The Draft EB-5 Bill: The Good News and The Bad News

The EB-5 Reform and Integrity Act of 2022 brought many changes to the EB-5 program. For the latest information, please click here.

It is noteworthy that the bipartisan coalition that had originally been formed to draft this bill, which included Democratic Representatives Polis and Lofgren, dissolved during the negotiations. The only Democrat remaining is Senator Leahy.

This article will explore some of the most controversial parts of the draft bill. It is not intended to be an exhaustive analysis of the entire bill. 

The title of this blog is “The Good News and The Bad News”. The bad news is that, in this writer’s opinion and in the opinion of most other EB-5 advocates with whom I have discussed the bill, this draft EB-5 bill, if passed in its present form and without significant changes, would seriously jeopardize the continued viability of the EB-5 program. That is a dramatic statement, but I do not believe it is an overstatement. I believe that the result of this bill would be similar to the late 1990s when abrupt changes in legacy INS policies, as manifested in the four precedent decisions, resulted in a virtual shutdown of the EB-5 program that lasted for more than five years.

So what could be the good news? Unfortunately, the good news is very short. To be sure, there are some favorable provisions in the draft bill – for example, concurrent processing and 245(k) eligibility for EB-5 investors in the U.S., increased flexibility for investors in a project in a terminated regional center, limited acceptance of tenant occupancy jobs. However, the best news is that the bill is only a draft and that there is strong opposition to many provisions in the draft bill both from other Senators and from most segments of the EB-5 industry. As a result, the chance of this draft bill in its present form becoming law appears to be low. End of good news.

The remainder of this blog will highlight some of the key provisions, starting with the two issues that have the greatest likelihood to create irreparable damage to the EB-5 program.

Effective Dates and Grandfathering

The draft bill would increase the minimum investment amount for TEA investments to $800,000 and for non-TEA investments to $1,200,000. It would also make substantial changes to the definition of a Targeted Employment Area. I will discuss these changes in more detail below. However, for purposes of the present discussion, the significant issue is that many projects that are presently in areas considered TEAs would no longer be in areas that qualify as TEAs under the new definition. The result would be that for investors in such projects, the required minimum investment amount would increase from $500,000 to $1,200,000.

For many in and out of the EB-5 industry, although the TEA definition is rife with controversy, the increase in the minimum investment amount is not controversial, especially since there has been no increase since 1990. However, the issue is whether the increase in investment amount, and the change in the TEA definition, should apply prospectively or retroactively. Shockingly, the draft bill would apply the increase retroactively to June 1, 2015. This would mean that thousands of investors who invested and filed EB-5 petitions over the last six months would no longer qualify. This is exacerbated by the unprecedentedly long USCIS processing times, which have resulted in the need to abandon traditional escrow arrangements in favor of releasing EB-5 money to the job-creating projects, often upon the filing of the EB-5 petitions. As a result, for thousands of investors, (a) they cannot get their money back, (b) their money has been used to create jobs and (c) they will no longer qualify for immigration benefits unless they invest another $300,000 or $700,000, which many cannot do.

The problems with this retroactive implementation are both obvious and troubling at many levels. First is the fundamental unfairness to investors. Imagine if you made an investment with the promise in writing of a specific benefit and then were told that you can’t get your investment money back and you will not be given the benefit. If this were perpetrated by a project developer, it would be blatant securities fraud. The fact that it is devised by the U.S. Government does not make it any better.

Let’s consider some of the ramifications in addition to the egregious treatment of the investors:

• Rampant litigation challenging the legality of retroactive application and seeking return of investment funds would be a virtual certainty;
• Allegations of securities fraud would become daily headlines;
• Investors would likely have rights of rescission based on material changes, and developers would not have the money available to pay back the investors;
• The reputation of the EB-5 program would be severely – and possibly permanently – undermined. How long will it take for foreign investors to reacquire confidence in a program where the rules would game are subject to change retroactively at any time?
• There would clearly be international relations implications. If the U.S. government can pass a law that results in foreign investors’ money being expropriated without their getting the promised return, why would we think that foreign governments would not take similar actions against U.S. individual and corporate investors in their countries? How could we have a basis to protest?
• I have spoken with a former high ranking U.S. government official with significant experience and knowledge of the government of China. He believes that such a change that would result in thousands of Chinese investors losing their investment money and not getting the promised immigration benefits would create an international incident and a likely formal governmental protest. It would not be at all surprising that the result would be that the Chinese government would at the very least place new restrictions on – and possibly at least temporary prohibitions on – investments by its nationals in the EB-5 program.
• The U.S. has entered into many investment treaties with other countries. Many of these treaties have prohibitions against “involuntary expropriation” of money invested by nationals of those countries in the U.S. It is very possible that the retroactive application of the law could be in violation of many of these treaties. Has this been considered by the drafters?

