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.

RC Reauthorization to 2/8/2018

February 2
See my Washington Updates page for ongoing updates.

January 23
The President has signed H.R. 195: Extension of Continuing Appropriations Act, 2018, which puts the federal government generally, and the regional center program, back in business through February 8, 2018. The bill text was amended over the weekend, but no additions that would decouple RC program authorization from government funding. However, this extension just gives a couple weeks to breathe before the same issues need to be re-fought. Congressional leaders have vowed to use the time to come up with their long-promised immigration legislation. I hope that this will happen and include EB-5 (though EB-5 is still absent from all debate). Ideally legislation should precede and preempt the EB-5 regulations threatened in February.

IIUSA has posted a helpful EB-5 Advocacy Announcement that includes this information: “While Republican negotiators on EB-5 are closer than ever to finding agreement internally, there are still bipartisan negotiations that need to occur. With pending regulations that could raise investment levels by over 100% and a current potential posted final action date in February, Congressional leaders would likely be left with only 60 days after that final action date to produce a legislative solution in place of the regulations.”

January 22

Update: Congress has cleared legislation to extend government funding to February 8, 2018. The vehicle is “Senate amendment to the House amendment to the Senate amendment to H.R. 195,” and I’ll link the text here when available.

As we wait for Washington to reach an agreement that would fund the government and reauthorize programs including the regional center program, here’s a post from Carolyn Lee on what the shutdown does and does not mean for EB-5.

January 20
The USCIS website announces:

The current lapse in annual appropriated funding for the U.S. government does not affect USCIS’ fee-funded activities. Our offices will remain open, and all applicants should attend interviews and appointments as scheduled. However, several USCIS programs will either expire or suspend operations, or be otherwise affected, until they receive appropriated funds or are reauthorized by Congress.

The list of programs to be affected until reauthorized by Congress includes the regional center program.

January 19
Congress lost its bet and failed to pass a new funding bill by midnight. But “lawmakers are believed to be negotiating a days-long extension that could be approved quickly.” In the meantime, the regional center program is on hold, and regional center-associated petitions and applications won’t advance until Congress takes action.

January 18-19
The Hill has a new article every few minutes on the likelihood that Congress will or won’t agree on time to the CR extending current funding and associated authorities (including RC program authorization) into February. So much drama. I expect that the CR will pass by 11:59 pm on Friday, assuming that our lawmakers have much to gain from speaking out against the CR, and more lose from the shutdown that would result from not voting for it in the end. But we shall see. Just in case, Klasko Law comments on effects of a potential government shutdown on immigration processing and programs and IIUSA explains Possible Government Shutdown: What it Means for the EB-5 Regional Center Program.

January 16
House Appropriations Chairman Rodney Frelinghuysen today introduced legislation (H.J.Res 125) to maintain current funding for federal operations and prevent a government shutdown. The Continuing Resolution (CR) is a stop-gap measure that will extend government funding through February 16, 2018.
There’s nothing in the text of H.J.Res 125 to prevent regional center program authorization from being extended with other authorities tied to current funding. But we’ll see whether Congress can manage to agree long enough to pass the CR and avoid a shutdown. The White House supports the CR, at least.

January 15
No indication yet that Washington is near compromise on new immigration legislation. A Continuing Resolution of current funding and authorities to February 16 continues to look likely. In honor of Dr. Martin Luther King Jr. Day today, I quote President Trump making an important point:

Today, we celebrate Dr. King for standing up for the self-evident truth Americans hold so dear, that no matter what the color of our skin or the place of our birth, we are all created equal by God.

This is not the belief evident in the current immigration reform discussion, which looks more like this:

We hold these truths to be self-evident, that all men are not created equal, that they are endowed by their nationalities with certain inalienable characteristics, that among these are propensity to violence, noxious ideology, inability to assimilate, and failure in the pursuit of property. — That to secure against such characteristics inherent in certain nations and their nationals, immigration policy is instituted among Us, to effect Our Safety and Happiness by erecting barriers against threats embodied in Them, and screening Them by the color of their passports in lieu of the content of their character.

