The EB-5 Visa is almost certainly going to become a more reliable means to immigrate to the U.S. in future thanks to the May 30, 2013 USCIS Policy Memorandum on EB-5 Adjudications Policy, which has established new rules and clarified others in areas where previously there was troubling uncertainty in EB-5 law and practice.

The EB-5 Visa has been long known for -

  • inadequate legal and policy guidance coming from the USCIS
  • policy and practice of the USCIS that is contrary to the written law
  • inconsistent adjudication standards leading to differing results across like fact patterns
  • a "culture of ‘no’" at the California Service Center of the USCIS
  • Requests for (Additional) Evidence (”RFEs”) that are plainly misguided
  • seminar after seminar where attorneys and regional center developers gather together in a grumpy consort to express exasperation at the government's failure to provide clear guidance to regional centers, developers and their counsel.

Not so this time, as the final memorandum (which had circulated in various draft forms for over two years) has brought new clarity and predictability to EB-5 law, and has been received with something like a hallelujah chorus by EB-5 attorneys and other commentators.

 

[1] The memo almost certainly means lower denial and RFE rates in the future for EB-5 visa investors.

Several of the most dramatic changes reduce or eliminate confusion in areas relating to EB-5 project structuring. Most notably, a regional center is no longer obligated to file time-consuming amendments if it wants to use industry codes, economic methodology, or geographical areas not approved in its designation letter(s). In addition, the “fund model” for holding and disbursing EB-5 capital has been given further support by the USCIS, business plans need not include all characteristics of Matter of Ho to be acceptable to EB-5 examiners, and there are other, smaller improvements as well. Although these new rules and clarifications mean investors will likely see more diverse and better projects in the future, the implications of these changes for developers have been adequately addressed elsewhere, so I will focus here on changes in the memorandum that are likely to reduce EB-5 investors’ likelihood of receiving project-based I-526 or I-829 RFEs or denials.

Reaffirmation of “Preponderance of Evidence” Standard of Proof

EB-5 immigration attorneys have often felt as though they must prove their investor clients’ sources and path of funds by the U.S. criminal law standard - "beyond a reasonable doubt", or by the “clear and convincing” civil law standard, when in fact the law states that the proper standard is the far lower "preponderance of the evidence" standard - that is, that the thing asserted is “more likely so than not so.”  Fortunately the 5/30/13 memo emphatically reaffirms the preponderance of the evidence standard as the sole appropriate standard for deciding EB-5 case, and this should send a clear signal to EB-5 visa adjudicators to tone down their ardor for RFEs and denials. This development, coupled with the recent move of the EB-5 office to the USCIS' main headquarters in Washington D.C. (and away from the notoriously EB-5 unfriendly California Service Center), should also help reduce the number of RFEs and denials. Better decisions are also expected because the USCIS is hiring a higher grade of civil servant for its Washington D.C. EB-5 office. All this is good for EB-5 investors, because it makes petition processing more rational and predictable.

Deference

The 5/30 memo fortifies and expands the USCIS' position on deference to prior USCIS decision for projects already in the adjudications pipeline. The Service will defer to all issues that were resolved in a preceding I-924 exemplar or I-526 petition for the same project. Thus, an investor with a pending I-526 petition in a project that has already received an I-526 approval can now confidently expect that the project-based portion of the petitioner’s I-526 will also be approved, and that overall processing time for the petitioners I-526 will be shorter, because the adjudicator will no longer have to repeat the prior adjudicators evaluation of the project-based portion of the petition. Previously there have been re-adjudications of many aspects of the project profile, including the reasonableness of economic job projection methodologies and re-evaluation of the business.

Note well, however, that deference does not apply to similar or phased projects, but only to the actual project the investor has participating in. Furthermore, once the I-526 is approved, the adjudicator will no longer be able to challenge the I-829 on such issues as whether the business plan is comprehensive and credible or whether an economic methodology estimating job creation is reasonable.  Of even greater significance, if the project is approved at the I-526 stage, and the business plan is not altered, project issues approved at the I-526 stage may not be re-visited or challenged at the I-829 stage, absent a finding of material change, a mistake in law or fact, fraud, or willful misrepresentation.

The memo says little about the petitioner side of the I-526 petition, that is, in proving the sources and paths of funds from the investor. But in our experience with immigrant investors, they are less concerned about what they can control (which, may include electing not to pursue an EB-5 visa if their documentation is weak), than in what they cannot control – the project’s progress to completion and the shifting sands of USCIS practice upon which their green card depends.

Material Change

The (in)famous December 9, 2009 “Neufeld” (named after the author) USCIS memorandum, addressing material change, stated that “the business plan in the Form I-526 petition may not be materially changed after the petition has been filed” if I-829 petitions were to be approved. Once denied, petitioners would have to file a new I-526 petition with a new project or new business plan for the original project. Not only would an investor and his/her family be sent back to the beginning of the EB-5 process, but, even worse, any dependent child that turned 21 after the I-526 was filed would no longer be eligible for a derivative EB-5 visa from a parent.

Exacerbating the problem, the Neufeld memo failed to define material change.