The bottom line is that retroactive application of increased investment amounts is objectionable from legal, personal, moral, national interest and international relations perspectives.

New Investments

New investments in most projects would be shut down immediately and indefinitely.

Effective on the date of enactment, the draft bill would disallow the filing of any I-526 petition on any project – grandfathered or otherwise – until an exemplar petition has been approved by USCIS. Effective immediately, such an exemplar petition would have to meet many new requirements, such as disclosure of fees or other compensation paid to all agents, finders or broker dealers; name and contact information of all agents; finders or broker dealers; and new certifications from the regional center and the NCE and the JCE regarding securities compliance.

Think of what this would mean. USCIS was taking in excess of twelve months to process exemplar petitions before the unprecedented onslaught of exemplar petition filings in August and September. Most estimates are that it will take USCIS years to process these pending applications. Now every project would require an exemplar petition filing, which petitions would be behind the pre-September 30 filings in terms of processing times. No one could even estimate the time it would take USCIS to adjudicate these exemplar filings. In the meantime, the program would shut down, probably for years.

At first glance, it might appear that the processing time for these exemplar petitions might not be so long. After all, the bill sets a “goal of completing adjudications, on average, not later than 120 days”. In addition, the draft bill authorizes premium processing of such applications. Unfortunately, this is completely illusory. Here’s the problem.

First, both the premium processing and the increase of regular processing fees necessary to achieve the 120 day goal are subject to a “fee study” for which there is no deadline. The author’s experience with such studies is that they often take years, not months. Second, the revision of fees, as well as the premium processing, cannot be implemented until the Secretary of DHS promulgates regulations. Regulations can take years, if not decades. For example, we are still awaiting regulations to implement immigration laws enacted in 1996 and 2000, not to mention revisions to the archaic EB-5 regulations from 1990. Most strikingly, 2002 EB-5 legislation mandated that legacy INS must promulgate regulations within 120 days. We are awaiting those regulations 13 years later.

Even if the law required adjudications in 120 days – as opposed to setting a goal of 120 days – USCIS has routinely failed to adhere to such requirements. For example, the law requires all L-1 petitions to be adjudicated within 30 days. It is an unusual event to see any L-1 petition (other than a premium processing petition) adjudicated in a period of time even close to 30 days. In the EB-5 context, the regulations require I-829 petitions to be adjudicated within 90 days. Despite the regulation, the present posted processing time for I-829 petitions is in excess of 14 months.

How about premium processing? While premium processing would be a favorable development, it does not guarantee processing within 15 days. All it means is that, if the adjudication is not completed within 15 days, USCIS must refund the premium processing fee.

The bottom line is that, no matter what the statute states, USCIS will not be able to adjudicate many hundreds of exemplar petitions – or perhaps even more – in a period of time that would make EB-5 feasible as part of the capital stack for projects presently in the market. In fact, I am not aware of any project that meets the shovel ready requirements for filing an exemplar petition that could be frozen in time for years before any new EB-5 capital could be raised.

“Ninety Percent Test”

The draft bill proposes to require that 10% of all qualifying jobs must be direct, full-time W-2 employees of the JCE. Direct employees of the NCE are expressly excluded (what if the NCE and the JCE are the same?). It appears that direct construction jobs, which are indirect jobs under EB-5 law, do not count toward the 10%. What happens if there is a long construction period and there will be no direct employees for 3 or 4 years or more?

Think of the large number of EB-5 projects that would be eliminated under this rule. Presumably, no infrastructure project would qualify. Does Congress really intend to exclude infrastructure projects from the EB-5 program? Presumably, no residential projects would qualify. Residential projects have become among the most popular of EB-5 projects. Does Congress really intend to exclude residential projects from the EB-5 program? There are many other examples that could be cited.

The bill would also require all construction jobs to be “full time”. This is a brand new and unworkable concept. None of the economic methodologies that are used to project construction jobs factor in a “full time” consideration.

This provision would also be applied retroactively with respect to investors filing petitions on or after June 1, 2015. The result would be that many projects structured during the past year and marketed to investors during the past year and in which investors have invested in the last six months would no longer be qualifying projects. Some of these projects might be able to be restructured to meet the new requirements. Many or most would not be able to be restructured. As with the retroactive application of TEA and investment amounts, the implications are not difficult to imagine – projects not moving forward, rescission by investors, defaults on loans, litigation.

Regional Center Changes

The draft bill would require advance approval of “significant proposed changes to organizational structure, ownership or administration” of regional centers. Think of what this would mean. If a regional center manager or administrator leaves or is replaced, the regional center would have to shut down until an amendment application is not only filed, but approved. Presumably, this would mean that the regional center could not continue to sponsor any projects until the amendment approval. Presumably also, all I-526 petitions that are pending in that regional center would be frozen until the amendment is approved. Is this really what Congress intends?