Dr. King’s genealogy of racial segregation from his How Long Not Long speech in 1965 could also be recast to explain how and why our current populist movement has been co-opted into an anti-immigrant movement with such violent sentiment against DACA. It may be said of the new economy that the donor class took the world and gave the poor white man legal status. And when his wrinkled stomach cried out for the food that his empty pockets could not provide, he ate legal status, a psychological bird that told him that no matter how bad off he was, at least he was a citizen, better than the Illegals.

We miss you, Dr. King!

January 11 post
Some dates to keep in mind as we wonder what will happen next with EB-5:

• January 19, 2018: The next regional center program sunset date (and the deadline for a new funding bill that some hoped to make a vehicle for sweeping new immigration legislation). It’s looking likely that this deadline will be pushed back a few weeks, however, with another continuing resolution.
• February 2018: The date indicated for final action on new EB-5 regulations (with provisions including drastic increase to the EB-5 investment amount)
• February 16, 2018: Possible next regional center program sunset date, if Congress fails to pass a new funding bill in January, and instead defers the funding and immigration fight with a continuing resolution  (or some speculate the CR could go into March)
• March 5, 2018: The date DACA protections are slated to end, and thus the date Congress is pushing to beat in passing a big immigration bill
• April 2018: The possible effective date for new EB-5 regulations, assuming that the rule is finalized in February with an effective date after 60 days (as ILW rumors)

The race is on for EB-5 legislation, with pressure from sunset dates and the need to forestall unwelcome regulations. Washington is actually talking about comprehensive immigration reform, including reshuffling visa numbers. But I haven’t heard EB-5 mentioned once, for good or ill, anywhere, by anyone, in recent immigration discussion. The left is for DACA; the right is for border security and against diversity visas and chain migration. Immigrant investment doesn’t fit with any side’s talking points. I hope that Congress privately remembers EB-5, because we really need action from them: to give the regional center program a longer-term authorization, to enact program changes better than what would come with new regulations, and to realize program potential by freeing up more visas for EB-5.

If broad-based immigration legislation happens soon, what will it include and how will it affect EB-5? We have a few hints, but nothing definitive yet. This week President Trump hosted a bipartisan and bicameral meeting on immigration reform that concluded (reportedly) with “an agreement to negotiate legislation that accomplishes critically needed reforms in four high-priority areas: border security, chain migration, the visa lottery, and the Deferred Action for Childhood Arrivals policy.”  (As an aside, I recommend the White House transcript of the meeting. It’s not especially informative, but an amazing artifact. If Aristophanes or Alexievich set out to write Washington today, I doubt they could beat this straight record of the January 9 Cabinet Room scene.)  Yesterday House Judiciary Chairman Bob Goodlatte introduced H.R. 4760 Securing America’s Future Act, which proposes sweeping changes in line with President Trump’s immigration priorities. The bill includes nothing that would directly affect EB-5, so far as I can tell. (The Immigrant Investor Pilot Program gets a name check, but only in context of a technical amendment that renumbers a subsection. No mention of program authorization or any EB-5 changes. H.R. 4760 proposes to increase employment-based visa numbers, but EB-5 wouldn’t benefit because the bill would change its allocation from 7.1% of the total to a flat 9,940 visas annually, regardless of the worldwide level. The bill fiddles with per-country limits for family-based visas, but not for employment-based visas.)  Meanwhile, the Senate is still trying to come up with a competitive immigration deal that’s more passable by Congress while still signable by the President. I’ll report on details when available, and also hope that advocacy people will eventually share what’s happening with EB-5 on the ground. (Update: IIUSA has published an Industry Special Report, and Senator Graham has posted summary provisions of the Senate’s Immigration Reform Act of 2018. The summary mentions nothing that would affect EB-5.)

EB-5 Regulations (2/2018?)

Update: For current status, check the Regulations Detail section of my Washington Updates page.

