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.

Is I-924 the new I-526? And what does “exemplar” mean?

UPDATE: The content of this post is now outdated. See instead my post with on-going updates I-924 options: What are actual and hypothetical projects? What does exemplar mean?

In its Proposed Changes to Processing of EB-5 Cases, USCIS offers interesting possibilities for the future — including accelerated and premium processing options — and also provides insight into its current thinking about the Regional Center program. The agency privileges “clear, focused applications and petitions,” and assumes that I-924 regional center applications are based on real projects and closely linked to I-526 investor petitions.

I sense a shift from the 2009 Neufeld Memo, which said that RC proposals could be based on “actual” or “hypothetical” investment projects, and that a “hypothetical” project would “demonstrate how an actual investment project will be capitalized and operate in a manner that will create at least 10 direct or indirect jobs per alien investor.” That seemed to leave the door open for regional center proposals to present hypothetical scenarios in lieu of actual projects — which is in line with regulations stating that an RC proposal is based “on general predictions, contained in the proposal, concerning the kinds of commercial enterprises that will receive capital from aliens” (Public Law 107-273). But I don’t see that flexibility in the Regional Center application options assumed in the most recent proposal.

[quoted from page 1 of Proposed Changes to USCIS’s Processing of EB-5 Cases]

Regional Centers submit I-924 applications in one of two varieties.
• First, “actual” applications present “shovel-ready” business projects that are sufficiently developed to support the immediate filing of actual I-526 petitions from participating investors. “Actual” applications are supported by specific business plans and economic analysis, the actual capital-investment structures and documentation for the investment offering, the anticipated regional economic impacts, and the Regional Center’s operating plan and structure. The review of the specific documentation to be provided in I-526 petitions for projects that can be started immediately after the approval of the I-924 application promotes efficiency and predictability within the EB-5 immigrant petitioning process as issues can be identified and resolved within the I-924 application prior to the filing of any I-526 petitions.
• Second, “exemplar” applications present feasible business projects that are not yet “shovel ready,” together with an exemplar I-526 petition, for a preliminary determination of EB-5 compliance. The “exemplar” process allows Regional Centers to seek approval of new, job-creating projects in principle before the business projects are fully developed to the point where participating investors can submit their I-526 petitions.

In these explanations, “exemplar” appears to mean an actual project that’s just not fully developed yet. This breakdown leaves no space for an RC proposal based on hypothetical scenarios or general predictions of the type of projects to receive EB-5 investment. It seems to require presenting real project(s) — the only option being whether or not you claim they’re “shovel ready.” And both “actual” and “exemplar” I-924s, as presented here, seem narrowly project-focused and to function essentially as pre-approval to the I-526 petition.

I’m very glad that USCIS is getting serious about offering a premium processing option, because unfortunately if someone calls me now with a genuinely “shovel-ready” project I can’t recommend Regional Center EB-5. With processing times as they are now, most projects that are ready to go today would be already finished or dead by the time the RC got approved and EB-5 investors had been recruited and received I-526 approval. I’ll be very excited if that whole process can be compressed from 1.5+ years to under 4 months. On the other hand, I’m not comfortable with streamlining at the expense of simplifying the I-924 into essentially a pre-I-526. What is a “Regional Center” after all? Do we want it to turn into a narrow umbrella for one particular immediate project? Do we want to send RC applicants who have a variety of potential projects at various stages of development to the back of the line while selecting for one-hit wonders? That’s the vision that seems to be emerging.

EB-5 to replace existing financing

UPDATE:

from the 5/30/2013 EB-5 Adjudications Policy Memorandum [Note: this is official policy. The other sources quoted below provide reference but are not policy.]

See 8 C.F.R. §204.6(j) (it is the new commercial enterprise that will create the ten jobs).

Since it is the commercial enterprise that creates the jobs, the developer or the principal of the new commercial enterprise, either directly or through a separate job-creating entity, may utilize interim, temporary or bridge financing – in the form of either debt or equity – prior to receipt of EB-5 capital. If the project commences based on the interim or bridge financing prior to the receipt of the EB-5 capital and subsequently replaces it with EB-5 capital, the new commercial enterprise may still receive credit for the job creation under the regulations. Generally, the replacement of bridge financing with EB-5 investor capital should have been contemplated prior to acquiring the original non-EB-5 financing. However, even if the EB-5 financing was not contemplated prior to acquiring the temporary financing, as long as the financing to be replaced was contemplated as short-term temporary financing which would be subsequently replaced, the infusion of EB-5 financing could still result in the creation of, and credit for, new jobs. For example, the non EB-5 financing originally contemplated to replace the temporary financing may no longer be available to the commercial enterprise as a result of changes in availability of traditional financing. Developers should not be precluded from using EB-5 capital as an alternative source to replace temporary financing simply because it was not contemplated prior to obtaining the bridge or temporary financing.

