USCIS Policy for EB-5 Redeployment and "At-Risk" Issues Discussed at IIUSA Conference
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:
- USCIS has indicated that a loan can be repaid after the jobs have been created providing the funds remain “at risk.”
- 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.
- 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.
- 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.
- 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:
- 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.
- 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.
- 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.
- 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.
- 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.
- In addition to immigration and securities/corporate issues, the other key issue is marketing.
- 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.
- 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.
Ronald R. Fieldstone is a partner in the Miami office of Arnstein & Lehr LLP, specializing in corporate/securities and taxation law. Mr. Fieldstone has published numerous articles and has been a lecturer in the fields of real estate, corporate/securities, tax law, and franchise law for the past 40 years. He currently practices primarily in the areas of corporate/securities and taxation law. He graduated from the Wharton School, University of Pennsylvania in 1971 (magna cum laude) and received joint MBA/JD degrees from Wharton School and University of Pennsylvania Law School in 1974. Since 2009, Mr. Fieldstone has actively been involved in serving as corporate/securities counsel for multifaceted industries involving EB-5 immigrant visa investor offerings. He represents both developers and regional centers in EB-5 matters, currently in excess of 225 EB-5 projects with a combined capital raise of nearly $6 billion.