Comment: RC Reauthorization Content Process Effect

Introduction: We discuss the probable RC reauthorization coming up in three different aspects - (A) What is in RC reauthorization? - the Content (B) How and when will RC reauthorization happen? - the Process (C) What does RC reauthorization mean to you? - the Effect - this last features some effects which are counter-intuitive. While this is a long piece, we believe that it will be helpful for all those in the EB5 industry. The TABLE OF CONTENTS appears below.

****TABLE OF CONTENTS****
(A) Content

  1. Integrity Measures
  2. Redeployment 
  3. Grandfathering for future RC investors
  4. Change to TEA Definitions
  5. Separate “Sandboxes” for Urban & Rural projects
  6. Increased Visa Numbers through not counting dependents
  7. Investment amount change for TEAs & Change in investment differential between TEAs & non-TEAs
  8. Summary of likely content

(B) Process

  1. Ukraine curveball
  2. Major RC may kill RC reauthorization
  3. Difference between House and Senate versions
  4. On or about March 11 (Mar 10 to 20)
  5. If no change in investment amounts, USCIS is likely to do it promptly, Courts are out of it

(C) Effect

  1. No permanent reauthorization, could be anywhere from 6 months to 2 years
  2. No grace period for legislative action but effective grace period of 2 weeks 
  3. If investment amount will be going up by statute, $250M in investment expected mostly in Directs, but also for RCs
  4. If investment amount will not be going up by statute, $250M in investment expected due to fear of USCIS raising the amount in a month or so after reauthorization - escrows for 2 weeks will likely pass muster with most securities counsel
  5. Either way, “wait and see” is not a good strategy - plans must be made now, for both Directs and RCs

****END TABLE OF CONTENTS****

(A) Content

  1. Integrity Measures are the core of Grassley-Leahy. There is a bipartisan consensus behind the integrity measures. It is unlikely that there will be reauthorization without integrity measures. This is a major issue for one individual, a major RC player–please read on.
  2. Redeployment: Congress is not focused on this issue at this time - this will have to wait for future Congressional attention.
  3. Grandfathering for future RC Investors: All the past RC investors will be functionally grandfathered with reauthorization. Grandfathering of future RC investors is unlikely because it is complicated. Further, grandfathering of future RC investors results in Congress losing leverage over RCs–which Congress is loath to do. 
  4. Change to TEA Definitions are too much nitty gritty and a political football for Congress to handle–Congress is likely to defer to USCIS for TEA definitions.
  5. Separate “Sandboxes” for Urban & Rural projects: It is unlikely that Congress will accept a separate sandboxes solution. Instead of apportionment of quotas, Congress is far more likely to negotiate on investment differential between TEA and non-TEA to implement its vision.
  6. Increased Visa Numbers through not counting dependents: This is a non-starter, and completely off the table–because it would mean treating EB5 preferentially than all other immigration categories–something that the Progressive wing of the Democratic Party will oppose tooth and nail.
  7. Investment amount change for TEAs & Change in investment differential between TEAs & non-TEAs: These are clearly on the table, and offer a simple way for rural and urban Senators alike to negotiate flexibly without going into any details. Urban Senators will argue for the differential to be as small as possible and Rural Senators will argue for a large differential and they can both meet somewhere in the middle.
  8. In Summary, it looks like only Integrity measures keeping investment amounts unchanged OR integrity measures plus a smaller differential in investment amounts are likely to be in a RC reauthorization bill with little else of consequence. 

(B) Process

  1. Ukraine curveball: Possible Russian military action in Ukraine will absorb all attention of Congress in giving the President what he needs to counter the Russians–all legislative timetables will be delayed somewhat in consequence.
  2. Major RC may kill RC reauthorization: Immigration Daily has learnt that the principal of a top 3 regional center has a felony record that would make him ineligible to be in the C-suite or the boardroom of a RC/NCE/JCE under Grassley-Leahy integrity measures. This individual is currently spending more money on lobbying than the rest of the EB5 industry combined to prevent passage of Grassley-Leahy language even if this dooms RC reauthorization.
  3. Difference between House and Senate versions: The House version of RC reauthorization may be more friendly to the EB5 industry. In the event that the Senate and the House have differing versions, that may require negotiation to reconcile–in the end the Senate version will likely carry the day, given the closely divided Senate.
  4. On or about March 11 (Mar 10 to 20): Though the Continuing Resolution is until March 11, it is common for appropriations to take a little longer (through another very short term continuing resolution). So RC reauthorization should be expected on or about March 11 (from March 10 to March 20), not necessarily exactly on March 11.
  5. If no change in investment amounts, USCIS is likely to do it promptly, Courts are out of it: If there is no change in investment amounts when Congress reauthorizes RCs, USCIS is likely to hike investment amounts promptly by reissuing the November 2019 modernization regulation. As there is no question any more about the legitimacy of the signatory of the regulation, the courts will not interfere with the regulation USCIS issues raising the investment amounts and establishing a strict definition of TEAs–thus effectively removing urban RCs from the EB5 market.  

