Published RC Decisions

As another in my series of “handy reference” additions to this blog, I’ve created a page summarizing and linking to  AAO decisions on Regional Center cases, including Regional Center investor petitions (I-526 and I-829)  and Regional Center applications (I-924).  These cases aren’t new and I’ve commented on each before, but I refer back to them often enough that it’s useful for me to link them in one place. For all of you out there searching for “sample EB-5 petition” or “example Regional Center application,” here’s your chance to look behind the scenes at how someone else assembled a petition and how USCIS judged it.

What is a “direct” job?

Now for a confession. After all this time working with EB-5 I’m still confused about how to use the word “direct job” in the Regional Center context. Here are the issues to reconcile:

1. Most regional center investments do not count job creation at the level of the “commercial enterprise” but at the level of an “investment project” (Where the commercial enterprise collects capital from EB-5 investors and then invests in a project that creates jobs.)
2. In discussing “direct” and “indirect” jobs, USCIS sources use “direct” to mean a job at the commercial enterprise level and “indirect” to indicate a job at the project level.  USCIS sources also use “direct” to mean an identifiable job that’s verified by payroll records and subject to 8 CFR requirements and “indirect” to mean a job that’s based on calculations by the economist. For example:
   

   “Direct jobs are those jobs that establish an employer-employee relationship between the commercial enterprise and the persons that they employ. Regional centers typically use the RIMS II or IMPLAN economic models to determine the number of indirect jobs that will be created through investments in the regional center’s investment projects.” Adjudicator’s Field Manual Chapter 22.4 (2)(A)

   “Direct jobs are actual identifiable jobs for qualified employees located within the commercial enterprise into which the EB-5 investor has directly invested his or her capital.
   Indirect jobs are those jobs shown to have been created collaterally or as a result of capital invested in a commercial enterprise affiliated with a regional center by an EB-5 investor.”
   June 16, 2010 Stakeholder Meeting Presentation

   The concept of what qualifies as a “direct” job for EB-5 purposes can be complicated. 1. For non-RC affiliated capital investments, job creation may only be credited through the creation or preservation of jobs that are directly within the commercial enterprise in which the EB-5 Investor made his or her investment. 2. For RC-affiliated capital investments, job creation may be credited through the creation of jobs directly within the commercial enterprise in which the EB-5 investor made his or her investment, but can also be credited with indirect job creation through equity investments or loans to other organizations, or through indirect job creation based upon an econometric model supported by a detailed business plan and associated economic analysis.3. The concept of a what a direct job is within econometric modeling differs slightly from a direct job described in #1 or #2 above, as a direct job in this context is a job that can be directly attributed to the economic impact of the capital investment in order to derive estimates of indirect job creation.
   Dec. 16, 2010 Stakeholder Meeting Presentation

3. I regularly see USCIS approving economic analyses that treat the Regional Center “investment project” only and use economic methodologies to calculate direct as well as indirect jobs created at the project level. In these analyses, “direct” jobs are part of a total calculation based various methodologies and don’t indicate jobs to be verified by payroll records.

It appears that in practice USCIS accepts that economists have a specialized definition of “direct,” and that the economist’s “direct job” is a subset of USCIS’s “indirect job.” Is this the solution, and does anyone have a clearer statement from USCIS on the issue? Do I dare use the word “direct” in my Regional Center business plans? How can the adjudicators tell when the word “direct job” means “ask for payroll records” and when it doesn’t? Several questions at stakeholder meetings have addressed the question (see particularly the 3/17/2011 meeting), but the published answers are not conclusive. And we need clarity because a lot of Regional Centers out there are counting on theoretical “direct jobs” for their projects, and don’t want to be hit with requests for W-2s and I-9s at the I-829 stage. Can anyone untangle this for me?

UPDATE: Perspectives from other EB-5 commentators.

