On Sep 29 2021 by H. Ronald Klasko
EB-5 Program: Unprecedented Times, Uncertain Choices Part 2
The EB-5 Reform and Integrity Act of 2022 brought many changes to the EB-5 program. For the latest information, please click here.
Part I of this blog provided “educated guesses” regarding the likelihood of the extension of the regional center EB-5 program and the likelihood and timing of the expected increase in investment amount to $900,000 in TEAs and $1.8 million in other areas. Part II of the blog will focus on suggested actions to be taken by prospective investors, regional centers and project developers.
As of the date of this blog, investors can only file direct EB-5 cases. A direct EB-5 case for an investment in a targeted employment area at $900,000 or above raises no issues. If an investor wishes to proceed with a direct EB-5 case based on an investment of at least $500,000 in an area that qualified as a TEA before November 2019, they have to be advised of the risk of a Court of Appeals decision overturning the decision of the Northern District of California (as discussed in Part I). It is best if such an investor is prepared to invest an additional $400,000 if that were to occur.
There are two scenarios with different levels of risk. In the first scenario, the investor presents a business plan anticipating the $900,000 investment of which $500,000 is invested at the time of the filing of the I-526 petition. This may be acceptable under the concept of “actively in the process of investing” but only if the investor is able to document that he has the full $900,000 available at the time of filing and, ideally, the lawful source of the additional $400,000 can be documented.
The second scenario is more risky. In this scenario, the business plan shows that the investor will be investing a total of $500,000, and such amount is invested at the time of filing. Could the investor then invest an additional $400,000 at a later date in the event of a court decision reinstating the regulation? As discussed briefly in Part I, USCIS could take the position that, even if the investor later invests the $400,000, the petition was not approvable when filed. However, there is a good argument (that we would be willing to take to court if necessary) that the petition was approvable when filed (before any adverse court decision) and the investor is now investing the requisite amount to make it still approvable following any adverse decision.
In summary, the options from safest to higher risk are:
- $900,000 direct EB-5 (assuming TEA);
- Direct EB-5 with business plan anticipating $900,000 of which $500,000 is made at the time of filing the I-526 petition and with documentation that the other $400,000 is immediately available, lawfully sourced and the investor has a commitment to complete the investment;
- Direct EB-5 in a TEA with a $500,000 investment and with the investor prepared to invest an additional $400,000 if that becomes necessary;
- Direct EB-5 in a TEA with a $500,000 investment for an investor who will not have the ability to invest any further amount.
Investors who want to invest in a regional center EB-5 project and hope to do so at a $500,000 investment level should have all the documentation prepared in advance and ready to file as soon as the regional center program is re-extended. Those investors must hope that the regional center extension occurs before any legislative, regulatory or judicial action that increases the investment amount. There is a possibility that there will be a short window to do this.
I want to raise one further point regarding future demand for EB-5 projects. The present lapse in the EB-5 program has made investors more aware than ever that they are not protected against the termination of the regional center program even if they have completed their investments, the funds have been used, the project has been built, and the jobs have been created…unless the investor has already become a conditional permanent resident. Needless to say, this creates a very unsafe feeling for investors. Even if the regional center program is extended, this unsafe feeling will likely quell demand unless the legislation includes a provision to grandfather pending EB-5 investors in the event of any future program lapse, or even termination.
These are especially difficult times for project developers. The recommended strategy is to craft projects based on $500,000 TEA investments in order to take advantage of what may well be a groundswell of investor interest if the regional center program is extended before the investment amount is increased.
However, the project documents must anticipate the possibility that at some point during the offering process the investment amount will increase. The business plan and offering documents must deal with the issue of investors investing at different dollar amounts, including whether they get the same or different interests based on the differing investments. The offering documents should also deal with the issue of whether and how investors can increase their investments to meet any increased minimum investment level. The business plan and economic report must evidence sufficient jobs for the greater amount of investors that would be required to meet a targeted EB-5 capital raise if investors invest $500,000, even though fewer jobs would be necessary if the higher investments become necessary.
In other words, project developers have to be willing to expend substantial effort and dollars to develop a project document without knowing for sure whether and when the regional center program will be extended and whether investors will be able to invest at the $500,000 level. The quagmire is exacerbated by the extreme difference in likely demand depending on whether the required investment amount is $500,000 or $900,000.
Many of the same issues confront regional centers, which have to make similar decisions on developing and/or sponsoring projects. In addition, during the lull, we advised regional centers to devote any extra time and resources that become available to prepare in advance for I-829 filings for conditional permanent residents. It is also a good time for regional centers to evaluate their compliance systems to be prepared for expected far greater compliance responsibilities if comprehensive EB-5 legislation is ultimately passed.
Another issue for project developers relates to the location of the project. The safest location is a project in an area that qualified as a TEA before November 2019 and also qualifies as a TEA based on the definition in the 2019 regulation. If a project is located in an area that qualified as a TEA before the regulation but does not under the 2019 regulation definition, even if it may allow for $500,000 investments for a short window before the investment amount is increased, the remaining investors would have to invest at the $1.8 million level when the investment amount is increased, which may prove to be difficult to market.
In summary, many investors, project developers and regional centers are, with good reason, taking a wait and see attitude based on the number of risks and uncertainties prevalent in these unprecedented times. Others view the present time as being on the cusp of unprecedented demand and unprecedented opportunity and want to be prepared to take advantage of a potential windfall. Hopefully, this blog has helped to crystalize the thinking of both present and potential participants in the EB-5 program.
The material contained in this article does not constitute direct legal advice and is for informational purposes only. An attorney-client relationship is not presumed or intended by receipt or review of this presentation. The information provided should never replace informed counsel when specific immigration-related guidance is needed.
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