Last month, the Administrative Appeals Office upheld denial of Regional Center-affiliated I-526 petitions based on EB-5 investment “to fund the development, production, sale, and eventual manufacture of alcoholic gelatin shots” (JUL292014_01B7203 and JUL292014_02B7203). I read that far and guessed that problems would be focused on the business plan, and sure enough. The investors also had some source of funds issues, and the cake was iced by the fact that the escrow agreement stipulated return of capital upon I-526 denial, which effectively terminated the investment before the petitioner had a chance to appeal the denial. But USCIS/the AAO focus on the business plan. To quote:
First, in the RFE, the director indicated that the petitioner did not source and itemize all pro forma financial data. … On appeal, the petitioner claims that she complied with the submission of a comprehensive business plan set forth in Matter of Ho and cites to sections of the business plan. The petitioner must submit a comprehensive business plan. 8 C.F.R. § 204.6U)(4)(i)(B).To be “comprehensive,” a business plan must be sufficiently detailed to permit the Service to draw reasonable inferences about the job-creation potential. Matter of Ho, 22 I&N Dec. at 213. Mere conclusory assertions do not enable USCIS to determine whether the job-creation projections are any more reliable than hopeful speculation. Id. The business plan does not reflect the source of the pro form financial data, and the petitioner did not submit detailed and itemized pro forma financial data that would meet the elements of a “comprehensive” business plan. Although the chiefs decision indicated that the petitioner did not submit detailed and itemized pro forma financial data, the petitioner does not submit the information on appeal.
Second, in the RFE, the director indicated that the petitioner did not demonstrate that the sales projections and the production and marketing costs were reasonable when compared to industry standards, and the input parameter was not reliable because the sales forecasts and pro forma financial statements do not demonstrate whether the sales projections are reasonable to the current market environment or when compared to industry standards. In response, the petitioner indicates that the sales projections and production and marketing costs were prepared by _______ and that ______ President, based the projections on actual industry experience. The chief determined that the petitioner did not submit any financial documents to support Mr. ____ claims, and the petitioner did not provide any evidence demonstrating a contractual agreement of to distribute the alcoholic gelatin shots.
I have no personal knowledge of this case, but it’s interesting to me as a business plan writer. Could I have helped prepare a plan that USCIS would have approved? Or is USCIS demanding evidence that excludes this type of proposal? Imagining that our alcoholic gelatin shot developer, Mr. X, had called me first for the business plan, I went out to look for sources of evidence to validate his sales forecasts and financial projections.
If Mr. X had a real estate-based proposal he could commission an appraisal report, and if he were in a well-organized industry such as hospitality he’d have good options for a third party market/feasibility study to corroborate his projections. USCIS sees a lot of real estate-related and hotel deals, and is accustomed to seeing such studies attached to the business plan. A reliable-looking third party study is the easiest way to assure USCIS’s comfort level with market and financial projections. Assuming that there is no name-brand source for a market study relevant to developing alcoholic gelatin products, I consider whether it’s possible for me to help make the business plan’s internal analysis strong enough to stand on its own. Does Mr. X’s business resemble other businesses for which financial information is available for comparison? Who collects industry data relevant to this business? When a business falls squarely within a NAICS code that groups similar businesses, then I can help support business plan projections with reference to published data for that NAICS category (for example from the Economic Census and Risk Management Association Annual Statement Studies). When a publicly traded company handles a similar product, I can reference data from annual reports and investor presentations. When a business is in an industry that’s covered by an active trade association or that’s of interest to economic development agencies, there we have more promising data sources. In Mr. X’s case, “development, production, sale, and eventual manufacture of alcoholic gelatin shots” involves activities that span several NAICS codes, and the NAICS categories lump businesses that may be operationally quite different from the subject, so NAICS category data may not be very helpful. The Internet leads me to product and pricing information for several competitors, which would help support sales estimates, and yields some data on industry trends and growth (and locates a Kickstarter for another alcoholic gelatin shot producer, in case you regretted missing your chance to invest). However I didn’t find sources to support a strong estimate of market size or potential penetration. Presumably Mr. X has tested and measured the market through his contacts, but USCIS will want more than his word to back up his conclusions.
I’d have had to call Mr. X back and say “I’m sorry, I don’t think I have the sources to handle this plan for EB-5. You could still consider EB-5 if you’re far enough along to have evidence for actual sales and financial performance (e.g. sales contracts, historical financials). But this may not work if you’re still at the estimate and projection stage, because I don’t know where we’re going to find evidence that will support your estimates and projections to USCIS’s satisfaction. I’m not saying that your product and proposal aren’t great – I just wonder whether EB-5 will work for you, since you’re not on a well-beaten path. But thank you anyway for calling me, and please think of EB-5 again if you have a restaurant or assisted living facility or other vanilla proposal that’s easier to sell to a nervous industry outsider like USCIS.” And indeed, I have phone calls like this several times a month. How many bright entrepreneurs and innovative products have I discouraged from EB-5! Yes, I’m pessimistic, but then funding is a matching game. EB-5 naturally won’t match every promising business, just like VC funds or bank loans or tax credits won’t match every proposal, and I wish I could’ve spared Mr. X an uphill battle.
The questions that USCIS asked Mr. X were reasonable, even if unfairly difficult to answer for this proposal. But I do have a complaint: that USCIS excludes experience as evidence. Here USCIS might learn from the Small Business Administration. SBA examiners have told me that their analysis of viability considers “is this proposal reasonable when compared to industry standards?” and also “how reliable are the people behind this proposal?” The SBA will assess the track record, credit, and relevant experience of the principals as critical factors in the credibility of a business plan. USCIS does not have a tradition of doing that. Our AAO decision doesn’t treat Mr. X’s experience and qualifications as relevant, and only asks for third party evidence to bolster his projections. Has Mr. X ever successfully launched a food/beverage product? Has he managed a business? What experience does he have in the industry? What’s his track record in financial matters? These are obviously relevant questions. I daresay USCIS would weed out more wishful-thinkers and frauds by focusing on verifiable answers to such questions than by simply fixating on third party references to support projection numbers. Recognizing experience as one pillar of business plan credibility would also potentially put more openness to innovation in the EB-5 program. Otherwise, EB-5 will be effectively limited to proposals that can show their reasonableness by demonstrating that they’re as similar as possible to what everyone else is doing.
EB-5 Updates 