Joseph Whalen, who has experience as a USCIS adjudicator, writes in his essay on The Business Plan and the Economic Analysis in Support Of the Form I-924:

When the Economic Analysis bases and ties its projection as to indirect job creation on a base level of newly created jobs attributable to the alien’s investment in a particular commercial enterprise rather than simply to the dollar amount of the investment, it is critical to differentiate between “direct employees” on the alien’s payroll vs. “direct employees” of a third party who are “indirect employees” for EB-5 purposes. Third party direct employees used as “direct jobs” in terms of input into the Econometric Model may be termed as “hypothetical” or “base jobs” or some other terminology that clearly distinguishes them as not on the alien’s payroll. This is critical at the I-829 stage as to the evidence that will be required to lift conditions on residence. The classic and easiest example that illustrates this is “mall tenants’ employees” while another could be “factory workers” when the alien is loaning money to an industrialist in order to let that other person or entity build, convert, or expand a factory.

And attorney H. Ronald Klasko includes the following among his Top 10 Lessons Experience Has Taught Me about EB-5:

9. There is a difference between a direct job as defined by USCIS and a direct job as defined by an economist.
–USCIS defines a direct job as being a W-2 employee of the new commercial enterprise in which the investor invests. Economists define direct jobs as direct employees of the job creating enterprise or the construction company, as opposed to indirect or induced employment.
10. It is better to rely on indirect and induced jobs, rather than direct jobs.
–reliance on direct jobs could result in condition removal denial if there are less direct jobs than projected or if some of the employees can’t be proven to be U.S. citizens or permanent residents. Relying on indirect or induced jobs, such as through an economic model that relies on expenditures, may result in the regional center having more control over proving the required facts for condition removal.

What does “restructure and reorganize” mean?

The 6/30 EB-5 stakeholder’s meeting with USCIS got confused over the question of what “restructure and reorganize” means. This question is important because EB-5 investment needs to be in a “new” business (unless it’s in an “expanding” or “troubled” business), and a business can qualify as “new” 1) if it was established after 11/29/1990, OR 2) by being thoroughly restructured and reorganized such that a new enterprise results. (Note that if you’re acquiring an existing business established since 1990, you don’t have to make a reorganization argument because the business already qualifies as “new” by virtue of date.) (See also my post on new and existing business scenarios.) Here is the relevant guidance.

8 CFR § Sec. 204.6 (h)
[The establishment of a new commercial enterprise may consist of:] … (2) The purchase of an existing business and simultaneous or subsequent restructuring or reorganization such that a new commercial enterprise results…

From Matter of Soffici
Although Ames Management was incorporated in 1997, it is the job-creating business that must be examined in determining whether a new commercial enterprise has been created. The Howard Johnson’s Motor Lodge purchased by Ames Management had been in operation for approximately 24 years and was an ongoing business at the time of purchase; Ames Management, doing business as Howard Johnson Hotel, has merely replaced the former owner. The petitioner has provided no documentation whatsoever to establish that the Howard Johnson’s was a “troubled business,” as defined above, prior to his purchase. He also does not claim that he will expand the hotel by 40 percent as provided in 8 C.F.R. § 204.6(h)(3). The petitioner has not shown the degree of restructuring and reorganization required by 8 C.F.R. § 204.6(h)(2); the hotel has always been a Howard Johnson and is still a Howard Johnson today. A few cosmetic changes to the decor and a new marketing strategy for success do not constitute the kind of restructuring contemplated by the regulations, nor does a simple change in ownership. Therefore, it cannot be concluded that the petitioner has created a new commercial enterprise.

Adjudicator’s Field Manual Chapter 22.4(4)(a)
If the petitioner submits evidence that the new commercial enterprise was a result of simultaneous or subsequent restructuring or reorganization of an existing business, the commercial enterprise that is the result of this action must be a new legal entity.

EB-5 Adjudicator Training Materials, pages 150-152
1(2) The purchase of an existing business and simultaneous or subsequent restructuring or reorganization such that a new commercial enterprise results) This part of the regulations allows for the alien to purchase a business that was already in operation as long as it was changed to such a degree that one could consider the resulting business as completely new and different from the one that existed previously. For example, if an alien purchases a budget hotel and continues to operate it under a different business name, we would require more evidence of reorganization and restructuring. Look for real changes in modes of operation, products and services offered, business structure, organization of personnel, and other aspects which would indicate that a new business has resulted. Note that it is not enough that an entity merely be reorganized or restructured. It must be reorganized or restructured to such an extent that a new business has resulted. What are some examples of changes which would indicate that a new business has resulted?

