By Catharine Yen and Christian Triantaphyllis
The word “guarantee” has become a scary, taboo word in the EB-5 field. Rightfully so, EB-5 practitioners should be cautious of redemption agreements and guaranteed returns of the capital investment written in the EB-5 project documents because that language negates the required “at-risk” element of an EB-5 investment.
Nevertheless, there are instances in the EB-5 field when certain guarantees are permitted. When reviewing EB-5 project documents, it is important to not reflexively dismiss a project because there are certain guarantees. This article will distinguish the difference between permissible and impermissible guarantees in the EB-5 field so that EB-5 practitioners and investors can better evaluate projects and projects can offer their investors more assurances regarding the investment.
Impermissible Guarantees in the EB-5 Field
The regulations at 8 CFR 204.6(e) provide that in order to qualify as an EB-5 investment, the immigrant investor must place “the required amount of capital at risk for the purpose of generating a return on the capital placed at risk.” For the capital investment to be considered “at risk,” there must be a risk of loss and a chance for gain. First and foremost, a guaranteed return of an immigrant investor’s capital investment from the new commercial enterprise (“NCE”) is impermissible. Generally, the NCE cannot promise or guarantee to pay back the immigrant investor’s capital investment because USCIS does not consider the investment to be “at risk” If that type of language is included in the project documents.
Similarly, the return on the immigrant investor’s capital investment cannot be guaranteed. As stated in Matter of Izummi (and reiterated in the USCIS May 2013 Policy Memo), “If the immigrant investor is guaranteed the return of a portion of his or her investment, or is guaranteed a rate of return on a portion of his or her investment, then that portion of the capital is not at risk.” This means that the NCE also cannot promise or guarantee a return, interest, or distribution of profits to the immigrant investor. While it’s entirely permissible for a successful project to distribute a return on the immigrant investor’s investment (i.e., profit distributions or interest payments) during or after the immigrant investor’s conditional residency period, this return on investment cannot be guaranteed (and it cannot be a portion of the immigrant investor’s principal investment) by the NCE.
Additionally, the immigrant investor may not demand a return or redeem a portion of the capital investment from the NCE even after obtaining conditional lawful permanent resident status because USCIS will consider that the capital investment is not “at risk.” This means that the NCE cannot guarantee a refund or return of the capital investment even after the I-829 petition is filed. Similarly, the investor cannot be guaranteed the right to ownership of a property or asset in consideration of the immigrant investor’s capital investment in the NCE because this negates the element of risk.
Thus, when reviewing the “distributions” section of private placement memorandum (PPM) of the investment opportunity, a description of each investor having an opportunity for monetary gain through distributions based on the investor’s equity ownership of the fund should pass muster with USCIS. Further, if the PPM states that no portion of the investor’s investment will be returned to the investor until that investor’s I-829 petition has been adjudicated by the USCIS, but may be returned after the adjudication of I-829 petition at the discretion of the NCE, understand that this language protects the investor by demonstrating that the EB-5 investment will be sustained through his or her EB-5 immigrant process and is not guaranteed to be returned at any time.
The underlying theme in all of these scenarios is that the investment must be an at-risk investment. Guarantees in the aforementioned situations invalidate the at-risk element, and thus they are impermissible guarantees in the EB-5 field.
Three Types of Permissible Guarantees in the EB-5 Field
Although we need to be cautious about the use of the word “guarantee” in project documents, instances exist when USCIS does permit guarantees in EB-5 project documents.
- Guaranteed refund of capital investment by the NCE upon denial of I-526 or CLPR admission.
Per the May 2013 USCIS Policy Memo, “an investor’s money may be held in escrow until the investor has obtained CLPR status if the immediate and irrevocable release of the escrowed funds is contingent only upon approval of the investor’s Form I-526 and subsequent visa issuance and admission to the United States as a conditional permanent resident [...]” (Emphasis added). The escrow agreement shows that the EB-5 investor is irrevocably committing his funds to the NCE; he has relinquished control of the funds and his funds will be released from escrow once certain escrow conditions are met (usually after I-526 petition approval). In this scenario, because the investor’s funds are irrevocably committed to an escrow account, USCIS is allowing the investor’s actual investment to the NCE to occur after the I-526 petition has been approved (i.e., when the funds are released from escrow).
