PM Update (redemption agreements, debt arrangements)

USCIS has updated the USCIS Policy Manual immigrant investor section with a new subsection titled “Redemption Language” that clarifies policy on debt arrangements. This new language follows up on a flurry of denials in 2017/2018 based on  suspected debt arrangements, and subsequent successful litigation. I await analysis from experts, but the new Policy Manual language comes close to granting “okay, we were wrong and you were right.” 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,” and footnotes the Kurzban’s recent Chang v. USCIS case over call options. However, the PM language also adds several qualifications. We’ll see whether the lawyers now agree that the clarified policy is fully justified under the regulations and Matter of Izummi. (UPDATE: In her analysis of the New USICS EB-5 Redemption Policy Update, Carolyn Lee points out problematic language that could be interpreted to prohibit even denial-based repayments. She also notes that the PM update reinforces the flawed marriage analogy from Matter of Izummi.)

I’ve copied below the policy alert and the new policy language. As usual, I also made a new file for the current 6 USCIS PM G (saved in this folder), and performed document comparison with the previous version (dated August 24, 2018) to confirm that nothing changed besides the one new subsection under 6 USCIS PM G(2)A(2).

From: U.S. Citizenship and Immigration Services <uscis@public.govdelivery.com>
Sent: October 30, 2018 11:02 AM
Subject: USCIS Policy Manual Update

USCIS is revising guidance in the USCIS Policy Manual to clarify its policy on debt arrangements in Volume 6: Immigrants, Part G, Investors. Please see the Policy Alert for more detailed information:

• Policy Alert: Immigrant Investors and Debt Arrangements (Final date for comments: Nov. 12, 2018)

Visit the Policy Manual for Comment page for more information on stakeholder review and comment.

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New language added to USCIS Policy Manual Volume 6 Part G Chapter 2 Section A(2)

Redemption Language

The regulatory definition of “invest” excludes capital contributions that are “in exchange for a note, bond, convertible debt, obligation, or any other debt arrangement.” [Footnote: The full definition of invest is provided at 8 CFR 204.6(e).]

An agreement evidencing a preconceived intent to exit the investment as soon as possible after removing conditions on permanent residence may constitute an impermissible debt arrangement. [Footnote: See Matter of Izummi, 22 I&N Dec. 169, 183-188 (Assoc. Comm. 1998).] Funds contributed in exchange for a debt arrangement do not constitute a qualifying contribution of capital.  [Footnote: EB-5 regulations contain two basic requirements in order to have a legitimate qualifying investment: (1) 8 CFR 204.6(e) defines “invest” to require a qualifying (that is, non-prohibited) contribution of capital; and (2) 8 CFR 204.6(j)(2) requires a qualifying use of such capital (placing such capital at risk for the purpose of generating a return). In order to satisfy the evidentiary requirement set forth at 8 CFR 204.6(j)(2), an investor must first properly contribute capital in accordance with the definition of invest at 8 CFR 204.6(e). If the contribution of capital fails to meet the definition of invest, it is not a qualifying investment, even if it is at risk for the purpose of generating a return.] In general, the petitioner may not enter into the agreement knowing that he or she has a willing buyer at a certain time and for a certain price.  [Footnote: See Matter of Izummi, 22 I&N Dec. 169, 186-187 (Assoc. Comm. 1998).]

Any agreement between the immigrant investor and the new commercial enterprise that provides the investor with a contractual right to repayment is an impermissible debt arrangement. In such a case, the investment funds do not constitute a qualifying contribution of capital.  [Footnote: See Matter of Izummi, 22 I&N Dec. 169, 188 (Assoc. Comm. 1998). Matter of Izummi addressed redemption agreements in general, and not only those where the investor holds the right to repayment. USCIS generally disfavors redemption provisions that indicate a preconceived intent to exit the investment as soon as possible, and notes that one district court has drawn the line at whether the investor holds the right to repayment. See Chang v. USCIS, 289 F.Supp.3d 177 (D.D.C. Feb. 7, 2018).] Mandatory redemptions and options exercisable by the investor are two examples of agreements where the investor has a right to repayment. The impermissibility of such an arrangement cannot be remedied with the addition of other requirements or contingencies, such as conditioning the repurchase of the securities on the availability of funds; the delay of the repurchase until a date in the future (including after the adjudication of the Petition by Entrepreneur to Remove Conditions on Permanent Resident Status (Form I-829)); or the possibility that the investor might not exercise the right. In other words, repayment does not need to be guaranteed in order to be impermissible. It is the establishment of the investor’s right to demand a repurchase, regardless of the new commercial enterprise’s ability to fulfill the repurchase, that constitutes an impermissible debt arrangement.  [Footnote See Matter of Izummi, 22 I&N Dec. 169 (185-86) (Assoc. Comm. 1998).]

The following table describes certain characteristics that might be present in agreements and explains whether their inclusion creates an impermissible debt arrangement.

Characteristics of Redemption Provisions
Type of Provision	Description	Impermissible Agreement?
Mandatory redemptions	Arrangements that require the new commercial enterprise to redeem all or a portion of the petitioner’s equity at a specified time or upon the occurrence of a specified event (for example, once the conditions are removed on the petitioner’s permanent resident status) and for a specified price (whether fixed or subject to a specified formula).	USCIS considers this an impermissible debt arrangement. Such impermissible obligations are not subject to the discretion of the new commercial enterprise (although it may have some discretion regarding the timing and manner in which the redemption is performed).
Options exercisable by the investor	Arrangements that grant the petitioner the option to require the new commercial enterprise to redeem all or a portion of his or her equity at a specified time or upon the occurrence of a specified event (for example, once the conditions are removed on the petitioner’s permanent resident status) and for a specified price (whether fixed or subject to a specified formula).	USCIS considers this an impermissible debt arrangement.
Option exercisable by the new commercial enterprise	A redemption agreement between the immigrant investor and the new commercial enterprise that does not provide the investor with a right to repayment. One example of such an agreement is a discretionary option held by the new commercial enterprise to repurchase investor shares. These options are typically structured similarly to options exercisable by the investor, except that the option is held and may be exercised by the new commercial enterprise. When executed, these options require an investor to sell all or a portion of his or her ownership interest back to that entity.	USCIS generally does not consider these arrangements to be impermissible debt arrangements. [Footnote: See Matter of Izummi, 22 I&N Dec. 169, 188 (Assoc. Comm. 1998). See Chang v. USCIS, 289 F.Supp.3d 177 (D.D.C. Feb. 7, 2018).] However, such an option may be impermissible if there is evidence the parties construct it in a manner that effectively converts it to a mandatory redemption or an option exercisable by the investor (considered a debt arrangement). For example, an arrangement would be impermissible if ancillary provisions or agreements obligate the new commercial enterprise to either (a) exercise the option (at a specified time, upon the occurrence of a specified event, or at the request of the investor) or (b) if it chooses not to exercise the option, liquidate the assets and refund the investor a specific amount.