The EB-5 program requires each investor to make a minimum of a $500,000 investment in a new commercial enterprise. The regulations make clear that the investment must be a contribution of capital, i.e. an equity investment. Specifically, a contribution of capital in exchange for a note, bond, convertible debt, obligation, or any other debt arrangement between the investor and the new commercial enterprise does not constitute a contribution of capital for EB-5 purposes. However, the regulations permit such a note or debt arrangement between the investor and the new commercial enterprise in one limited circumstance - when the note or debt is secured by the assets of the investor (and not secured by the assets of the new commercial enterprise).
For many years, EB-5 investors have monetized assets for use as a cash EB-5 investment by taking out a home equity loan on a property they own. Historically, USCIS also has allowed investors to take out a personal loan in the investor’s name and secured with a relative’s property, so long as that relative gifted the “use” of the real property as collateral for the loan. For example, an EB-5 investor may be employed abroad and have good credit, but perhaps he or she does not own a home with enough value to fully collateralize a loan for an EB-5 investment. The investor’s parents may sign a mortgage contract that collateralizes the investor’s personal loan with the parents’ property, with the end result that the investor is liable for the loan but if there is a default, the bank may foreclose on the parent’s property. Certainly, such a foreclosure does not mean there are no consequences to the investor and that the investor has no personal liability for the loan.
USCIS has recently changed its policy on this issue through the adjudication of I-526 Petitions. Following its April 22, 2015 Stakeholder’s call, USCIS issued a written summary of the Immigrant Investor Program Office’s (IPO) Deputy Chief’s remarks on the issue. From its recent adjudications and its written summary, USCIS has stated that if the investor takes out a loan secured by property that will be used as the EB-5 investment, than the collateral must be owned completely by the investor. This situation should be distinguished from a situation where a relative uses his or her property to collateralize a loan and that loan is also taken out by the relative and not the investor. In that situation, if the relative then gifts the cash proceeds of the loan to the investor, that gift of cash proceeds should be considered capital under the regulations and the EB-5 Petition should be approved. USCIS does not seem to be denying cases with those facts. Instead, USCIS is denying cases where the investor takes out the loan, but the loan is secured by the property of another (or even where the property is owned by the investor jointly with a parent or child under the theory that the investor cannot be personally and primarily liable for the loan). USCIS is reasoning that the act of taking out a loan in this manner constitutes an investment of “indebtedness,” which, under the regulations, must be secured by assets of the investor.
There are a number of reasons why this legal reasoning by USCIS is flawed. First, the statute at INA §203(B)(5)(A) does not define “capital” nor does it proscribe what types of “capital” an investor may invest. The regulations at 8 C.F.R. §204.6(e) define “capital” 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 and primarily liable and that the assets of the new commercial enterprise upon which the petition is based are not used to secure any of the indebtedness.” Under the Last Antecedent Rule of statutory and regulatory interpretation, the requirement that a capital contribution to a new commercial enterprise be secured is only applicable to contributions of indebtedness (e.g. a contribution of a promissory note to the new commercial enterprise). In the scenario described above, there is no debt arrangement between the investor and the new commercial enterprise; the investor has entered into a debt arrangement with an independent banking institution and he or she is investing cash, which is specifically allowed under the regulations.
It appears that USCIS is applying an overly broad definition of “indebtedness.” The definition of “indebtedness,” however, has already been decided through the immigration precedential decisions governing EB-5 petitions. Specifically, Matter of Hsuing, 22 I&N Dec. 201 (AAO 1998), and Matter of Izummi, 22 I&N Dec. 169 (AAO 1998), examined what constitutes a sufficient contribution of capital when an investor is contributing indebtedness. In Hsuing, the investor had entered into a payment agreement with the new commercial enterprise to make a $500,000 capital investment payable in three installments. In so doing, he contributed a promissory note in lieu of cash. Hsuing clearly interpreted “indebtedness” in 8 C.F.R. §204.5(e) as a promise to pay the new commercial enterprise in the form of a promissory note. An investment of cash into the new commercial enterprise, however, is not indebtedness or a promise to pay.
Likewise, in Matter of Izummi, the investor executed a promise to pay the new commercial enterprise over time instead of investing cash, which has a clear present value. Izummi specifically held that “[I]n the present case…the promissory note is not evidence that the petitioner is in the process of investing $500,000 of cash.” Izummi made a clear distinction between cash and a promissory note. Cash has a clear present value and demonstrates that an investor meets the capital requirements of the statute and regulations. A promissory note between the investor and the new commercial enterprise, or “indebtedness,” is paid over time and may fluctuate in value, making it difficult for USCIS to determine whether an investor will meet the minimum capital requirements under the statute and regulations. The precedent decisions of Hsuing and Izummi establish a clear difference between an investment of cash and a contribution of indebtedness to the new commercial enterprise that must be secured by the assets of the investor. A debt arrangement between the investor and an independent banking institution is therefore not “indebtedness,” as defined in the precedential decisions.
Interestingly, in its own policy guidance, USCIS accepts the limited definition of “indebtedness” as defined by Izummi and Hsuing. The USCIS May 30, 2013 “EB-5 Adjudications Policy” Memorandum PM 602-008 (the “Policy Memo”) expands on the definition of capital to note that it not only includes, cash, equipment and other tangible property, “but that it also can include the immigrant investor’s promise to pay (a promissory note), as long as the promise is secured by assets the immigrant investor owns, the immigrant investor is liable for the debt, and the assets of the immigrant investor do not for this purpose include assets of the company in which the immigrant is investing.” Moreover, a review of the regulations that govern “treaty investors” (a similar nonimmigrant category for immigrant investors) is particularly instructive because it was the express intent of Congress to mirror the definition of “capital” for the purposes of EB-5 Petitions with the definition of “capital” for treaty investors. The Legacy Immigration & Naturalization Service explicitly stated in the implementing regulations that “acceptable investment funds include such personal assets as a second mortgage on a home, unsecured or unencumbered loans or assets, and loans on the alien’s personal signature.” Accordingly, the E-2 implementing regulations allow for loans on the personal signature of the investor; this should be the case for EB-5 as well. Of course, it remains perfectly acceptable for USCIS to require evidence of the loan and that any collateral used to secure it was acquired lawfully.
Many stakeholders in the EB-5 community have expressed concerns over the USCIS treatment of these cases for the reasons described above. USCIS appears to be misapplying both the facts and the law. However, as a practical matter, USCIS is denying petitions where the investor takes out a loan, but the investor does not fully own the property that is used to secure that loan. It is likely that this issue will only be resolved at a policy level or through litigation with USCIS. If an investor chooses to take out a loan for the source of the EB-5 investment, it is important to examine the collateral and its ownership carefully for this issue.