At-risk with call option and preferred return? — updated

—UPDATES since original post—

10/30/2018: USCIS more or less laid this issue to rest with an update to the USCIS Policy Manual. Regarding redemption provisions only exercisable by the new commercial enterprise, the PM now states that “USCIS generally does not consider these arrangements to be impermissible debt arrangements,” with footnote to Kurzban’s Chang v. USCIS case.

7/9/2018: Ron Klasko explains how his firm is litigating challenges to debt arrangements in the article At Risk, Debt Arrangement, Guaranteed Redemption: Important Distinctions

6/13/2018: IIUSA has included helpful analysis of challenges to investment structures and terms in its letter from IIUSA to USCIS regarding Major Issues Facing the EB-5 Industry.

5/9/2018: Ira Kurzban has published an article based on his success with Chiayu Chang, et. al., v USCIS  “Federal Litigation: The Knockout Punch to USCIS’s Overbroad Policy on Redemption Agreements and Call Options?”

FYI here are my notes for an ILW call on 4/17 to discuss the “invest” requirement, and new USCIS challenges to equity with debt-like features. The notes link to the relevant decisions and cases, and summarize the fact pattern and arguments for each case.

4/6/2018: Another lawsuit CHANG et al v. DEPARTMENT OF HOMELAND SECURITY et al (Case Number: 1:18-cv-00659). Here’s a summary and the full complaint.

2/9/2018: I’ve been alerted to a couple district court decisions that rule against USCIS in favor of EB-5 petitioners in cases involving call options.

  • Chiayu Chang, et. al., v USCIS 1:16-cv-01740 (Filed 02/07/2018)
    …The question in this case is whether United States Citizenship and Immigration Services (USCIS) acted in an arbitrary and capricious manner when it declared plaintiffs ineligible for visas because their investments came with a “call option,” which gave the company in which they invested the choice to buy plaintiffs out. Because the call option at issue here does not provide the investors with any right to repayment, the Court answers this question in the affirmative and grants partial summary judgment to plaintiffs… Unlike a sell option—or a note, bond, or similar arrangement—a buy option provides the investor with no security that she will ever see her money again. …A call option alone does not a debt arrangement make….
    (Attorney representing the plaintiffs: Ira J. Kurzban of Kurzban Kurzban Weinger Tatzeli & Pratt, PA)
  • DOES 1-72 v. UNITED STATES CITIZENSHIP & IMMIGRATION SERVICES et al 1:15-cv-00273 Filed 2/24/2015, decided 03/10/2017
    …Importantly, the Call Option was a right exercisable by Quartzburg Gold or its general partner, not the Plaintiff-investors, and the Quartzburg Gold documents made clear that there was no guarantee that it would be exercised. Despite statements that the general partner would strive to be able to exercise this option and buy out the Plaintiff-investors, both the LPA and the Offering Memorandum made clear that “[t]here [was] no guarantee regarding when the Partnership shall exercise such call option, or if such call option shall ever be exercised at all.” …. The Call Option accordingly did not guarantee Plaintiff-investors anything, nor did it have any effect on the risk that the Plaintiff-investors faced that they might lose their capital contributions if the underlying mining projects were not successful… (Attorneys representing the plaintiffs: Robert C. Divine & J. David Folds of Baker Donelson)

— ORIGINAL POST 1/26/2018 —
Every EB-5 offering is a balance between natural investor desire for a return and exit strategy, and EB-5 policy prohibiting debt arrangements between the immigrant investor and new commercial enterprise. (As a reminder, there’s no problem with debt between the NCE and job-creating entities in regional center offerings. The restriction is between the EB-5 investor and NCE.) People who prepare offering documents have to walk a fine line, and should note recent cases that help define where USCIS thinks that line lies.

A number of recently-posted cases in the 2017 and 2018 folders I-526 appeals deal with investors in a regional center project who were denied due to a provision in their Limited Partnership Agreement.  (See DEC222017_03B7203 as a representative example. Other decisions for the same offering: DEC192017_01B7203, DEC192017_02B7203, DEC222017_01B7203, DEC222017_02B7203, JAN172018_01B7203, JAN172018_04B7203, JAN172018_08B7203, JAN172018_09B7203, JAN172018_10B7203.) Here’s the targeted provision:

Article 9.1 of the partnership agreement provides that at any time on or after the date that a foreign investor’s Form I-829 has been adjudicated, the NCE’s general partner may, in its sole discretion, notify the investor of its desire to purchase (i.e. redeem) his or her interest. The purchase price will include 100 percent of his or her capital contribution ($500.000) plus all accrued and unpaid preferred returns. ….Preferred return is one half of one percent (0.5%) per annum on the total unreturned Capital Contributions [$500.000] of an investor.

Considering the USCIS Policy Manual policy on guaranteed returns and Matter of Izummi, one might think this provision would be acceptable because (1) this provision doesn’t give the investor a right to demand the return (since only the general partner can initiate the buyout), (2) the NCE general partner is not guaranteed to be a willing buyer (since the purchase “may” happen at its sole discretion), and (3) a certain price is not assured (since the purchase itself is not assured). But one would be wrong, according to the analysis by USCIS and the AAO.  They found that,

The fact that the general partner has the right to purchase or redeem, which the partnership agreement references as a “buyout right,” rather than the Petitioner having a right to sell his interest is not determinative. We previously found that a sell option was an impermissible debt arrangement regardless of whether it was enforceable.

AAO admits that Matter of Izummi treated a different kind of redemption agreement that gave the Petitioner a sell right, but “the language of the decision goes beyond those facts, explaining not only that the enforceability of the arrangement is immaterial but that an investor may not be assured of receiving a certain price.”