ORIGINAL POST

Many people ask me about the possibility of bringing in EB-5 capital to replace existing financing. This option is especially attractive to developers, as it would allow them to deploy EB-5 money at a later stage in the development process and avoid making the project wait on EB-5 marketing and immigration delays. It may or may not be approved by USCIS depending on the circumstances of the case.  The key point is that you need to have an argument for how the investment can be said to result in creation of jobs. Some written evidence for you to consider:

from USCIS’s Executive Summary of the 5/1/2012 EB-5 Quarterly Stakeholder Engagement

Bridge Financing
Q: Under what circumstances will USCIS approve bridge financing? Will the memo address this? This does not appear to be covered with adequate specificity in the last iteration of the policy memo. Stakeholders are not aware of any written guidance on bridge financing other than am AAO decision on the Victorville case, and this is an extreme example with specific facts. Of the two memos in 2009 (June and December) on construction, the December 2009 memo superseded the June memo, but stakeholders continue to receive RFEs referencing the June memo.
A: Pursuant to 8 C.F.R § 204.6(j)(4)(i), the new commercial enterprise, not the EB-5 investors, must create the requisite employment. As such, it is acceptable for the developer or the principal of the new commercial enterprise, either directly or through a separate job-creating entity, to utilize interim, temporary or bridge financing – in the form of either debt or equity – prior to receipt of EB-5 capital. If the project commences based on the bridge financing prior to the receipt of the EB-5 capital and subsequently replaces it with EB-5 capital, the new commercial enterprise still gets credit for the job creation under the regulations.

from AAO Decision Affirming the Termination of Victorville Development Inc. (December 21, 2011)

The regional center must be terminated because the applicant is seeking to invest capital only after the jobs in question have already been created. DPSG and Plastipak began hiring in December 2009. As of June 2010, the IWWTF was 90 percent complete. Regardless of the stage of financing the investors propose to provide, it remains that the jobs for which the applicant wishes to receive credit already exist. Notably, the record does not show that the applicant made a commitment to provide later-stage financing at the outset of the project. Instead, the applicant appears to have decided to commit capital toward later-stage financing only after the initial stages of the project that created the jobs in question were already complete.
The applicant’s argument that the IWWTF will be a ghost plant if it does not obtain bridge financing is inherently an argument that touches on preservation of jobs, not creation of jobs. The regulation at 8 C.F.R. § 20S.6G)(4)(ii) allows investors to be credited with preserved jobs, but only for investments in a troubled business. The applicant has never claimed or documented that the alien investors will be investing in a troubled business. As such, they may not rely on job preservation arguments to establish eligibility for benefits under the EB-S visa program.

from the December 16, 2010 USCIS EB-5 (Immigrant Investor) Stakeholder Quarterly Engagement

A stakeholder asked USCIS to confirm if it is permissible to utilize EB-5 funds to pay off a loan on a capital investment project as long as it is clearly described in the business plan and will result in job creation.  USCIS shared that there have been some instances where the plan presented has been approvable, and there have also been other instances where timing is a factor. If the project has essentially concluded and EB-5 capital is simply going to replace debt in which the jobs are already created through non EB-5 capital, this does not make a compelling argument that jobs were created as a result of the investment.  Also in all instances whether it’s an equity position or a loan instrument into a project, the agency is looking for EB-5 job creation.  Therefore, like in all EB-5 cases, the evidence must demonstrate that the loan is EB-5 compliant and that jobs would be created within a reasonable period of time.

from an April 23, 2010 AAO Decision (Denial of Form I-829 for a Regional Center project in Philadelphia)

The ultimate issues in this matter are …. whether the new investment demonstrates how the regional center’s bridge loan allows the petitioner to be credited with the statutorily required job creation.  … Had USCIS reviewed the Butcher & Singer business plan in the context of a Form 1-526 petition, it might have raised serious concerns about this plan, such as how the investors’ loan during the final stages of construction that purports to cover preliminary costs such as design fees can truly be credited for creating any jobs and where PIDC acquired the $1,500,000 to loan to the Partnership.  . . . Had the petitioner disclosed this plan, USCIS might have questioned how replacing one loan with another loan would create jobs.

