May 30, 2013 USCIS EB-5 Policy Memorandum Deserves an “A” – The Dawn of a New Era in EB-5 Adjudications

(By Bernard P. Wolfsdorf, Esq.)  Our February 6, 2012 blog, “Transitions and Changes for the EB-5 Program? Predictions for the Year of the Dragon,” warned all to be cautious as there was going to be “a very scary roller-coaster ride.”  Two weeks later, U.S. Citizenship and Immigration Services (USCIS) published the now infamous “tenant occupancy” Memorandum. As a result, the EB-5 arena became treacherous and adjudications became severely backlogged with about 7,000 cases stuck in the pipeline.

In December 2012, we blogged on “Transitions and Changes for the EB-5 Program? 2013 Will Be the Year of the Snake.” After lengthy review, USCIS issued its long-awaited new EB-5 Policy Memorandum on May 30, 2013. In our December 2012 blog we:

1) Pointed out the need for predictability, including providing opportunity for comment before adopting new positions. USCIS gets an “A” here. 

2)    Asked for a “binding preapproval process that includes robust deference to previously acceptable positions.” “A+”. 

3)    Asked for “clarity on counting construction phase jobs”. We received an answer to this request but not the right one. Grade “C”. 

4)    Asked USCIS to “honor the position outlined in the June 2009 Memorandum regarding material change and support for the changes articulated by AILA.”  “A-”.

5)    Honoring State TEA designation deference. “A”. 

6)    Clarity regarding the bridge financing standard. “A”. 

7)    Respecting industry standards on NAICS codes. “A”.

With 6 “A”s and one “C,” the Memorandum provides the clarity we need and ushers in a new era.  The removal of artificial reliance on industry NAICS codes is very helpful, and no longer requiring amendments will provide essential flexibility. The acceptance of the widely used fund model is also a big step forward, as is the clarification of the requirements for a hypothetical project. USCIS earns an A+ for stating adjudications must be based on the preponderance of the evidence and deference must be granted to prior decisions.

The Memorandum also earns an “A” for clarifying several other critical areas including:1)    Unequivocally confirming EB-5 money can be used to pay off bridge financing,2)    Certain material changes occurring after approval of an initial investor petition may be accepted as such changes do not alone create a basis to deny an application to remove the conditions on a green card,3)    Confirming that the geographical boundaries of state-designated Targeted Employment Areas (TEA) will be accepted, and4)  When indirect jobs outside of the regional center boundaries can be counted.

Geographical and Industry Boundaries

The Memorandum provides much-needed clarity for the issue of regional center geography. The proposed geographic area must contribute to the supply chain, as well as the labor pool, of the proposed project. The Memorandum appears to allow an immigrant visa petition to be filed for a contiguous geographical area outside of the approved regional center geographical boundaries, provided there is an acceptable explanation for expanding those boundaries.

Regional centers will likely avoid taking chances and accordingly request a geographical amendment, but will nonetheless be in a better position and permitted to take on projects without needing to wait for the amendments to be approved. The Memorandum also makes it clear that immigrant investor petitions can be filed using different economic methodologies and different industry NAICS in addition to covering different geographical areas. This provides considerable latitude as the amendment process will likely be used to provide assurances, rather than approved amendments being required to file an immigrant petition.

Additionally, the new policy Memorandum makes it clear that indirect jobs can qualify and be counted as jobs attributable to a regional center, based on reasonable economic methodologies, even if they are located outside of the geographical boundaries of a regional center.

Material Change

USCIS has taken a huge leap forward by confirming a change in fact is only material “if the changed circumstances would have a natural tendency to influence or are predictably capable of affecting the decision.” In doing so, USCIS makes clear that if there is a material change between the filing of the initial immigrant visa petition and the time the investor obtains conditional permanent resident status, a new visa petition must be filed. Sadly, this doesn’t protect age-out kids. However, significantly, where the material change occurs after the grant of conditional permanent resident status, the investor can still remove the conditions if the investment has been sustained and the jobs created. This allows for a changed or new business plan. In the latter case, the new business plan will be examined and if found to be compliant, the application to remove the conditional nature of the permanent residence can be approved. To make these workable, regional centers can now advise USCIS as to material changes, and hopefully obtain some form of acknowledgment.

