Diversified Investment / Fund Model for EB-5

I’ve been getting a lot of calls recently from people planning EB-5 offerings that involve a diversified investment strategy. Investors of course like to see their eggs going into more than one basket, so that the chances for profit and job creation aren’t entirely dependent on the success of a single business or project. But what investment mechanisms will USCIS accept? May investors’ money be divided among multiple projects? Must these projects all be identified in advance? If one project fails, can all investors share credit for job creation at the project that succeeded? May an EB-5 investment vehicle act as a mutual fund?

There are two ways to approach the question of “what works for EB-5”: through the law or through the lore. The lore includes things like USCIS answers to questions at stakeholder meetings and the “what happened to my case” stories one hears from attorneys and Regional Center people. Tracking the lore will give you a sense of the interpretations and preferences current at USCIS. Just keep in mind that this guidance is unofficial, may change, and isn’t binding. The other approach is to go to the law – the statutes, regulations, and precedents that must form the basis for all interpretations – and carefully build your own argument for “what works for EB-5.” If the lore suggests you’d better not do something, but you have a smart case solidly based in the rules to show that you can, you should be safe.

For the law most relevant to the question of diversified investment, I recommend you to the precedent decision Matter of Izummi. This decision treats an I-526 filed for a Regional Center investor, and goes into detail about what is and isn’t wrong with this picture:

Significantly, the decision doesn’t say that it was impermissible for the new commercial enterprise (AELP) to invest in a credit company which then made loans to multiple export companies. Rather the AAO details several problems with the way the scheme was implemented, including 1) location (investment and job creation outside TEAs and Regional Center geographic area) and 2) use of capital (investor funds not all reaching the companies most associated with job creation). So if you’re considering a structure similar to that involved in the Izummi case, carefully consider how you’ll avoid the problems identified in the Izummi example. (By the way, the Izummi fact pattern picture is from the EB-5 training materials released by USCIS.)

The most useful published lore that I have relevant to the question of diversified investment is this Q&A from the 3/17/2011 stakeholder meeting with USCIS (see slides 52-58).

Question: Please explain your current thinking and practice concerning evaluation of petitions that involve investments in enterprises that pool multiple investors’ money and allocate the capital to multiple job-creating projects/entities at the same time. In the past USCIS has reacted with ambivalence to these notions, and some adjudications of the past have reflected opposition to them. Investors would like to spread their risk of loss among multiple projects, and it seems reasonable to allow them to spread their risk of any one project’s ability to create the target number of jobs by letting the investors allocate the job creation from the total of the jobs created by multiple projects (using some method of allocation agreed to among the investors, such as “first to invest, first jobs allocated,” though other methods might work).

Answer: A regional center may opt to structure EB-5 capital investment projects that involve multiple investment vehicles. However, USCIS has consistently maintained that a regional center must transparently show at the Form I-526 stage the specific job creating entities/projects in which the investor’s capital will be invested, supported by comprehensive business plans and an economic analysis that provides a reasonable methodology for estimating the job creation that will occur as a result of these complex investments.
Some recently-reviewed RC applications have put forth capital investment structures that seem to presume that the EB-5 immigration process allows for a Regional Center to recruit EB-5 investors, who then file Form I-526 petitions in order to invest in an enterprise without identifying the specific capital investment projects that will receive the immigrant investor’s capital.
This same presumption is reflected in some of the questions regarding capital investment structures as follows:

• Our Regional Center is approved to include Florida businesses in many RIMS II “sectors”. If in a I-526, we submit a generic business plan (and legal documents) for a business that falls within one of the sectors, then, after the I-526 is approved, the business affiliate gets the investor’s funds and selects the specific business. Is that permissible?
• I would like the Service to comment on the desired legal structure for multiple asset investments. How must an RC structure the limited partnership investments when there are sub-assets to a project? The push for fund of funds regulations is significant—will the USCIS allow all Regional Centers the same flexibility to not specifically identify the jobs creation project at the I-526 and allow them to let the USCIS know what we did sometime before the I-829?