This type of escrow arrangement that allows for the release of funds to occur at the time of I-526 petition approval implies that the funds can be returned to the investor if the I-526 petition is denied, and a guarantee to do so is permitted by USCIS. USCIS commonly approves I-526 petitions that have this type of escrow arrangement.
Similarly, the May 2013 USCIS Policy Memo also states, “If the agreement between the [NCE] and the immigrant investor […] provides that the investor may demand return of or redeem some portion of capital after obtaining conditional lawful permanent resident status […], that portion of capital is not at risk” (Emphasis added). The memo clearly states that the EB-5 investment is not at risk if a guaranteed return of the investment is offered after obtaining CLPR status. Again, because of this language, we conclude that USCIS is also implying that the NCE may issue a refund or return of the investor’s EB-5 investment before the EB-5 investor obtains CLPR status if a denial of I-526 petition or CLPR status occurs. Again, USCIS commonly approves cases where the controlling agreement of the NCE allows for a guaranteed refund of the capital investment upon denial of the I-526 petition or CLPR status.
It’s reasonable that USCIS accepts this language in EB-5 project documents because most EB-5 investors are willing to make the EB-5 investment because of the possibility of obtaining a green card. If the I-526 petition or application for CLPR status is denied, then there is no legal immigration basis for the EB-5 investor to obtain a conditional green card. Naturally, the EB-5 investor would rather withdraw the EB-5 investment.
- Guaranteed refund of capital investment by the project developer upon denial of I-526 petition or CLPR status.
As stated above, USCIS is accepting language in EB-5 project documents whereby the NCE can guarantee a refund of the EB-5 investor’s investment upon denial of the I-526 petition or CLPR status.
In the past, escrow accounts were structured such that funds would be released upon the approval of an investor’s I-526 petition. However, due to long USCIS I-526 processing times, escrow agreements now commonly allow for the early release of EB-5 funds into the project. An issue arises if the I-526 petition is denied after the investment funds have already been released from escrow and spent on the project. In this scenario, the NCE no longer has funds on hand to refund the investor with the I-526 petition denial. As a result, USCIS is also currently accepting language that calls for the refund of the investment to the EB-5 investor upon denial of the I-526 petition or CLPR status that is guaranteed by the JCE or its affiliates, otherwise known as the project developer with cash on hand to make such a refund. One can see that the need to offer the investor a refund guaranteed by the JCE is a matter of practicality because the NCE is less likely to still have access to the investor’s investment funds if the I-526 petition is denied.
- Loan from the NCE to the JCE can be guaranteed
As previously discussed, the return of the immigrant investor’s investment into NCE cannot be guaranteed in any way because it negates the required “at-risk” element of an EB-5 investment. In other words, the NCE cannot promise to pay back any portion of the immigrant investor’s EB-5 investment.
However, a different scenario involves the Job Creating Enterprise (“JCE”), such as the project developer, guarantying to pay back the loan made by the NCE. For example, the JCE provides collateral to secure the EB-5 loan to provide assurance that the NCE will obtain an asset if there is a default on the loan. Furthermore, the JCE may guarantee that the loan will be paid back to the NCE. This guarantee is one step removed from the relationship between the EB-5 investor and the NCE, and USCIS is currently allowing such guarantees between the JCE and NCE.
Due to the fact that USCIS accepts certain guarantees, but rejects other guarantees, investors should not dismiss consideration of an EB-5 project solely for the use of the word “guarantee” in the project documents. Instead, investors and their lawyers should carefully read the language in the documents to determine if the language will be permitted by USCIS.