By Marta Lillo
Investors in the EB-5 visa program must fully understand section 204.6 of the Code of Federal Regulations (CFR), a key regulation among the many federal and state laws governing the program.
This section is part of a federal law that oversees employment-based immigrant visas, such as the EB-5 investor visa program. This regulation outlines the requirements for petitions for employment-creation immigrants, including EB-5 investors. The rule applies to both EB-5 direct investors and regional center investors.
However, this rule also governs the participation of non-EB-5 investors and regional centers (RC) in the capital stack of these projects. The first are individuals who do not seek immigration benefits under the investor visa program but contribute capital to an EB-5 project. The second are approved entities established under the EB-5 immigrant investor program guidelines, regulated by the United States Citizenship and Immigration Services (USCIS).
Both play a critical role in projects. Individual non-EB-5 investors commonly pool capital into a project as partners of an applicant when the latter decides to invest directly instead of through an RC. Meanwhile, many regional centers contribute capital to the projects they sponsor for EB-5.
Like their EB-5 counterparts, they can participate in an EB-5 investment provided their capital is lawful and with an identified source.
In many cases, these investors already live in the U.S. and prefer to be silent partners of family members or close acquaintances applying to EB-5 or choose to participate because it’s good business. “The non-EB-5 funds usually go to the JCE [Job Creating Entity], not NCE [New Commercial Enterprise],” says Joseph Barnett, partner at WR Immigration.
However, the amount and depth of information these non-EB5 investors must provide to USCIS is a matter of debate.
USCIS’ interpretation of section 204.6 for direct EB-5 investments
Samuel Newbold from CSG Law explains that the “USCIS is taking a position in some direct cases, not all of them. They have not applied this rule consistently across all adjudications, which is against the law, but they do it anyway; it violates the Administrative Procedures Act for them to not apply a law or a rule consistently across all adjudications. We started to see the 204.6(g) regulation that USCIS is applying to direct investment in SOEs [Single Operating Entities] or a holding company with wholly owned subsidiaries. And they’re saying that the source of capital not from an EB-5 investor must also prove that it’s from a lawful source. A number of different immigration attorneys I’ve spoken with have had this issue pop up in their cases to varying degrees of success.”
Newbold adds that in many cases, non-EB-5 investors provide minimal information like a letter or a statement showing their capital was lawful or tax returns, “but never on the same level as the EB-5 direct investor because that’s just not practical in a business sense.”
The USCIS requiring the same level of depth in the information for non-EB-5 investors, when they are not pursuing a green card, is a “very problematic behavior,” Newbold adds.
“EB-5 was intended to be flexible,” the attorney insists. “It was intended to be used to promote economic development activity, not restrict it. So why would you want to interpret a regulation that makes it very difficult to use EB-5 in everyday types of transactions? The statute and the regulations have always contemplated EB-5 investor’s capital being combined with non-five investment capital and for EB-5 investors to get the credit of all of that capital.”
He adds that the EB-5 investor already meets the program’s legal statute if they invest their funds in a for-profit entity that meets state and federal laws and create the minimum ten jobs required, regardless of whether they combine their capital with non-EB-5 money.
“And yet, USCIS interpretation of 204.6(g) is antithetical. It makes no sense as a matter of law. It makes no sense as a matter of policy, and it generally makes no sense in the real world,” Newbold argues.
Securities and litigation attorney Robert Cornish explains that the issue regarding 204.6(g) depends on whether there actually are non-EB-5 investors taking equity stakes in the projects like EB-5 investors do. “If so, what disclosures they require, if any, depends on their status and the offering exemptions relied upon, including institutional exemptions. Such participants in the capital stack have vastly more resources to perform due diligence or evaluate projects than the ‘garden-variety’ EB-5 investor. Even so, other capital stack participants may simply be conducting straight loan transactions without an equity component. Transactions of this size by custom and practice likely already have adequate risk disclosures.”
However, it is unclear what disclosure is sufficient for a true EB-5 lender under the regulation, according to Cornish. “Whether such disclosures for a true lender are adequate under 204.6(g) remains to be seen. Even if the disclosure isn’t on the mark, what remedy does an investor have for a 204.6(g) violation, assuming that the alleged violation is a proximate cause of financial harm,” he questions.
Meanwhile, Barnett cautions that this approach could discourage individuals from making direct EB-5 investments. “A lot of folks who could be interested in partnering with a direct EB-5 investor don’t. Who to go down that path, who wants to give the federal government all that financial information? This is something that USCIS has been bringing up over the past few years for direct cases.”
This interpretation of the regulation would also be affecting RC investment in EB-5 projects. “204.6(g) applies to both RC and direct cases. It has the potential to impact RC sponsored projects depending on how they are structured,” Newbold adds.
According to Barnett, USCIS is not requiring RC investors to show the lawful source of capital invested by other RC investors.
How EB-5 investors should prepare their potential business partners
Barnett cautions that direct EB-5 investors “should be speaking with potential business partners about this requirement at the initial stages of forming a business plan to ensure they are willing and able to provide some documents related to the source of non-EB-5 capital in the NCE.”
The lawyer advises being proactive instead of waiting for a Request for Evidence (RFE) to “find out a business partner is unwilling or unable to in a short period of time to respond.”
This interpretation by the USCIS may impact certain petitions but not all. Phil Cohen, business plan writer and the president of Strategic Element, stated that he still writes business plans that illustrate non-EB-5 investors investing with EB-5 investors, and he hasn’t “heard from the lawyers suggesting that we do otherwise.”
However, if the USCIS requests the same level of financial information from EB-5 and non-EB-5 investors in a direct investment, “it does seem like an incorrect interpretation, unless there is something in the RFE that explains the reasoning, beyond just a simple rejection of the premise,” he says.
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