Bridge Financing

It is now clear the replacement of bridge financing with EB-5 money capital is acceptable provided it was contemplated prior to acquiring the original non-EB-5 financing.As a result the financing does not have to be contemplated prior to acquiring the bridge or mezzanine. As long as the financing to be replaced was contemplated as short-term temporary financing that would later be replaced, it would be acceptable. Now if traditional forms of financing fall though, it is possible to use EB-5 money.

Hypothetical Projects versus Actual Projects

After requiring verifiable detail for hypothetical projects, which by definition is a contradiction, it is now clear a hypothetical project need only contain general proposals and general predictions so it can be determined whether the proposed regional center will more likely than not promote economic growth, improve regional productivity, enhance job creation and increase domestic capital investment. It does not appear that either organizational or transactional documents, nor detailed business plans, are required to obtain regional center approval. On a related note, business plan do not need to contain all the requirements detailed in Matter of Ho. 

As a result, actual projects will require detailed business plans and “verifiable details,” otherwise their inclusion will not be afforded deference in adjudications. However, the project can still be approved as a hypothetical project. Now the project is mentioned by name in the regional center approval notice. However, exemplar projects require submission of “organizational and transactional documents,” and may be distinguished from actual projects which are given deference with respect to everything, except the “organizational and transactional documents.” The exemplar is given deference with respect to all documents, including organizational and transactional documents.

Deference

As intimated above, perhaps the single most significant enhancement is the extensive use of the term “deference.” USCIS has made it clear actual projects receive deference. When USCIS approves a project the individual future investors are entitled to rely on this adjudication. Moreover, the final petition to remove conditions must be approved if the original business plan is followed. In the past there has been re-adjudication of many aspects of the case, including the reasonableness of economic job projection methodologies and re-evaluation of the business. The only exceptions are in cases of material change, or if there is misrepresentation or fraud, or if there is reason to believe a mistake of fact or law was previously made.

Lawful source of funds must be proven for Non-EB-5 Capital for Stand-alone/Direct
This appears to be a new and unduly burdensome requirement that could impede the growing success of stand-alone projects as other investors may be unwilling to cooperate with the immigrant investor.

Timing of Job Creation

The Memorandum is clear the jobs must be created within two and one half years from the approval of the original immigrant visa petition. The other critical issue is to resolve the standard of job creation that must be within a “reasonable time” of the adjudication of the application to remove the conditional nature of the immigrant visa petition. Now it is clear the jobs must be created within one year after the end of the two years of conditional residence. The only exception is if there are extreme circumstances, such as force majeure.

Targeted Employment Area “TEA” Determinations where Jobs in Multiple Locations

For stand-alone or direct EB-5 cases, the TEA is based on the location in which the new commercial enterprise is “principally doing business.” In the case of a regional center EB-5 application, it’s where the job-creating enterprise is “principally doing business.”

Fund Model Approved

A common framework involves the EB-5 money being invested in a new commercial enterprise and then spent amongst several enterprises that in turn create the jobs. Now it is clear that with stand-alone projects the EB-5 money can go to several wholly-owned subsidiaries. Moreover, for regional centers, the money can even be spent in unrelated companies that create the jobs. It is not clear to what degree the funds have to be earmarked, or if one entity’s jobs can be offset with another’s.

Regional Centers Can’t Promise Eventual Ownership of an Asset

The US EB-5 program evolved out of the E-2 investor program that requires the funds to be “at risk” on the presumption that such investments are more likely to create jobs. It is now clear an investor can receive a return on capital as long as the return is not guaranteed. However, if the investor is individually guaranteed the right to eventual ownership or use of a particular asset in consideration of the investor’s contribution of capital into the new commercial enterprise, such as a home or other real estate interest or item of personal property, the expected present value of the guaranteed ownership or use of such assets, then this does not count toward the total amount of the investor’s capital contribution in determining how much money was truly placed at risk.In conclusion, the Memorandum is a giant leap forward for the EB-5 program and reflects the administration’s commitment to making the program more transparent.