The “certain price” issue is the main leg to stand on for the December 2017 denials. (One wonders about the difference a profit-contingent preferred return would’ve made. Also, the leg still looks pretty weak, considering that the offering apparently lacks the defining feature of debt: fixed obligation to pay.)  But the AAO appears to question debt-like elements generally.

A review of the record as a whole reveals an arrangement where once the conditions on the Petitioner’s resident status have been removed, the NCE would likely redeem the Petitioner’s original capital contribution and pay him or her a modest “preferred return,” similar to an interest payment. Such an arrangement, though not characterized as a loan in the offering documents, contains the same elements (principal, interest, repayment period) that one would find in a debt agreement.

AAO concludes,

Considering the partnership agreement and offering memorandum together, we find that the Petitioner did enter into an impermissible debt arrangement with an understanding that the general partner intended to repay the full investment plus preferred returns. This arrangement is not permitted under the broad language at 8 C.F.R. § 204.6(e) (definition of “invest”).

As another example, consider APR182017_01B7203, a 2017 decision that challenges a “Priority Return” in a direct EB-5 offering.

Page 4 of the business plan states that “the NCE will pay the limited partners, if funds are available, a preferred return on their investment, beginning after the EB-5 funds are invested in the project.” As we discussed in our second NOID, Izummi, 22 I&N Dec. at 183-88, provides that if an investor is guaranteed a specific rate of return or the return of his or her investment, then the capital is not at risk, because in essence, the investor has loaned funds to, rather than invested in, the business. See 6 USCIS Policy Manual, supra, at G.2(A)(2).”

Preferred returns on equity investment and buyout provisions are common in EB-5 offerings, and have mostly passed without challenge. I’d be happy to hear analysis of the above non-precedent decisions by someone who can help define (or criticize) the line that USCIS and AAO took in these particular cases. (Thank you, commenters.)

Quotes for reference:

6 USCIS Policy Manual G.2(A)(2)

An arrangement under which funds have been contributed in exchange for an equity interest subject to a redemption agreement which provides that the investor may demand a return of some portion of his or her investment funds, including after obtaining conditional permanent resident status, is an impermissible debt arrangement, no different from the risk any business creditor incurs.

Matter of Izummi

For the alien’s money truly to be at risk, the alien cannot enter into a partnership knowing that he already has a willing buyer in a certain number of years, nor can he be assured that he will receive a certain price. Otherwise, the arrangement is nothing more than a loan, albeit an unsecured one.


About Suzanne (
Suzanne Lazicki is a business plan writer, EB-5 expert, and founder of Lucid Professional Writing. Contact me at (626) 660-4030.

5 Responses to At-risk with call option and preferred return? — updated

  1. D says:

    Hi Suzanne

    I have understood that a loan to a project is also an investment because the investor may not be repaid in full or in part if the enterprise fails. Many people (including myself) have invested based on that interpretation, and I know people who have got their conditions removed on such a basis.

    Do you know what percentage of total RC investments are equity and what percentage debt investments?

    Thank you.

    • Most regional center deals have (at least) two transactions: (1) between the EB-5 investor and the new commercial enterprise; (2) between the new commercial enterprise and the job-creating entity/project. #1 must always be an equity investment per EB-5 policy; #2 can be debt or equity. I can’t recall that USCIS has published any data related to transactions between the NCE and JCE, but in my observation a majority involve debt. 100% of transactions between the NCE and investor must be equity, and this AAO decision addresses the question of debt-like elements in such equity investments.
      See also Mr. Latour’s reply below.

  2. Suzanne, I respectfully disagree with the AAO’s conclusion for a number of reasons:

    1- The fact that the option is unilaterally that of the General Partner “in its sole discretion” means that Matter of Izummi does not apply…there is no certainty that the GP would exercise that option and no control of liquidation by the Limited Partner in any event.

    2- The Policy Manual provision does not apply in this case since the language in question doesn’t let the investor “demand” ANYTHING, the decision to execute the option is solely that of the General Partner.

    3- Finally, the provision specifies that it can ONLY be executed by the GP “after the date that a foreign investor’s Form I-829 has been adjudicated”, meaning that the EB-5 process would be 100% concluded…how can the government tell private parties what to do AFTER its authority to administer the EB-5 process has ended??

    USCIS has long acknowledged that at EB-5 investor can divest from their EB-5 investment at any time after the conclusion of their I-829 process. When the AAO says that the option by the GP to force the sale is effectively the same thing as the INVESTOR’S right to force the sale, they are mistaking a standard contractual provision which can only be exercised by the GP AFTER the EB-5 process is concluded with an EB-5 investors option to exit the investment under his or her terms BEFORE the process is concluded. Apples and oranges and I disagree with their reasoning.

    Cheers and all the best in 2018, Yoda of EB-5! (-;
    Jose Latour

  3. To D: you are fine because the loan based model for EB-5 has long been accepted by USCIS. While I can’t give you numbers, the majority of EB-5 projects today are indeed loan-based. In the past, before EB-5 went mainstream, investors had no choice but to become minority equity partners in EB-5 ventures which they did not control. There are certainly bona fide equity-based EB-5 projects, but many of the projects which have left investors high and dry have been equity-based deals where sketchy US partners misspend investor funds and hide behind the “at risk” language to wash their hands of responsibility.

    The loan-based model, when used by a reputable and proven Regional Center and U.S. partner, is how the logical quid pro quo required is fulfilled: the U.S. partner gets cheap, non-recourse money in the form of a low-interest loan from EB-5 investors and the investor gets the peace of mind of knowing that in exchange for lending the US partner the funds at a modest rate, the US partner will deliver both the job creation required AND, at the end of the EB-5 process, the repayment of the EB-5 loan investment.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.