Why the Definition of “Capital” for the Purposes of the EB-5 Program Should be Broad

by Dillon Colucci

The purpose of the EB-5 program is to foster foreign investment in the United States which will create jobs in underdeveloped areas.[1] Indeed, one of the recent bi-partisan proposals to amend the law which enables the EB-5 program to function explicitly states, with respect to the regional center aspect of the EB-5 program, that such program “…has been designated by the Secretary of Homeland Security on the basis of a proposal for the promotion of economic growth, including prospective job creation and increased domestic capital investment.”

Despite this, beginning in the middle of 2014 and culminating in written guidance issued on April 27, 2015, USCIS has made a policy decision to disallow investments of cash when such cash is not fully secured by the alien entrepreneur’s assets.[2] It is believed this policy decision stemmed from a non-binding Administrative Appeals Office (AAO) decision from May 2014.[3] In that case, the AAO determined that Matter of Soffici, a precedent decision from the AAO, precluded cash proceeds obtained via a loan from being evaluated as if they were “cash,” as that term is used at 8 C.F.R. 204.6(e).[4] Thus, the AAO found cash proceeds obtained via loan must be analyzed as if such cash were “indebtedness.” Accordingly, the AAO evaluated the “cash” in question as if it was a contribution of a promissory note, which is how “indebtedness” is defined under Matter of Izummi and Matter of Hsiung.[5] Izummi and Hsiung laid out strict guidelines of how a promissory note can be valid under the EB-5 program, which include the requirement that the promissory note be fully secured by assets of the alien entrepreneur.

Unfortunately, this analysis is very flawed. By definition, a promissory note is a promise to pay in the future, not a present investment. Practically speaking, a promise to pay is the antithesis of a cash investment. Thus, equating an investment of cash to a promise to pay in the future does not make logical sense. Furthermore, it appears contrary to the goal of promoting economic growth to constrain the ways and means for alien entrepreneurs to invest lawfully obtained capital into private enterprises in furtherance of the creation of jobs for U.S. workers. The definition of “capital” under the regulations is as follows:

“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. All capital should be valued at fair market value in United States dollars. Assets acquired, directly or indirectly, by unlawful means (such as criminal activities) shall not be considered capital for the purposes of section 203(b)(5) of the Act.”

For over twenty (20) years, USCIS recognized Congressional intent to maintain a broad definition of “capital” in order to maximize the promotion of job creation within the United States. This position was supported by the legislative history of the EB-5 program. During the legislative history of the EB-5 program the Senate Judiciary Committee formally endorsed the requirements already used by the treaty investor program (E-2) when it discussed defining “capital,” signaling its intent for a broad definition of the word.[6] The Foreign Affairs Manual and USCIS policy governing the E-2 program’s definition of “capital” explicitly includes cash obtained from a personal loan (i.e. a loan with no collateral) to be an acceptable investment. Furthermore, Legacy INS, the department which was replaced by USCIS, explicitly recognized this Congressional intent in the Federal Register by stating:

“[T]he Service has expanded the definition of capital for two reasons. First, the legislative history of the Act suggests that Congress intended the definition to be broad…[S]econd, the overwhelming majority of those commenting on this issue supported such a change, believing that excluding debt from the definition of capital would ignore modern business practice and severely limit the number of investors eligible or willing to apply under the employment creation provision.”[7]

This rationale behind the definition of “capital” still holds true today. Excluding certain forms of “capital,” such as cash derived from a mortgage loan which is secured by real property not 100 percent wholly-owned by an alien entrepreneur ignores modern business practices and severely limits the number of investors eligible or willing to apply. The effect of this exclusion is to reduce the number of U.S. jobs which could be created through the EB-5 program.  Furthermore, constraining who can gift lawfully obtained “capital” to an alien entrepreneur would also directly reduce the number of U.S. jobs which could be created through the EB-5 program.[8] These constraints on the definition of “capital” and how such “capital” can be obtained do not reduce fraud or allow the investment of unlawfully obtained “capital” because the requirement that all “capital” must be derived from lawful sources of “capital” remains intact.

This discussion regarding the definition of “capital” is necessary because of recent actions by USCIS to limit investments of cash derived from the proceeds of a mortgage loan where such loan is not secured by a property the alien entrepreneur solely owns. For example, an alien entrepreneur who has proven to USCIS satisfaction that he or she has lawfully earned the monies used to purchase a property, and who now seeks to mortgage that property to obtain cash to create U.S. jobs, will have his or her I-526 Petition denied if he or she owns that property with anyone other than his or her spouse (i.e. if the alien entrepreneur owns the property with a parent or child). USCIS has taken the position that it does not matter if the cash used to purchase the house was lawfully sourced. The mere existence of a third-party (i.e. a child) with co-ownership rights, even where the third-party has officially consented to the mortgage and has formally gifted any rights to the proceeds to the alien entrepreneur without an expectation of return, will cause a denial. In such situations, USCIS claims that the property is not fully secured by assets the alien entrepreneur owns.

In a real world context, consider if entrepreneur were to mortgage a property co-owned by him and his mother (assuming he has demonstrated a lawful source of capital to purchase the property) to obtain cash to start a business. The mother signed an affidavit stating she consented to the use of the property and is gifting any proceeds received by her son for this purpose. No one would or could claim that such cash used to start the business was not the entrepreneur’s. Furthermore, the cash invested would not represent a debt of the new business, as the cash is not secured by the business or any of its assets and is freely available to the business to create jobs. However, under USCIS’ interpretation of “capital” this entrepreneur would not be allowed to invest in the United States and create U.S. jobs through the EB-5 program. Thus, this interpretation of “capital” only serves to reduce the amount of U.S. jobs that can be created through the EB-5 program.

Other than the flawed reading of the case precedent decisions discussed above, there does not seem to be a valid rationale for constricting the definition of “capital.” This makes it hard for EB-5 program stakeholders to understand the motivations behind this change of policy by USCIS.  Because a broad definition of the term “capital” would maximize the program’s ability to create jobs for U.S. workers and fulfill the laws purpose of promoting economic growth in the United States through foreign investment, any pending legislation should include language to accomplish this.

EB5Investors.com Staff

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