I-526 petitions may not be approved for investments (or loans) to businesses that will not be identified or selected until after the approval of the petition. Such a strategy is not EB-5 compliant as the EB-5 program is not an attestation-based program. Prospective job creation must be demonstrated at the Form I-526 petition through USCIS review and approval of the business plan and associated economic analysis for the actual capital investment projects that will receive the immigrant investor’s capital. This documentation provides the foundation for the adjudication of the I-829 petition to determine if the investor has met the requirements for removal of conditions pursuant to INA 216A and 8 CFR 216.6. The Ninth Circuit has held that USCIS may not “de-couple” I-526 petition approval from I-829 approval. See Chang v. U.S., 327 F.3d 911, 927 (9th Cir. 2003). This means that, using Form I-829, alien investors must demonstrate compliance with the EB-5 program rules by confirming the fulfillment of the investment scheme and business plan that USCIS approved at the I-526 petition stage. See id.

Most if not all RCs generally seek to limit their capital investment offerings to those that may qualify for the reduced capital investment threshold of $500,000 through investments in a TEA. Additionally, a large percentage of RC-affiliated capital investment vehicles involve investments in NCEs which ultimately loan capital to third parties who use the capital in the ultimate job-creating project. There are other requirements for eligibility for the approval of EB-5 petitions which prohibit an I-526 attestation-based process, to include:

• INA 203(b)(5)(B)(i) which provides that a certain number of visas made available under the EB-5 category “be reserved for qualified immigrants who invest in a new commercial enterprise …which will create employment ina targeted employment area”(emphasis added).

Matter of Izumii, 22 I&N Dec. 169(Comm. 1998) provides significant guidance in making TEA determinations and RC capital investment projects, to include the following:

• Regardless of its location, a new commercial enterprise that is engaged directly or indirectly in lending money to job-creating businesses may only lend money to businesses located within targeted areas in order for a petitioner to be eligible for the reduced minimum capital requirement.
• Under the Immigrant Investor Pilot Program, if a new commercial enterprise is engaged directly or indirectly in lending money to job- creating businesses, such job-creating businesses must all be located within the geographic limits of the regional center. The location of the new commercial enterprise is not controlling.

Other facets regarding I-526 eligibility are predicated on a review and analysis of the actual capital investment project, to include the identification of the ultimate recipient of capital investment funds, such as:

• Determining job creation, generally: In order to demonstrate that the new commercial enterprise will create not fewer than 10 full-time positions, the petitioner must either provide evidence that the new commercial enterprise has created such positions or furnish a comprehensive, detailed,and credible business plan…See Matter of Ho, 22 I&N Dec. 206 (Comm. 1998), 206.
• Determining job creation as a result of investments into pre-existing business..SeeMatter of Soffici, 22 I&N Dec. 158 (Comm. 1998), 158. See also Matter of Hsiung, 22 I&N Dec. 206 (Comm.. 1998), 201.
• Determining whether the job creation may be met through the preservations of jobs in a “troubled business”. See INA section 203(b)(5)(A)(ii) and 8 CFR 204.6(j)(4)(ii).

01/2012 Update: The draft EB-5 policy memorandum currently in the comment stage includes the following language relevant to diversified investment (see III.A.3, page 6):
An immigrant investor may diversify his or her total EB-5 investment across a portfolio of businesses, so long as the minimum investment amount is placed in a single commercial
enterprise. An immigrant investor who is not associated with a regional center may deploy
capital into a portfolio of businesses, so long as all capital is deployed through a single commercial enterprise and all jobs are created within that commercial enterprise. For example, in an area in which the minimum investment amount is $1,000,000, the investor can satisfy the statute if the commercial enterprise deploys $600,000 toward one business that it wholly owns, and $400,000 toward another business that it wholly owns. See 8 C.F.R. § 204.6(e). (In this instance, the two wholly-owned businesses would have to create an aggregate of ten new jobs between them.) An investor cannot qualify, on the other hand, by investing $600,000 in one commercial enterprise and $400,000 in a separate commercial enterprise.
In the regional center context, where indirect jobs may be counted, the commercial enterprise may create jobs indirectly through multiple investments in corporate affiliates or in unrelated entities, but the investor cannot qualify by investing directly in those multiple entities. Rather, the investor’s capital must still be invested in a single commercial enterprise, which can then deploy that capital in multiple ways. Where an investor elects to invest in a portfolio of businesses to satisfy EB-5 Program requirements, he or she must invest the standard statutory minimum of $1,000,000 in total unless each one of the businesses is located in a targeted employment area.

(Note that in the Conversation with Director Mayorkas that introduced this memo, the USCIS representatives reserved judgement on a number of questions regarding what kinds of diversified investment would in fact be allowable in practice.)