It has been estimated that material change has been the basis for more I-829 RFE’s and denials in recent years than any other issue except failure to create the required amount of jobs.[2]

In the past, I-829 petitions have been denied when the regional center was forced to change its business plan due to problems unforeseen during the planning stage or earlier adjudication stage, even though the investor sustained his investment and the funds remained at risk.[3] Then there are the cases wherein EB-5 developers have been forced to move investors from a project in anticipation of an I-829 denial based on material change, causing these investors to forfeit their EB 5 procedural progress and potentially lose the derivative benefit of an aging out child.

After years of objections by the EB-5 industry that the prevailing USCIS standard was unrealistic in the inevitably unpredictable world of business, the USCIS shows it got the message when it states on page 27 that “USCIS recognizes the fluidity of the business world and therefore allows for material changes to a petitioner’s business plan made after the petitioner has obtained conditional lawful permanent resident status.” Far more significantly, the USCIS for the first time attempts to define “material change.”  The new standard is “a change in fact is material if the changed circumstances would have a natural tendency to influence or are predictably capable of affecting the decision.”

The principal implication of the new definition is that the project business plan may be altered even significantly after I-526 approval while still allowing investors to remain in the same queue toward I-829 approval and remain eligible for approval based on a de novo evaluation of the business plan at the I-829 stage.  Not only does the immigrant investor not lose time, but any derivative child who was under 21 years of age at I-526 filing is still eligible for I-829 approval without “aging out.”  Changes in the business plan that occur prior to I-526 approval, however, are not affected by this rule, so families with children who age out after the I-526 petition but prior to approval are still subject to the age out problem.

Bridge Financing

The use of bridge financing in EB-5 project, whereby construction may begin using private equity or debt that will eventually be replaced by EB-5 funds, can make EB-5 projects more attractive to overseas investors in at least two respects.

First, investors don’t have to risk joining the project when it’s still in the more speculative pre-construction stage, but rather they can join the project while it is already underway when fewer things can go wrong prior to I-829 adjudication and project completion. In a highly conservative investment such as EB-5, where not just one’s finances but one’s family and future are affected by the success or failure of the project, this is a profound advantage.

Secondly, investors can take a “free ride” on the preceding due diligence evaluation undertaken by the third-party lender or equity partner that provided bridge financing for the project. Our firm saw last year how a $300 million construction loan provided by a syndicate led by Deutsche Bank for a building under construction in New York could substantially increase investor confidence in the project’s likelihood to succeed.

The USCIS has long been concerned that "bridge financing" might just be an after-the-fact description used by an EB-5 developer for lowering his or her cost of capital by replacing previously arranged financing, with little or no effect on new job creation. As a result of this concern, previous adjudications emphasized the importance of demonstrating the “nexus” between the EB-5 funds and the subsequent job creation. This in turn required a timeline with documentation that demonstrated, in effect, that “but, for” the anticipated EB-5 funding, the prior bridge financing would not have been provided. In 2012, restrictive USCIS policy statements and requests for additional evidence regarding bridge financing had a chilling effect on developers to the point that bridge financing has been used rarely recently. The 5/30/13 memo restates the current rule, noting that while “[g]enerally, the replacement of bridge financing with EB-5 investor capital should have been contemplated prior to acquiring the original non-EB-5 financing…” but also notes that “even if the EB-5 financing was not contemplated prior to acquiring the temporary financing, as long as the financing to be replaced was contemplated as short-term temporary financing which would be subsequently replaced, the  infusion of EB-5 financing could still result in the creation of, and credit for, new jobs.” The memo thus permits approvable bridge financing in circumstances where it would have previously been unacceptable to the Service when EB-5 refinancing was not anticipated when the bridge financing was secured, and also probably signals a less strict showing of “nexus” in cases where EB-5 refinancing was in fact anticipated.

The bridge financing also allows to control the job creation aspect of a project. For example if a $100 million budget project were entirely EB-5 investor financed, the project will need to create at least 2000 jobs (preferably more to allow for a safety cushion). If the economist report predicts only around 1800 jobs to be created, part of the bridge financing can remain in the capital structure until it can be replaced with non EB-5 equity or debt.

Additional Implications

Enhanced Clarity 

Lack of clarity in the law inevitably leads to more conservative business choices by developers. Previously the ambiguity about what “material change” meant, and thus many EB-5 developers have been forced to shy away from post-I-526 business plan adjustments and project improvements that might have led to a more profitable return on capital and more funds available for repaying investor funds.

Time to Market Shortened

Now that EB-5 developers and project managers can forego the very lengthy process of seeking USCIS approval of a project in a new industry or new geographic area, the range of options is increased and the time is takes to get the project to the point where EB-5 can be accepted is shortened.

Shorter time frames from project conception to project offering to EB-5 investors also reduces the chances that deal will go stale due to unforeseen circumstances by the time investors are in.

Reduced Risk Premium Arising from Regulatory Uncertainty

More predictable environment may lead to somewhat higher returns. Anything that reduced risk for investors also reduces risk for developers. Now a more stable and predictable environment developers may wish to provide better returns to investors. Predictably so as the market will no doubt become more competitive.

Predictability allows investors’ immigration counsel to more confidently appraise the project’s likelihood to result in a green card (although, of course, the underlying financial issues remain).