from a December 22, 2009 AAO Decision denying a Regional Center proposal

The plan further indicates that the applicant is “in discussions” to invest in Phase I of the Westport Waterfront project and is “currently negotiating” to participate in the buildout of retail and office buildings to maximize job creation.” The Westport Waterfiont project is already financed up to $380,675,000 through private debt, private equity and grants. The business plan proposes that the limited partnerships would either “come in as equity (e.g. buying out the $30 million debt of Citigroup) or may fund individual projects within each phase (e.g. investing in the office and retail project for period ‘J’ in Phase I or investing in the office, retail and hotel project in parcel ‘D’ in Phase II).” The total investment by regional center limited partnerships would be between $30 million and $1 50 million. The applicant did not submit any evidence of ongoing negotiations or a letter from Turner Construction confirming that it is interested in the applicant’s proposed investment strategies. Moreover, the plan does not explain how assuming financing that already exists, such as assuming Citigroup’s loan, would create any jobs that would not otherwise be created. Without the proposed terms of such an agreement, we cannot conclude whether the “equity” from the limited partnerships instead of the “debt” fiom Citigroup would significantly improve Turner Constructions’ financial situation such that the limited partnerships’ financing could be said to create jobs and improve regional productivity. While we do not suggest that this type of financing is automatically disqualifying, the application cannot be approved unless the applicant first establishes that this assumption of existing financing will improve regional productivity.

USCIS questioning TEA designation

—- UPDATE —-
The issues in this post no longer apply since the 5/30/2013 EB-5 Policy Memo, which commits USCIS to defer to state determinations of the appropriate boundaries of a targeted employment area. To quote from page 8 of the Policy Memo:

b. A State’s Designation of a Targeted Employment Area
The regulation provides that a state government may designate a geographic or political subdivision within its boundaries as a targeted employment area based on high unemployment. Before the state may make such a designation, an official of the state must notify USCIS of the agency, board, or other appropriate governmental body of the state that will be delegated the authority to certify that the geographic or political subdivision is a high unemployment area. The state may then send a letter from the authorized body of the state certifying that the geographic or political subdivision of the metropolitan statistical area or of the city or town with a population of 20,000 or more in which the enterprise is principally doing business has been designated a high unemployment area. 8 C.F.R. § 204.6(i).
Consistent with the regulations, USCIS defers to state determinations of the appropriate boundaries of a geographic or political subdivision that constitutes the targeted employment area. However, for all TEA designations, USCIS must still ensure compliance with the statutory requirement that the proposed area designated by the state in fact has an unemployment rate of at least 150 percent of the national average rate. For this purpose, USCIS will review state determinations of the unemployment rate and, in doing so, USCIS can assess the method or methods by which the state authority obtained the unemployment statistics. Acceptable data sources for purposes of calculating unemployment include U.S. Census Bureau data (including data from the American Community Survey) and data from the Bureau of Labor Statistics (including data from the Local Area Unemployment Statistics).

—–OLD POST FROM 2011 —–

The USCIS quarterly stakeholder meeting on 10/14/2010 raised an important question:

A stakeholder inquired if it was acceptable, for purposes of defining a TEA, to link a high unemployment area with census tracts or political subdivisions with low unemployment in order to arrive at an aggregate finding of high unemployment when the intent is actually to invest in the low unemployment area.

At that time USCIS didn’t really answer the question (consult the Executive Summary linked above for detail), and the matter came up again in the 03/17/2010 stakeholder meeting. This time USCIS defined its position more clearly, emphasizing that the agency expects your “TEA area” to make sense as a unit, either geographic or political, and not just be a random assemblage of census tracts that happens to average a high unemployment rate, and that your designated state authority happens to approve. To summarize from the presentation (see slides 42-48):

1. It’s not enough to just have a TEA letter from the designated state official, but “A state-issued TEA designation must be supported by evidence, including a description of the boundaries of the geographic or political subdivision and the method or methods by which the unemployment statistics were obtained. The statistics used in the state’s analysis must reflect the national and local unemployment rates for these regions at the time of the alien investor’s capital investment.”
2. The TEA must be based on a “geographic or political subdivision” whose boundaries can be defined. (The presentation says that “elections districts such as congressional districts, state representative districts, state senatorial districts, county supervisor districts, city council member districts… appear to meet the legal definition of a political subdivision” and does not explain what constitutes an acceptable geographic subdivision.)