Full-Time Employment

For the first time, the draft bill would require that a job must last at least 24 months to be considered full-time employment. This would mean that a job would have to start on the first day an investor gets conditional residence in order to meet the 24 month test by the time the investor files for condition removal. As a practical matter, few if any direct EB-5 investors would be able to obtain condition removal using this test. For regional centers, for which 10% of all jobs must be direct full-time positions, how would this test be applied, especially since operations may not commence – and direct employment may not commence – for two or three years while construction is being completed?

Definition of TEA

Separate from the issue of retroactive application of the new TEA definition, the definition itself is problematic at best.

The draft bill would require that at least 2,000 of the 10,000 numbers available under the quota go to investors who invest in rural area projects. While the merits of such an allocation could be debated, what shouldn’t be debatable is the fact that any unused numbers from the rural quota should be made available to investors investing in non-rural projects. The prospects for Chinese EB-5 investors under the present quota are dire enough without a new legislative provision that could result in less than 10,000 numbers being actually used in the program.

Only USCIS would be able to determine TEA qualification. States would be excluded. Since there would be uncertainty in structuring projects without knowing if they meet the definition of a TEA, presumably there would have to be separate filings with separate processing times for TEA determinations. One can only imagine the delays that this would engender.

The actual definition of “Targeted Employment Area” in the draft bill is, at best, completely ambiguous and, at worst, would eliminate most urban TEAs. In addition to including an expanded definition of a rural area, and adding “high poverty areas”, “Enterprise Communities”, “Renewal Communities”, “Empowerment Zones”, “Promise Zones” and closed military bases, the bill has a very confusing definition of “high unemployment area” TEAs, which would be the category into which most urban TEAs would fall. The actual language of the draft bill requires that the project’s census tract and each contiguous census tract must have an unemployment rate of 150% of the national average. This is basically the same as the original S.1501, which required that the census tract in which the project is located have an unemployment rate of at least 150% of the national average. However, the draft bill now adds the following language, which is in addition to the requirement that the census tract have an unemployment rate of at least 150% of the national average: “which may include any census tract or tracts contiguous to one or more of the tracts that have the requisite unemployment rate.” Because I viewed this language to be very ambiguous, I contacted three experienced EB-5 economists. All three were unable to determine what the meaning of this language is. One provided what he considered to be the most likely interpretation of this language and concluded that it would result in approximately 90% of current urban TEAs being disqualified.

Project Grandfathering

Separate from the issue of investor grandfathering is the issue of grandfathering of projects. The draft bill would grandfather projects for which any investor filed an I-526 petition, or a regional center filed an exemplar petition, before June 1, 2015. The grandfathering would apply to the amount of the investment, the TEA definition and the 90% rule. The grandfathering would create three levels of investors – (a) investors in any project who filed before June 1, 2015; (b) investors in a grandfathered project but only if they filed prior to the date of enactment of the new law; and (c) all other investors who either invested in a non-grandfathered project or who invest in a grandfathered project after the date of enactment. The grandfathering would not apply to the requirement that an exemplar petition be approved before any further I-526 petitions could be filed, which would take effect immediately upon the new law being effective.

In order for a project to have had an I-526 petition filed before June 1, 2015, it would likely have had to be structured in 2014 with marketing commencing, at the latest, in early 2015. As a practical matter, this would mean that virtually all projects structured and brought to market during most of the last year would not be grandfathered.

There are major problems with this scheme. If the goal is to separate paper projects from real projects, why not draw the line to exclude projects that do not have any investor petitions filed by the effective date of a new law? If there is a benefit to grandfathering a project, why end the grandfathering when the new law passes, thereby ensuring two classes of investors in these projects?

In addition to creating two classes of projects based on an arbitrary retroactive date, the retroactive grandfathering provision would have severe consequences likely unintended by the drafters. From the point of view of investors, those who invested in projects that are not grandfathered would be jeopardized because the project may no longer qualify under the 90% test and may no longer be in a TEA under the new definition and, therefore, may no longer be marketable.

Presumably, those investors may have a right of rescission based on a material change under securities laws. This could both jeopardize completion of the project and result in developers being forced to return money that has already been used in the project.

Third party financing sources which lent money to the project based on perceived availability of EB-5 capital and based on compliance of the project with EB-5 law might well be expected to cancel or default based upon these retroactive changes. Loss of senior indebtedness or bridge financing would likely result in project failures. This could result in even grandfathered investors not being paid back because of the lack of funds available to the developer. Such investors also would not be able to obtain condition removal, subjecting them to removal from the U.S. Litigation among multiple parties would be an expected result.

These are just some of the key provisions in the draft bill. This blog does not discuss any of the so-called “integrity and transparency” provisions, which encompass a substantial portion of the bill. Those provisions are the most likely to be included in a bill to extend the regional center EB-5 program beyond December 11. They are not without controversy, but they are likely to engender qualified support from most quarters as a condition to extension. These provisions will be the subject of a separate blog.

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