• If a dairy reorganized from a corporation to a partnership, but kept the same employees, equipment, and cows, would such a change meet the standard?
• If an alien bought a cafe and then restructured and reorganized it to also provide catering and banquet services in a new 5,000 square foot facility, would it appear that a new business resulted?
• If a taxi service added a new limousine to its fleet and changed its name, would such a change meet the standard?
• If an alien bought a Motel 6 business and then through improvements and a new franchise began operating a Marriott hotel, would such a change meet the standard?

[Unfortunately the training materials do not go on to say how to judge these examples. I assume the correct answers are A. "I can't answer this; it's too case-specific,"  or B. "I can't answer this; I'd have to see all the facts of the case," or C. "I will discuss this with our senior leadership, " or D. All of the above. ]

Investor referral fees

Since, as Jor Law and Martha Stewart remind us, it’s a good idea to keep on the right side of the Securities and Exchange Commission, do pay attention to the minefield involved in paying  investor referral fees. AILA yesterday reposted a  A 5/17/10 letter from the U.S. Securities and Exchange Commission denying the “no-action” request of Brumberg, Mackey & Wall in relation to the firm’s activities of referring investors to a company for a fee without registering as a broker-dealer. AILA Doc. No. 11062863.

Comment on Proposed Processing Changes

The comment period on the Proposed Changes to USCIS’s processing of EB-5 Cases ends today (6/17), and I finally did write and email my opinion. I commented on the words “shovel-ready” and “exemplar,” pointed out the revisions to Public Law 107-273 (2002) SEC. 11037(a) implied in the proposal, and offered an alternate suggestion for improving the adjudication process by establishing a separate workflow for Regional Center amendments. You may read the full text of my response here.

I’m very encouraged to see the comment filed by the AILA EB-5 Committee, which expresses a number of points I wanted to make even better than I did.

The “Shovel-ready” Concept

Proposed Step 1 in the “Proposed Changes to USCIS’s Processing of EB-5 Cases” (comment period ending this Friday 6/17) is “Accelerated and Premium Processing of ‘Shovel-Ready’ Cases.” The EB-5 community has been pressing for a long time for a premium processing option, and for a long time USCIS has said no because if they did everyone would use it and they don’t have the staff to accelerate everyone’s cases.  This new proposal suggests a way to select just a portion of cases worthy of expedite: the “shovel-ready” standard.  If your I-924 petition is based on a project that is “shovel-ready,” defined as “business projects that are sufficiently developed to support the immediate filing of actual I-526 petitions from participating investors,” it will enjoy hugely shortened processing times (as short as 15 days versus 5 months).

I have a few concerns about that word “shovel-ready” and its definition.

• USCIS shouldn’t create a situation in which as-yet-unauthorized regional centers would be forced to promote as-yet-unapproved projects and rush investor and source of funds screening – which would be inevitable if USCIS defines the term to necessitate “immediate filing” of actual I-526 petitions from participating investors the moment I-924 approval is received.
• If “immediate filing of I-526” isn’t a reasonable definition for “shovel-ready,” then what is? We do need USCIS to give a strict definition, or for sure nearly all RC applications will claim that their projects are shovel-ready and we’ll be back to square one with premium processing impossible because everyone is trying to take advantage of it.
• USCIS might learn from the history of the “shovel-ready” concept as a standard for privileging applications for stimulus funding. Sec. 1602 of the American Recovery and Reinvestment Act of 2009 Division A Title XVI provides a definition of the standard that President Obama and others have referred to using the term “shovel-ready”: “In using funds made available in this Act for infrastructure investment, recipients shall give preference to activities that can be started and completed expeditiously, including a goal of using at least 50 percent of the funds for activities that can be initiated not later than 120 days after the date of the enactment of this Act.” I feel that “120 day” standard might be reasonable in the EB-5 context as well — definitely more sensible than “immediately” anyway. However the term is still slippery enough that USCIS may find itself with President Obama who saw stimulus projects starting to take off over 16 months after the Act was enacted and who joked yesterday at his Council on Jobs and Competitiveness that “Shovel-ready was not as … uh .. shovel-ready as we expected.”
• The “actual (shovel-ready)” and “actual (exemplar)” distinction makes some sense only at the I-924 stage, not at the I-526 stage. The I-526 petition is being filed by an EB-5 investor — of course at that point the project is ready to receive EB-5 investment! If not the petition will get denied, not just demoted. By the “shovel-ready” standard, all approvable I-526 would qualify for premium processing.