— Original Post —

While we have our eye on the legislation ball, the Office of Management and Budget has given us a new EB-5 deadline to think about. The Spring 2017 Unified Agenda had mentioned April 00, 2018 as a “Final Action Date” for regulations dealing with EB-5 investment amounts and TEAs (RIN 1615-AC07), but now the Fall 2017 agenda has advanced that prediction to February 00, 2018. I’d doubted the April date because so many factors seemed likely to delay regulations (the prospect of legislation instead, the fact that Congressional intent as expressed in draft legislation looks so different from what DHS put in the proposed regulations, the administration’s coolness to regulation in general, government inertia in general), but advancing the date to February looks like positive intent to really get the EB-5 regulations done.

We don’t know yet what will be in the final Rule 1615-AC07, since it may have been revised significantly since the Notice of Proposed Rulemaking. But as a reminder, here’s what the NPRM proposed:

• Increase the standard minimum EB-5 investment amount to $1,800,000, or $1,350,000 in a TEA.
• A TEA is based on high unemployment and incentivized with 25% reduction to the investment amount (not other factors or incentives as proposed by Congress).
• A TEA can only be designated for a high-unemployment MSA, county, city, single census tract, or limited group of census tracts. DHS, not the states, is responsible for TEA designation.
• Give priority date protection (an investor with an approved I-526 could choose to file a new I-526 while keeping the original priority date, subject to certain restrictions)
• Spouse and children may be able to file I-829 even if not included on the principal investor’s petition.
• Other technical changes.

The federal rulemaking process requires that “At the end of the process, the agency must base its reasoning and conclusions on the rulemaking record, consisting of the comments, scientific data, expert opinions, and facts accumulated during the pre‐rule and proposed rule stages.” In April 2017, the public responded to the NPRM with challenging questions and criticism, and some persuasive data and policy arguments. The agency must take these into account. If USCIS revised the proposed rule in response to public comment, they might have modified the proposed investment amount increases (nearly all commenters argued strongly for this), either narrowed or expanded the gap between TEA and non-TEA investment (there were spirited arguments on both sides), modified the restrictions on census tract TEAs, or reconsidered giving DHS the burden of issuing TEA designations. On the other hand, USCIS is not well known for changing track in response to evidence and arguments presented by the public. The Fall 2017 OMB notice reiterates USCIS thinking about the potential costs and benefits of the proposed regulations:

The proposal to raise the investment amounts and reform the targeted employment area (TEA) geography could deter some investors from participating in the EB-5 program. The increase in investment could reduce the number of investors as they may be unable or unwilling to invest at the higher proposed levels of investment. On the other hand, raising the investment amounts increases the amount invested by each investor and thereby potentially increases the total economic benefits of U.S. investment under this program. The proposed TEA provision would rule out TEA configurations that rely on a large number of census tracts indirectly linked to the actual project tract by numerous degrees of separation, and may better target investment capital to areas where unemployment rates are the highest.

If a final rule were published in the Federal Register in February 2018, it could go into effect as early as March 2018, and apply to petitions filed on or after the effective date. (See A Guide to the Rulemaking Process for an explanation of the typical process.)

On the other hand, the threat of immanent regulations may inspire Congress/industry to finalize EB-5 legislation ASAP instead.

Meanwhile, the OMB Unified Agenda has pushed back the estimated date for a Notice of Proposed Rulemaking for RIN: 1615-AC11, the EB-5 rule dealing with regional center designation, the exemplar filing process, continued regional center participation, and regional center termination. The Spring agenda had estimated April 2018; the Fall agenda has October 2018. We previously responded to this as a Advance Notice of Proposed Rulemaking. The agenda’s cost/benefit comment notes that:

DHS is still in the process of reviewing potential changes it would propose to the regional center process. DHS may propose to implement an exemplar filing requirement for all designated regional centers that would require regional centers to file exemplar project requests. An exemplar filing requirement could cause some projects to not go forward, but DHS is still in the process of assessing the impacts on the number of projects that may be affected. DHS anticipates that any proposed changes to the regional center program would increase overall program efficiency and predictability for both USCIS and EB-5 stakeholders.

