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USCIS issued its third draft EB-5 policy memorandum on February 14, 2013. It is open for public comment through April 1, 2013.
While the draft policy memorandum technically does not establish USCIS binding policy, it is a window into its present thinking on various subjects relating to EB-5 adjudications.
This alert will discuss the highlights of the draft policy memorandum in terms of either new policies or clarifications of previously unclear policies. It is not meant to be a summary of the entire memorandum, most of which merely restates existing law and policy.
It is important to note initially that the memorandum is not an exhaustive memorandum in that it does not cover most aspects of I-924 adjudications, including adjudications of EB-5 projects. For example, it makes no reference to use of EB-5 money to pay back bridge financing; whether EB-5 loans can be paid back to a new commercial enterprise before conditions are removed; whether direct employees of the job-creating entity (indirect employees of the new commercial enterprise) must be “qualifying employees”; etc.
Perhaps the most significant change in policy articulated in the draft memorandum relates to the “material change.” The draft policy memorandum, if implemented, would reverse the policy contained in the December 11, 2009 Neufeld Memorandum, which established the material change standard. The draft memorandum appears to have gotten it right. The agency draws a distinction between a material change occurring between the filing and the adjudication of Form I-526 or the filing of Form I-526 and the approval of conditional permanent residence status), which would require a new I-526 petition, and a material change occurring after approval of the I-526 petition, which would not require a new or amended I-526 petition. The stipulations are that the changed business plan must still fall within the I-924-approved industries for the regional center and that the investment capital be “expeditiously redirected into the alternate project, such that USCIS can conclude that the full amount of capital was at risk and fully available to the job creating entities throughout the period of conditional residence.”
USCIS appears to draw a distinction between a material change to a business plan and a complete change in either the job creating entity or the new commercial enterprise. USCIS leaves that area rather ambiguous stating that it “may not comply with the requirements to invest and sustain the investment.” The meaning of that sentence is unclear and needs to be clarified.
USCIS states an intent to develop a mechanism for a petitioner to notify the agency when there are substantive material changes. This would be welcome, and it is an improvement that has been suggested on multiple occasions.
Finally, on the subject of material change, USCIS notes that it may need to revisit issues that had been adjudicated in the I-526 process when there is a material change in the business plan. Examples given are when the investment proceeds are diverted from one industry to another with different multipliers for job creation projections, when the number of investors in a project have changed dramatically or when certain assumptions made in the economic report were not satisfied.
The second area where USCIS states new policy relates to the timing of job creation, specifically with respect to adjudication of the condition removal petition. USCIS restates its position that, in the adjudication of the I-526 petition, the agency must be satisfied that the jobs will be created within 2 ½ years of the approval of the I-526 petition. This author has opined on a number of occasions that this standard is incorrect, and it may be a subject of a separate blog in the near future. For now it remains USCIS policy.
The important new language in the memorandum relates to adjudication of I-829 petitions. First, the memorandum notes that the regulations allow for “substantial compliance” with both the capital investment requirement and the job creation requirement. This is not new, but is a helpful indication that the Service realizes that its regulations do not require full compliance, but only substantial compliance.
The key language relates to the regulatory requirement at the I-829 stage that the jobs be created “within a reasonable time”. USCIS for the first time establishes a one year period after the I-829 filing deadline as generally being considered a “reasonable time” (Director Mayorkas, at various public meetings, had previously advocated 6 months). The draft memorandum states that jobs that will be created within a year of the I-829 filing deadline will “ordinarily” be considered to be created within a reasonable period of time, whereas jobs projected to be created after that timeframe usually will not be considered to be created within a reasonable time (absent extreme circumstances, such as force majeure.)
Various parts of the memorandum deal with geographical areas, either for purposes of a regional center or for purposes of determination of a targeted employment area. The memorandum iterates the standard that the new commercial enterprise must be “principally doing business” in the TEA and adds that a majority of the required jobs must be created in the TEA. The memorandum provides more detail than previously available regarding factors used to determine where businesses “principally do business.”
