Investors in Terminated RC, Portfolio Investments
August 9, 2016 2 Comments
So long as USCIS persists in not publishing new regulations or policy, we have to keep looking at case-specific sources for hints at what it’s thinking. Here are a couple recent EB-5 insights from non-policy sources.
Investors in a Terminated Regional Center
If a project loses its regional center sponsor, can an investor still continue with the project and count the jobs it creates? The investor in the JUL182016_01B7203 case was not allowed to do so. This petitioner invested in early 2012 and received I-526 approval in 2014. Then USCIS terminated his project’s regional center sponsor in 2015, and issued a notice of intent to revoke his approved petition shortly thereafter. At this point three years had passed since the investment and petition filing, but the petitioner did not yet have conditional permanent residence and was thus still in that vulnerable no-material-change period. USCIS and AAO considered whether he should be able to continue with the process independently and count direct jobs as if he were a direct investor, but decided not. The reason: the jobs were in a job-creating enterprise separate from the new commercial enterprise (a structure only allowed for regional center projects) and changing that structure would be a material change. So the investor would have to start over with a new I-526 petition.
We can’t tell whether the decision might have been different had the project not been cited in the regional center termination decision, or had EB-5 investors secured a new regional center sponsor for the project. But the decision suggests a pretty hard line on the point that: “During the period of conditional residence, a petitioner is expected to implement the business plan underlying the original petition, and USCIS guidance acknowledges that a petitioner may need to adjust his or her plans during this time. But when such changes are material, USCIS policy requires the investor to file a new petition.” Expect to see this line challenged, as investors line up with their attorneys to complain about being punished for actions by RC principals – actions that do not necessarily implicate the investors and sometimes not the projects either. Long processing times, retrogression, and possible regional center program sunset add urgency to the material change issue for regional center investors. Klasko Law has a post on Path America Regional Center and Giving Innocent Investors a Way Forward (12/3/2015), and the State of Vermont is advocating for options for its investors (but no response from USCIS so far). In the meantime, I’ve added this case to an on-going log of material change examples in my material change post.
Portfolio Flexibility, Debt-Like Investments
USCIS has produced interesting documents as defendant in a suit brought by investors in Quartzburg Gold, LP, a Idaho State Regional Center project. You can find all the case material by Googling the LP name or the case number (1:15-cv-00273-CKK). I’m particularly interested in USCIS statements on two boundaries that investors and project companies naturally try to push: investor assurances and project flexibility. Investors want to get their money back eventually and demand security, while USCIS is on the alert for debt-like arrangements and guaranteed returns. Project companies like flexibility to work with unpredictable reality, while USCIS wants the I-526 business plan to specifically predict what will happen and then match what does happen.
The Quartzburg case addresses the grey areas of portfolio investment flexibility and re-deployment. The Quartzburg Gold, LP Limited Partnership Agreement defined investment “Projects” to include four named mine projects (with one marked as tentative) and potential additional or replacement mine projects. The LPA provided that “The General Partner has authority to approve funding of other projects identified by Idaho State Gold Company, either in addition to or replacement of the preceding projects, to the extent appropriate based upon the capital requirements of the listed Projects, the General Partner’s ongoing due diligence, and contingencies that may arise in development of the foregoing Projects.” USCIS went on to deny a bunch of I-526 petitions for limited partners in this agreement, with one ground being the fact that “which mining projects ultimately would receive capital was uncertain at the time of filing.” In a 4/15/2016 statement for the court, USCIS argues that,
Plaintiffs cannot satisfy their burden of showing they will create the requisite number of jobs because they have acknowledged (and the past demonstrates) that their business plan is wholly speculative because the projects themselves are subject to change…. As such, it was not arbitrary and capricious for USCIS to conclude that a business plan analyzing a tentative list of possible projects is insufficient to show likelihood that 160 investors are likely to show their investments are each likely to create ten new jobs.
In a 5/2016 statement, USCIS protests further that,
Contrary to Plaintiffs’ claim, Defendants are not requiring the initial business plan to remain entirely static throughout adjudication. But, at a minimum, the petitioner must submit a business plan that is based on JCEs that are more than just possible projects. Whether the plan for one particular JCE may adapt over time is one matter; the complete overhaul of the entire business plan is another.
I quote all this because people are filing similar EB-5 deals right now. For example, I think of franchisees who offer investment in a pipeline of currently-identified plus potential future franchise locations. If USCIS applies its Quartzburg Gold arguments to such cases, they will be denied for depending on possible projects. But it’s hard to know with USCIS. Sometimes relatively speculative portfolio scenarios are not challenged as such. Even in Quartzburg Gold, USCIS denied a bunch of petitions for other reasons before raising the JCE uncertainty issue. Matter of Izummi treats an NCE with “actual and proposed loan activities” in multiple identified and potential companies, and finds fault with how the business model was implemented but does not challenge the model per se. And that’s a precedent decision. It will be interesting to see the outcome of the Quartzburg litigation. Meanwhile I’ve added this example to my on-going master post on portfolio investments.
I won’t go into the “at risk” part of the Quartzburg case, but you can read the documents to learn how USCIS smells an equity arrangement to determine whether it’s really a debt-like arrangement. I’d just like to point out this intriguing series of events.
- 2/16/2010: USCIS designates Idaho State Regional Center
- 12/22/2010: Reuters makes a splash with “Special Report: Overselling the American dream overseas.” The article begins “In a conference room in an office building in downtown Shanghai, Jason Lee is literally selling the American dream” and goes on to report the specifics of Mr. Lee’s sales pitch: invest in an Idaho State RC gold mine project with “a 100 percent money-back guarantee”; just lend $500,000 to the mine today and eventually be repaid with 500 ounces of gold. The Reuters journalists attended an event for Chinese investors, read a Mandarin brochure for the Idaho project, and then contacted USCIS to ask whether these promises didn’t violate fundamental EB-5 rules. “The immigrant investor’s investment cannot be guaranteed,” confirmed the USCIS spokesperson. Reuters also contacted the Idaho State RC principal, who protested that he did not have an agent in Shanghai and no redemption promises were being made to investors. EB-5 got little press back in 2010, and this Reuters article (which also covered other RC projects) attracted attention.
- 6/9/2011: USCIS initiates a Government Motion to Reopen its approval of Idaho State RC, and issues an RFE notifying the regional center that it must remove all language from organizational documents that could be construed as redemption agreements. The regional center complies, and USCIS issues a new designation letter dated 9/13/2011 that cites its review and approval of revised organization documents dated 7/1/2011.
- 2012-2013: Investors file I-526 petitions based on investment in the gold mine projects of Quartzburg Gold, LP, sponsored by Idaho State RC.
- 2013: USCIS starts to issue Notices of Intent to Deny on the Quartzburg Gold, LP investors, with the first 69 all citing just one problem: a provision in the organizational documents that looks like a redemption agreement.
(I know about the first and third bullet points from the RC’s designation letters, the second from my brilliant memory, and the rest from the litigation paperwork. I don’t know how these events are linked, but we can speculate. Maybe the moral is that journalism has power and one can’t be too careful about what’s said – and overheard — in China. Also, that it’s unsafe to rely on the words “the following documents have been reviewed and approved” in a regional center designation letter.)
3/2017 UPDATE: Here is a decision on the case.