RC Program Reauthorization (CR to 12/22/2017)

Updates:

• 12/8: H.J. Res 123 has been signed by the President and is now P.L. 115-90. Now we wait for legislation that will authorize the regional center program past December 22, 2017.
• 12/7: A continuing resolution through December 22 passed the House and Senate today, and the President is expected to sign it. H.J. Res 123 is a “clean” extension, meaning that it simply extends the deadline for previous funding and authorities (including the regional center program) without changes.
• 12/7: Regional center program authorization is still waiting on Congress to manage a Continuing Resolution that would extend current government funding and associated authorities past December 8. Washington continues to fight and risk shutdown. If by chance current government funding and the regional center program sunset on 12/8, what will happen to EB-5 investors? The impact will not be too painful so long as the lapse is temporary. Judging from past history, the Department of State will change EB-5 regional center visa categories from “Current” to “Unavailable” in the Visa Bulletin, and pause issuing visas to RC investors until the RC program is authorized again, returning to business as usual.  USCIS has reportedly prepared “what if” guidance for two sunset scenarios: if the Regional Center program lapses but Congress apparently intends to reauthorize it, or if Congress indicates its desire to end the program. I’m guessing that if the lapse appears temporary/unintentional, then IPO will probably also just hold off on new RC petition approvals until the program regains authorization. And as another reminder: EB-5 itself is a permanent program and not facing a sunset; direct EB-5 petitions and applications can continue as usual regardless of RC program authorization.
• 12/5: Senator Grassley and Senator Cornyn — two people who have worked on EB-5 legislation in the past — today announced a new bill that would address a number of immigration issues but apparently not EB-5.  S.2192 “The Security, Enforcement, and Compassion United in Reform Efforts (SECURE) Act of 2017” is about security and enforcement, not about compassion or unity, and not concerned with EB-5 (though it would give permanent status to E-Verify, a temporary program historically reauthorized with the regional center program).
• 12/5: The Hill notes that immigration is in the spotlight as discussions continue over a series of continuing resolutions that would extend current government funding to 12/22/2017, and then again to January or February next year. But the contentious issues are Delayed Action for Childhood Arrivals and border security; no one’s arguing about EB-5 so far.
• 12/4: It looks as if there will be an extension to December 22 (or possibly into January), to give Congress more time to come up with a new funding bill.

Original 11/29 post: EB-5 is permanent, but the EB-5 regional center program faces another sunset date. The RC program’s current authorization is tied to a continuing appropriations act that expires next week Friday, December 8. Sabers are rattling in Washington over the next funding bill, and we may be in for another short-term resolution while our representatives get things figured out. EB-5 hardly rates in the scheme of significant and controversial issues facing Congress now, and I don’t hear anyone speaking out about it. I expect we’ll see (1) a new appropriations bill or continuing resolution next week that includes clean extension to the RC program for the bill’s duration (since that’s been the pattern for two years, and the default option for a Congress busy with other matters); or (2) limited EB-5 program changes crafted by/for the few people who spend most on EB-5 lobbying, slipped quietly and at the last minute into a larger bill to facilitate passage and forestall review and criticism from a broader base of interests. I do not think the regional center program will be terminated, or omitted on purpose from the next appropriations bill. Termination calls have never been very loud or widespread, and termination would also take time and attention from Congress. However, the reauthorization picture is not pretty. The RC program has received seven short-term extensions in the past two years. Congress hasn’t taken positive action on EB-5 since 2012. A program with billions of dollars on the line deserves more stability, attention, and enthusiasm.

Chart notes: The PL numbers identify the public laws that contain regional center program authorization. Each opaque blue bar begins with the date of PL enactment and ends with the end of RC authorization in that PL. The light blue shading reflects the fact that the first three reauthorizations just extended the original authorization (from five years to seven, then ten, then fifteen years). If anyone knows how to fill in the authorization gaps in my chart before 2008, please email me the missing PL numbers.