jurisdiction. Isn’t it up to the foreign governments to regulate their marketing activities? We do not allow foreign governments to regulate U.S. activities. The implications of these provisions could totally upset the industry abroad, especially in China, and therefore create a significant setback to fundraising activities abroad. It is difficult to predict the potential impact of these provisions as well as the rules that would be promulgated by the Secretary.
  14. The new Bill would prohibit a foreign governmental entity from providing capital to, or be directly or indirectly involved with the ownership or administration of, a regional center, a new commercial enterprise, or a job-creating entity. This would seem to effectively eliminate any Projects from the EB-5 Program whose developers are owned by or involve a foreign governmental entity, of which there are many such existing EB-5 projects under way, especially projects with Chinese developers which are partly or fully owned by or involve the Chinese government.
  15. Additionally, the new bill prohibits any person to own, manage or otherwise be involved with a regional center unless the person is a U.S. national or has been lawfully admitted for permanent U.S. residence. 

The purpose of this post is to cover some of the provisions of the proposed legislation and is not meant to be a detailed review of the proposed bill. If you have any questions about this post and/or other EB-5 Investor Program matters, please contact me. My contact information is available by clicking here.

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Comments

Ron.
An excellent summary.
There are definitely points worth discussing.

Edward Beshara

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