A Recap of EB-5 Investment Financing Strategies – The Clock is Ticking Loudly

Thursday, June 27, the long awaited and oft delayed EB-5 regulations seemed to have been finally finalized and are on their way to publication with the resulting effectiveness to come at last. That seemed like a good reason to review EB-5 financing strategies as investors may need to pull out all the stops to get their I-526 petitions filed in time to qualify under the existing rules.

Over the last few months I have written a few articles that cover different financing strategies available to EB-5 investors, in particular in the wake of the Zhang decision from late last year. (See Zhang v USCIS Civil Action No. 2015-0995 (D.D.C. 2018). A copy can be found here: http://ilw.com/immigrationdaily/news/20190701case.pdf

Normally, when dealing with USCIS, the rule of wisdom is to keep things as simple as possible and conform activities as closely as possible to their understanding of the law and regulations, regardless if their understanding is wrong (which it often is). No one should want to risk a fight with USCIS and the delays and expense that comes with it, that is unless there is a good reason. In today’s EB-5 world, there unfortunately are. Firstly, there are the pending regulations mentioned above. This applies to all potential EB-5 investors. The second reason is because of the risk of retrogression that is capturing an increasing number of EB-5 investors. Retrogression can add years, or even decades, to the time it takes for an investor to receive a green card. In China, it is currently more than 10 years and in Vietnam, it is approaching a decade. India has just joined the retrogression club, potentially followed by Brazil and South Korea. In EB-5 there are two currencies, time and money, and both are going up, so it would behoove investors to file as quickly as possible to lock in the lower investment amount and an earlier priority date. The strategies described herein are about giving investors options to make their investments sooner rather than later.

In my most recent article, “In the Process Of – How to Effect an EB-5 Investment over Time” outlines how it is perfectly legal (and always has been) to file an I-526 petition based on an amount less than the full investment and then complete the investment over time. See http://discuss.ilw.com/articles/arti…by-matt-gordon.

One update to that article is that there is no minimum amount of capital required to start the ‘in the process of’ investment. The Adjudicator’s Field Manual is silent on this, but the Adjudicators EB-5 Training Materials specify:

The required amount of capital is not required to be invested at the time of filing. Absent an escrow arrangement, a signed subscription agreement will generally satisfy the “in the process of investing” element.

So all an investor needs to do is literally sign on the dotted line (of the subscription agreement) and they are in a position to file. Of course, the full investment amount must be transferred and it would be a wise idea to start sooner than later as the regulation itself as the word ‘actively’ before ‘in the process of’, suggesting a long delay may give USCIS a pretext for challenging whether or not the process had started at the date of filing.

See Pg 13 of the materials found on the USCIS website: https://www.uscis.gov/sites/default/…_Materials.pdf

The two articles before that talked about investment strategies that came more into focus by the Zhang holding.

The first strategy involved the use of proceeds from unsecured loans obtained from third parties (not the NCE) to finance the investment. According to the court in Zhang, loan proceeds are simply cash, which is the investment capital. See: http://discuss.ilw.com/articles/arti…by-matt-gordon

The second strategy was for those investors with illiquid assets that could be used as security for a loan. Here they would issue a secured promissory note (indebtedness) for the investment to the NCE, secured by the assets. This comes from the second important holding in Zhang that clarified how ‘contributed indebtedness’ satisfies the definition of capital as required under 8 C.F.R. § 204.6(e). For a discussion of the Zhang holding in regard to the use of contributed indebtedness, see my previous article: http://discuss.ilw.com/articles/arti…by-matt-gordon. It’s important to note here, that this strategy really wasn’t newly articulated by the Zhang court, but rather highlighted as Zhang was restating part of the holding from In Matter of Izumi.

These three options, each alone, provide investors significant tools by which one might accelerate the potential I-526 filing date compared to the time it would take to assemble the full investment amount and then file. Where this gets particularly interesting is that there is nothing to suggest that these strategies could not be used in combination to achieve an ever greater outcome (faster filing). For example, for an investor with some hard assets, the ‘contributed indebtedness’ strategy could be used to start the process as the down payment for the investment, which could then be completed over time with either the investor’s cash (or even cash obtained from unsecured 3rd party loans). Investors can buy additional time simply by signing the subscription agreement as that starts the ‘process of’ investing and then fulfill the commitment using these other strategies.

One point of concern from some members of the immigration bar has been that USCIS has appealed Zhang. That is true and there is a risk, that if overturned, investments based on unsecured loans would no longer be legal. It is an important to note that in appealing the case, USCIS did not ask for a stay of execution of the judgement, so as of the time of this writing (and for a good while longer while the appeal is pending) Zhang is the law. Investors who invest now in reliance on Zhang would have a valid estoppel argument if USCIS tried to claim that the unsecured loan was not legal as it was at the time of their filing. The other two strategies are plainly legal, as the contributed indebtedness strategy was affirmed in Izumi, and the ‘in the process of’ strategy by the plain meaning of the words in the regulations.

The risk is not only duly noted but should always be duly articulated to each and every client who might seek to use a strategy that entails some risk. What should not happen is where an attorney tries to dissuade the investor from using it or refuses to represent them. That goes beyond the attorney’s purview. What should happen is an accurate and fulsome disclosure of the risks (as that is our job as attorney and advisors) and then let the investors make the best decision for themselves on whether potential gains outweigh the costs. For those who will not be able to afford the minimum investment amount increase or cannot tolerate delays beyond a certain point, the rational decision for them may very well be to take the risk. The EB-5 program is about entrepreneurial risk, for without risk there is no reward.

About The Author

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.