The recent Zhang decision (Zhang v USCIS Civil Action No. 2015-0995 (D.D.C. 2018) has the potential to greatly aid investors in financing investments that can qualify for the immigration benefits under the EB-5 program. A link to the text of the case can be found here.
Prior to Zhang, USCIS imposed requirements on loans an investor could use to create the funds (proceeds) that were then used for the EB-5 investment. USCIS treated loan proceeds as contributed ‘indebtedness’, which per regulations, required the debtor to be the primary obligor of the debt and to have collateralized the debt with assets at least of equal value to the debt.In Zhang, Ira Kurzban successfully argued that the loan proceeds were simply cash and not ‘contributed indebtedness’. In evaluating cash, USCIS was without the regulatory basis to impose any conditions of how the cash was obtained (qualities of the loan transaction), other than requiring that the cash was from legal sources. USCIS could not require, for example, that the loan transaction be a secured loan, nor could they require that the investor be the primary obligor. As an aside, the court took USCIS to task for (its regular practice) of creating requirements that go beyond what is contained in the properly adopted rules (under the Administrative Procedure Act). This case opens up quite a number of USCIS practices to similar challenge.
Thankfully the court got it right, not just from a legal perspective, but from the policy perspective as well. In USCIS’s original requirement, it was basically imposing a standard where only an investor’s asset value could be used to finance the investment. The court basically and correctly said, ‘who cares’, so long as the capital was lawfully obtained and it is put to work creating jobs in the US economy, why would it matter if the source was debt or assets.
USCIS shouldn’t fret too much over this. The policy is still sound. If the investor borrows the money from a friend and then defaults, that’s an issue between the investor and his or her creditor. Per long standing EB-5 rules, the EB-5 investor would have no right to call the investment back (to repay the loan); nor should the investor use the EB-5 investment as a form of collateral for the loan (as that might have untoward immigration consequences in the event the collateral were seized). Regardless of what happens with the loan that produced the cash loan proceeds, the NCE still has the cash, so the United States economy has gotten the intended benefit for which our country is providing lawful permanent residency.
The Zhang holding has the potential to open EB-5 up to a much larger number of potential investors. Many potential investors do not have either $500K in current cash, or assets needed to secure a loan (as required under the now defunct USCIS rule). Many do however have friends and relatives with the needed cash who would be willing to loan it to the investor. Under the old rule, they could not invest by borrowing the funds as the ‘cash proceeds’ of that loan would not have met the USCIS imposed requirements. The only alternative would have been a gift, which was often not desirable and created potential tax consequences. Now, under Zhang, unsecured loans are perfectly permissible.
Keep in mind that cash loan proceeds must still be proven coming from legal sources. If the loan is made from a credible financial institution, based on current adjudication standards, that should be enough; however, in the case of a loan from friends or family, proving the legality of how the creditor obtained the funds would still be required.
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.