The deadline for comment on the proposed changes is this Friday, and I’m still struggling with what to say. It’s easy to point out problems, but what constructive suggestion can I make? I sure don’t want to kill the impulse to improve procedures and shorten processing times, so I don’t want to tell USCIS what’s wrong with its proposal if I can’t suggest better options.

Lessons from Matter of Izummi

Matter of Izummi is an EB-5 precedent decision that’s often cited these days in USCIS letters and meetings and in AAO decisions. So I encourage everyone to read it (keeping in mind that Public Law 107-273 eliminated the requirement set forth in Izummi that an investor must have had a hand in the actual creation of the business). Here are a few important practical issues that I’ve seen treated recently with reference to Matter of Izummi.

Q: Can an EB-5 offering guarantee the investor ownership of a condo unit?
A: Maybe not. A Notice of Intent to Deny (3/11/2011) from USCIS cites Matter of Izummi to explain how promising to redeem a portion of Member Interest  with the deeded title to a condo constitutes a redemption agreement and makes part of the capital not at risk. This Notice was based on one particular offering, not a general policy from USCIS, and other arrangements involving real estate ownership may be acceptable.  The bottom line seems to be this:  investment agreements shouldn’t guarantee that the investor will certainly get something regardless of whether or not the investment or the green card succeeds.  The Notice doesn’t say that  investors can’t get a return, but any return  must be clearly contingent on the success of the investment. Please click here for the full text of the section of the Notice of Intent to Deny dealing with the condo issue.

Q: Can an EB-5 offering say that the investor will receive guaranteed annual distributions from the Partnership?
A: No – if you promise a return, clarify that it will be contingent on profit, not a guaranteed fixed rate. Matter of Izummi says: “Since there is never a guarantee that the Partnership will generate sufficient profits during any given year to pay each investor his 12-percent guaranteed distribution, the possibility exists that the distributions may be drawn from the contributions of future limited partners (thereby necessitating the acquisition of more and more limited partners) or from the contributions already made (thereby depleting the initial contributions).”

Q: If you realize that the investment agreements you filed with an I-526 petition have problems, can you file an amendment to correct them?
A: No, you can’t. As Matter of Izummi says: “A petitioner may not make material changes to his petition in an effort to make a deficient petition conform to Service requirements.” If you want to correct a mistake, you need to start over with a new I-526.

Q: Can EB-5 investment be moved from one project to another if the first project doesn’t succeed?
A: A recent AAO decision (4/23/2010) involving CanAm (Philadelphia Industrial Development Corporation) says no, that’s not okay. It notes that “while Izummi [etc] does not preclude prospective investments, nothing in that decision suggests that the alien is free to move his investment from the prospective project presented to USCIS in support of the Form I-526 to a project that USCIS has never reviewed in any respect.” And you can’t ask USCIS to review a new business plan either (after I-526 filing). As the AAO told Capital Area Regional Center in 2010: “While the facts in Izummi [etc] involved amendments to agreements rather than a business plan, that decision opines that the reasoning requiring a petition to be approvable when filed applies to material changes in business plans as well.” If one project fails, investors may invest in a different project and start the process all over with new I-526s.

Q: May a business allocate part of the capital received from EB-5 investors to cash reserves?
A: No, that’s not okay. Matter of Izummi says “Reserve funds that are not made available for purposes of job creation cannot be considered capital placed at risk for the purpose of generating a return on the capital being placed at risk.” The concern is that the business might just be setting aside some of the investment to pay back the investors.

Q: If USCIS approved a similar petition before, does that mean it will approve mine?
A: Not necessarily. A recent AAO decision involving South Dakota shows that USCIS approved the first two I-829s and denied the third I-829 for investors in the same project. As Matter of Izummi says “The Service does not pre-adjudicate investor petitions; each petition must be adjudicated on its own merits… To say that an agency’s knowledge cannot grow, and that an agency is prohibited from benefiting from its experience, is unreasonable.”

PS: I’m not a lawyer, and may not have the most reliable interpretation of the case and these questions.