The financing of EB-5 investments (by the investors) continues to metamorphosize in the wake of the recent Zhang decision (Zhang v USCIS Civil Action No. 2015-0995 (D.D.C. 2018)).
A link to the text of the case can be found here:
The Zhang decision clarifies the potential use of contributed indebtedness on the part of an EB-5 investor as a means to finance an EB-5 investment. Practitioners should note that the contribution of a promissory note to satisfy the investment requirement was specifically endorsed In Matter of Izumi. The Zhang decision reaffirms that practice and provides greater clarity as to the contours of this financing strategy.
The central holding of the Zhang case was that ‘loan proceeds’ are themselves not a form of ‘indebtedness’ that is ‘contributed’ by the investor as an asset to the NCE, as argued by USCIS, but rather simply cash. That was an important holding, which afforded EB-5 investors the ability to use unsecured loans to finance their investments as the court held that USCIS was without authority to require collateralized loans without going through the formal rulemaking process. For more on this, see my recent article, here:
Citing 8 C.F.R. § 204.6(e), the court noted, “the alien investor must “ contribute [a qualifying amount of] capital” to that enterprise. Id. “Capital” is defined as “cash, equipment, inventory, other tangible property, cash equivalents, and indebtedness secured by assets owned by the alien entrepreneur, provided that the alien entrepreneur is personally ….” [Zhang at P.4, emphasis added].
USCIS reasoned that investing loan proceeds is tantamount to investing indebtedness, which must be secured by the petitioner’s personal assets under the regulation. [Zhang P.10].
The court rejected USCIS’s argument that cash loan proceeds subsequently invested in an EB-5 enterprise were anything but cash, and in doing so clearly articulated a pathway for a cashless asset-based form of EB-5 investor financing:
“Indeed, an investor can only contribute indebtedness if the investor’s “state of being indebted” is to the enterprise itself. See 8 C.F.R. § 204.6(e). In that sense, the indebtedness is an asset of value because the investor is obligated to make payments to the enterprise at a later date.” [Zhang P.29].
The court held that the contribution of indebtedness, or say a promissory note, is sufficient to qualify as the invested capital needed to perfect an I-526 petition. The court further noted the requirements contained in the CFR with respect to contributed indebtedness and confirmed in prior administrative case law (In Matter of Izumi):
“In Matter of Izumi, USCIS considered an arrangement whereby an investor promised to pay an enterprise in the future via a promissory note. USCIS confirmed that such an arrangement can constitute investing “capital” pursuant to the regulation so long as the alien investor was personally and primarily liable for the indebtedness to the enterprise.” [Zhang P.30].
(“A promissory note secured by assets owned by a petitioner can constitute capital under 8 C.F.R. § 204.6(e) if: the assets are specifically identified as securing the note; the security
interests in the note are perfected in the jurisdiction in which the assets are located; and the assets are fully amenable to seizure by a U.S. note holder.”). [Zhang P.30, citing, Matter of Hsiung, 22 I. & N. Dec. 201, 201 (BIA 1998)].
The Zhang holding may prove a savior to the many investors who have sufficient assets to effect an EB-5 investment, but often have problems converting those assets into cash (especially US dollars here in the United States).
This may be particularly important in the context of the impending new EB-5 rules that may raise the minimum investment amount to $1.35 million or more. The regulations do not limit the amount of indebtedness. Per Zhang, USCIS cannot simply impose a limitation (make up a new rule) without going through the APA requirements.
“It is well-settled that a policy that adds a requirement not found in the relevant regulation is a substantive rule that is invalid unless promulgated after notice and comment. See Cent. Texas Tel. Co-op., Inc. v. F.C.C., 402 F.3d 205, 211 (D.C.Cir. 2005).” [Zhang P.48].
Accordingly, a person with sufficient assets could consummate the investment and lock in the current minimum investment amount by contributing a promissory note to the NCE that is collateralized by the person’s assets valued at $500,000 or more. There is nothing in the CFR, binding precedent or statute that limits the amount of capital that can take the form of contributed indebtedness. The logical result is that with assets of $500,000 or more, an alien petitioner can properly invest by contributing a fully secured promissory note in the amount of $500,000 and no cash (or other assets) whatsoever. In other words, no money down EB-5.
This has the potential to solve an investor’s liquidity problem, giving the investor ample time (even years) to liquify his or her assets and transfer the money to the United States. In particular, because there are no requirements in the regulations that say that the collateral has to be in the United States. To the contrary, as noted above, the only requirements, per Matter of Hsiung, is that “ the security interests in the note are perfected in the jurisdiction in which the assets are located; and the assets are fully amenable to seizure by a U.S. note holder.” This option may be crucial as USCIS has been challenging I-526 petitions on the grounds that the mode of transfer is potentially illegal. This usually occurs where citizens of China, Vietnam, or India for example, use unlicensed currency transfer agents or otherwise skirt domestic currency export laws to transfer funds. (For a good article, see: https://iiusa.org/blog/wp-content/up…s-for-RFEs.pdf )
Using a contributed indebtedness strategy to start the process, investors could then take the time to transfer the currency legally.
For investors with liquidity issues coming from Vietnam and India, investing sooner may have the added benefit of substantially reducing the wait time for a Green Card due to retrogression. For investors everywhere, No Money Down EB-5 is a perfectly legal and viable means of effecting an EB-5 investment.
Matt Gordon is a noted policy expert in the visa-based investments field and is an authority on structuring visa-based investments. Mr. Gordon’s career spans business operations, finance and law. He is the editor of the EB-5 Book, the legal treatise on the EB-5 program and a frequent lecturer to immigration attorneys. Mr. Gordon has participated in policy events, including those hosted by the White House and Harvard University’s Kennedy School of Government. Prior to founding E3iG, Mr. Gordon was an investment banker for a decade and ran the US division of a Swiss multi-national corporation. Mr. Gordon is a licensed attorney, having practiced mergers and acquisitions law at the beginning of his career with the largest and most reputable Wall Street firms including Fried Frank and Sullivan & Cromwell. Mr. Gordon received his B.S. in Policy Analysis from Cornell University and his J.D., cum laude, from the University of Pennsylvania School of Law.