Now the community is buzzing over a 3/11/2011 Notice of Intent to Deny issued to an RC in Florida that calls out as unacceptable a strategy that many Regional Centers currently use. To quote from the notice:

In support of counsel’s contention that the job-creating enterprise is located within a TEA, the petitioner provided a letter dated March 25, 2010 from a State of Florida official. The official concluded that by joining several census tracts which are contiguous to census tract [tract number], the combined area experienced high unemployment at least 150 percent of the national average unemployment rate for 2009. Thus, according to the letter, the combined area qualifies as a targeted employment area.
The plain language of the regulation indicates that TEA must be “a” single geographical or political subdivision. … Nothing in the regulation suggests that a petitioner may qualify for the reduced investment amount by seeking government confirmation of the fact that adding several high unemployment census tracts to a low unemployment census tract produces a higher average unemployment rate. Census tract [tract number] does not qualify as a TEA by itself. Census tract [tract number] qualifies as a TEA only by combining adjacent census tracts and averaging the unemployment data. Such an analysis renders the reduced investment amount meaningless as any alien could qualify for the reduced amount simply by adding high unemployment census tracts to a census tract that is otherwise not a TEA. Rather, the investment must be in “a” geographic or political subdivision officially designated as a TEA.

If your project address doesn’t fall in a TEA census tract, how do you show that your larger qualifying area or group of census tracts is not random but counts as “a” geographic or political subdivision? Here is how the State of California Governor’s Office breaks down the requirements for special state designation:

If the location of the proposed new business does not fall into a qualifying area described in Step 2, justification for high unemployment area qualification might be possible by special designation of a smaller area within the otherwise non-qualifying area.  The state government may designate a particular geographic or political subdivision located within a metropolitan statistical area or within a city or town having a population of 20,000 or more as an area of high unemployment and having at least 150 percent of the national average rate.
In order to consider special area designations, applicants for such designation must observe the following criteria:
A)   The entrepreneur asking for designation should include a description of the boundaries of the geographic or political subdivision:
a.  A geographic subdivision would be an area carved out based on the physical features of the Earth’s surface.  (Good examples would be XYZ Valley, XYZ Bay, etc.)
b.   A political subdivision would be a division of a state that exists primarily to discharge some function of local government, such as a civil administrative unit of a county or city.  (Administrative units of the federal or state government do not qualify for special designation.)
B)   The proposed area must have an unemployment rate equal to or exceeding 150% of the national unemployment average based on the weighted average of the unemployment rate of the contiguous census tracts comprising of the desired area.

2011 AAO Decision (South Dakota)

The USCIS website has published a new AAO decision dated 4/14/2011 involving denial of an I-829 petition for a Regional Center investor. The investment was made in 2005 in a new dairy farm within South Dakota International Business Institute (SDIBI), Dairy Economic Development Region (DEDR). A few points of interest:

• This decision reveals that two investors in the same business had had their I-829s approved before this petition was denied. The AAO explains “With respect to the other two alien investors who have removed conditions, the AAO is not required to approve applications or petitions where eligibility has not been demonstrated, merely because of prior approvals that may have been erroneous.” Keep in mind that past success does not guarantee future success!
• The AAO did chastise USCIS for trying to deny the I-829 based on a factor that had been approved at the I-526 stage. “Under the reasoning of Chang, the director erred in revisiting the appropriateness of the multiplier. The director approved the Form 1-526, which disclosed that the petitioner would be using the 2.66 multiplier for the location of the dairy. The petitioner did not materially change the location of the proposed employment creation and the director does not identify information that was misrepresented or not disclosed at the Form 1-526 stage that would warrant a new evaluation of the multipliers used. Thus, the petitioner should be able to rely on the 2.66 multiplier as an acceptable means of demonstrating total job creation, including indirect jobs. The AAO withdraws the director’s concern that the 2.66 multiplier is not appropriate.”
• The AAO addresses (not very thoroughly) two important challenges by counsel: 1) that  the director is applying a clear and convincing burden of proof rather than the preponderance of the evidence standard appropriate to immigrant petitions, and 2) that an employer may not request any documents beyond those allowable for Form 1-9 purposes without violating employment discrimination provisions of the Act.
• All of you who considered verifying direct jobs with payroll records should read this, to see what a mountain of paperwork may be involved and what a comb USCIS may take to it. (Never guessed that the line spacing on your W-2s could become a focus of suspicion? Think again!)