Helpfully, USCIS reiterates its deference to state determinations of the appropriate geographical area that has been designated as the TEA. This had previously been clarified after USCIS had earlier challenged state geographical TEA determinations.
Another area where USCIS has, at different times, taken varying positions is the issue of whether indirect jobs can be created outside the geographical boundaries of a regional center. In its most recent prior iteration of policy, USCIS had indicated that these jobs can be counted subject to case by case determination. In this draft policy memorandum USCIS eliminates any conditions whatsoever and simply states that indirect jobs can qualify even if they are located outside of the geographical boundaries of the regional center.
The least helpful language related to geography relates to the determination of the geographical boundaries of a new regional center. Those of us who work with developers in creating new regional centers are very aware of USCIS’ restrictive policies in recent times on this subject. USCIS states that the supply chain, as well as the labor pool, for proposed projects will be important in determining the reasonableness of a proposed regional center’s geographic boundaries. The most disturbing language relates to the regional center having to prove that the proposed economic activity “will substantially promote economic growth in the proposed area as a whole.” Does this mean that every project in the regional center must impact every area of the regional center? This is particularly problematic with respect to previously-approved regional centers with a broad geographical area.
The memorandum clarifies some previously-held agency positions relating to the requirement that the investment be “at risk”. Significantly, USCIS states that if an investor is guaranteed the right to eventual ownership or use of a particular asset, including a real estate interest, the value of the guaranteed ownership or use of such asset will be subtracted from the amount of the investor’s capital contribution in determining how much money was placed at risk. The draft memorandum also states a previously-stated, but rarely- used, position that the investor’s money may be held in escrow not only until approval of the I-526 petition, but also until the investor becomes a conditional permanent resident. Finally, the memorandum confirms that an investor can receive a return on his or her capital during or after the conditional residency period, so long as the return was not previously guaranteed and so long as the funds are not a return of the investor’s principal (but rather a return on principal; namely a profit).
The draft memorandum reiterates some helpful language from the previous draft memorandum regarding the so-called fund model of investments across a portfolio of businesses. In summary, USCIS states that the investment must be made into a single commercial enterprise, but that commercial enterprise can deploy the capital among various wholly owned subsidiaries (in the case of a direct EB-5) or unrelated entities (in the case of regional center EB-5s). Left unstated is the agency position on the extent to which a specific investor’s funds must be traced to a specific job-creating entity and the impact if one of several job-creating entities does not create sufficient jobs.
Briefly, the following are other points of note in the draft policy memorandum:
Converting a restaurant into a nightclub or adding substantial crop production to an existing livestock farm are cited as two examples of a restructuring or reorganization that would be sufficient to establish a new commercial enterprise.
Where a new commercial enterprise has owners who are not seeking to enter the EB-5 program, the source of their capital must be derived by lawful means.
The EB-5 investment can be used for non-job-creating purposes as long as it helps the new commercial enterprise create 10 jobs. Examples are purchasing land, obtaining licenses, staffing a hotel, etc. The memorandum also includes in this list of examples “paying financing costs to unrelated third parties.” It is not clear if this is meant to expand or liberalize the agency’s previous policy on using EB-5 funds to repay bridge financing.
USCIS states: “In general, multiple EB-5 investors petitioning through different regional centers or on a standalone basis may not claim credit for the same specific new job.” This, of course, is not controversial. However, it is interesting to speculate whether this is meant to articulate an agency position that multiple regional centers can be used for the same project as long as there is no double counting of jobs.
The draft memorandum references regional center amendments. It does not reference the need for an amendment to change industry code. Is this intentional? It does not clearly indicate whether a change in economic methodology requires an amendment (the Service has taken different positions on this at different times).
- Finally, the policy memorandum discusses the agency’s “deference” policy. Deference will be provided to a determination in an approved I-924 or I-526, but will not apply to a different project or the same project with material changes to the project plan.
In summary, there are some useful clarifications or expansions of previous policy in this third draft policy memorandum. Subject to clarifying or changing a small number of policy statements, the publication of the memorandum as a final policy document will be a step forward. The next step would be a separate policy memorandum covering many of the issues not covered in this draft, especially relating to I-924 and project adjudications.