(C) Effect

  1. No permanent reauthorization, could be anywhere from 6 months to 2 years: No permanent reauthorization of RC program is expected, Congress evidently wants to keep RCs on a short leash. RC reauthorization is likely to be somewhere between 6 months to 2 years. Given that, the possibility of further lapses will remain hanging over RCs. One way for RCs to deal with this uncertainty would be to issue Hybrid (both RC and Direct) offerings in the same project going forward so that they can continue raising money during future RC lapses (Hybrid offerings also have the advantage of presenting different options to investors  with different risk/reward profiles).
  2. No grace period for legislative action but effective “grace period” of 2 weeks: Unlike regulations issued by agencies such as USCIS, legislation by Congress does not require any grace period. Statutes can, and usually do, become effective when the President signs the bill both chambers of Congress have passed. However, there is an approximate 2 week gap between the first disclosure of the relevant legislative text in one of the chambers and its passage by the other chamber, and possible Conference between the chambers, followed by votes in both chambers–so there will effectively be a 2 week “grace period”. 
  3. If investment amounts will be going up by statute, $250M in investment expected mostly in Directs, but also for RCs: There are two possibilities regarding investment amounts in the RC reauthorization–the investment amounts go up or they do not change. If the investment amounts go up, there will be a gold rush of a quarter of billion dollars just like we saw in the last week of June 2021. The lion’s share of this money will flow to EB5 direct–but there are probably not enough investment slots available. Most likely, almost every Direct project currently in the market will be fully subscribed, indeed over-subscribed. Thus, the golden era of Pooled Directs will end with a bang. Furthermore, immediately after reauthorization, RCs will experience a boom from investors who have been waiting to invest in RCs during the lapse. 
  4. If investment amounts will not be going up by statute, $250M in investment expected due to fear of USCIS raising the amount in a month or so after reauthorization - escrows for 2 weeks will likely pass muster with most securities counsel: This will be the 2019 grace period all over again, since USCIS will likely waste no time in reinstituting the November 2019 modernization regulation, which will raise the investment amounts (and narrow the TEAs) shortly after Congress completes its work. While some investors will wait for the President’s signature on the omnibus bill before getting started with the investment process, some investors, who have been patiently waiting for a chance to invest in an RC project, will want to start the investment process as soon as it is clear that RC reauthorization is indeed occurring. These investors can commence source of funds, execute subscription documents, and in some cases, even wire the money in anticipation of the Presidential signature - this will give them a head start on their priority dates compared to investors who wait to invest. Such money will likely be into short term escrows (2 weeks or so), which will likely pass muster with most securities counsel. Investing early will be a hedge against hasty USCIS action, such as an “interim final rule” effective immediately upon publication (while such an effective date is likely not lawful, USCIS has not been known for strict adherence to the law). It is important to note that Direct projects will also benefit in this scenario, since the investment amount will be going up for both RCs and Direct projects through USCIS regulatory action.
  5. Either way, “wait and see” is not a good strategy - plans must be made now, for both Directs and RCs: For Directs this may be the sun setting finally on their golden era–but not before a supernova of investments beyond what anyone had ever imagined. For RCs, there may be an intense shortened grace period reminiscent of the grace period before the November 2019 deadline. There is precious little time for both Directs and RCs to position themselves in the market prior to the breaking of the dam; for both Directs and RCs “Wait & See” is a sure fire way of missing this lucrative opportunity. Because EB5 is an investment vehicle dependent on statutes and regulations, wild swings come with the territory, which does not happen with other investment channels. Just a week before the RC lapse on June 30, 2021 the EB5 industry took in $250 million of investments–more than previous 18 months combined. It looks like another such period is at hand. It is prudent to prepare for it, whether you are a Direct project or a Regional Center, or in the best of both worlds, a Hybrid project that can sell both Direct and Regional Center slots.

Conclusion: An exciting period for EB5 lies ahead, be prepared!

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