By Jeffrey B. Carr
Time and time again over the last three to four years, the future of the EB-5 program has gone back and forth on the pros and cons of various program reforms. With larger issues such as Deferred Action for Childhood Arrivals (DACA) and border wall funding now hanging over broader immigration policy discussions in Washington, EB-5 reforms continue as a second or even third-tier issue.
The dawning of the new congress in 2019, with the change in control of the House, represents another, and perhaps the best opportunity in years to get a workable deal. A workable deal from the perspective of the industry means not only meeting the many challenges of a successful EB-5 program reform, but also successfully seizing the opportunity to reach an agreement on how to obtain an adequate number of visas for the program so it can reach its economic and job-generating potential.
The parts of the EB-5 program that are ripe for reform include: a near certain increase in the minimum EB-5 investment amount; revamping Targeted Employment Area (TEA) definitions; and a number of changes to the way that EB-5 regional centers and EB-5 project sponsors-managers must operate. The EB-5 regional centers’ proposed reforms have been initially designed to bring more structure to the way all regional centers and project developers and capital raisers must operate, administer, and report under the program.
MINIMUM INVESTMENT AMOUNTS AND TEAS
The range of proposals from various stakeholders to reform the minimum investment amount include those in the Department of Homeland Security (DHS) proposed regulations released back in January of 2017 and the increases proposed by the so-called Cornyn legislative proposal provided back in the Spring of 2017. As proposed by the DHS, the minimum investment amount for projects in a TEA would rise sharply to $1.35 million—an increase of $850,000 from the current minimum investment amount of $500,000 for TEA projects. The proposed DHS regulations also would increase the minimum investment amount for all projects not located in a TEA to $1.8 million—an increase of $800,000 from the current $1 million amount. EB-5 stakeholders have not been receptive to the rather severe DHS proposal. It is widely hoped that this DHS proposal would not be implemented without a significant reduction. The more workable numbers to the industry in the Cornyn legislative proposal would increase the minimum investment amount to $800,000 for TEA projects and $850,000 for all other projects.
Another area ripe for regulatory reform is how the program defines TEAs. Again, the range of TEA revision proposals have been largely defined by those proposed in the draft DHS regulations and the proposals included in the so-called Cornyn legislation. In both cases, projects that would qualify as a TEA project and for the lower minimum investment amount would be much more restricted. One independent analysis of the impact of the DHS’ TEA reform proposal indicates that the mix of TEA-qualifying projects would flip almost entirely—from a current mix of more than 95 percent of the projects qualifying for the TEA minimum investment amount (and less than 5 percent non-qualifying) to a post-reform project mix where only about 15 percent of the projects would qualify as a TEA project (and about 85 percent non-qualifying). Nearly all proposals would therefore result in a large increase in a typical project’s minimum investment amount. Because no one really knows how these minimum investment amount increases will impact program activity, the industry has been advocating for increases in the lower end of the proposed ranges.
PROPOSED CAPITAL RAISING, REGIONAL CENTER OPERATIONS CHANGES
The third area of concern for EB-5 reform relates to the proposed new requirements for the way that regional centers, project sponsors-managers, and marketing agents conduct themselves when planning, developing-operating, raising capital, and administering EB-5 projects. These proposed changes have been comprehensively reviewed by a number of parties—including two major EB-5 industry stakeholder groups and a distinguished group of securities attorneys-regional center operators—who are looking to advance a workable set of reforms. A number of suggestions were provided to counter the proposed changes made through the DHS’ regulatory proposal and in response to the most problematic aspects of the various legislative proposals. To date, the parties have not yet been able to come together in a consensus agreement to reform the EB-5 program.
Even so, finding some solution on a set of essential EB-5 program reforms remains crucial for all involved. It is critical because it is the only avenue to solving the real problem—which is finding a reasonable path to obtaining more visas to meet demand. Without the implementation of meaningful EB-5 reforms, there are few viable paths to an adequate supply of visas for the EB-5 program. The negative effects of an inadequate supply of visas have become painfully evident over the past several years as several EB-5 investor sourcing countries that have run up against their visa limits. The harsh reality that a potential mainland Chinese investor will have to wait more than 10 years to obtain legal entry into the U.S. through the EB-5 program has had a chilling impact on investor interest in that country. The EB-5 industry is also rightfully concerned that visa wait times have also significantly expanded for additional, critical EB-5 investor-sourcing countries such as Vietnam and India. It is only a matter of time before that also occurs for Brazil and South Korea.
FACTORS OF RETROGRESSION
The root cause of the program’s visa numbers problem reflects a combination of two factors: the unprecedented success of the EB-5 program over the last five or so years, and the way the U.S. Department of State counts (and limits) employment-based immigration program visas for certain countries. Regarding the first, the EB-5 program experienced unprecedented levels of interest in the aftermath of the U.S. “Great Recession”—when traditional sources of capital to fund projects dried up in the aftermath of the national financial crisis. Over the first roughly 20 years of the EB-5 program’s activities, investor interest in the EB-5 Program never came anywhere near using the total number of visas available to the program or to any single investor-sourcing country. That all changed when interest in the program grew, and EB-5 capital became an attractive source of capital used as substitute for very expensive, mezzanine-type equity capital. As a result, the EB-5 program is now being impacted for its record of success—for generating multi-billions of dollars in job-creating investment capital for hundreds of development projects. Indeed, over the last five years, EB-5 has become one of the U.S.’ most significant merit-based immigration programs, even against the backdrop of well-publicized stories of a few “bad actors” in the program.
Regarding the second and in the opinion of many, the U.S. Department of State (DOS) has been adding “insult to injury” to the above because of the way it has historically counted, and in many ways unnecessarily limited, the visa numbers it allows per country in the employment-based categories. The EB-5 program is limited to just under 10,000 each year. Further, for family-based and employment-based programs, the DOS has over the years allowed no more than 7 percent of the total annual allotment to go to any single country. Along with the DOS’ historical interpretation that spouses and dependent children must be counted against the per country cap, this approach to counting visa caps has severely limited the number of visas available to actual EB-5 investors to only about one-third of the level that could otherwise be possible if the visa numbers only applied to actual EB-5 investors. Critics point out that the DOS’ visa counting approach is nowhere to be found either in the law or in any duly-adopted program regulation. They suggest that the DOS’ way of counting visas is simply a convention based on a flawed reading of the law and legislative intent over the years.
This concern last July led to a widely-publicized class-action lawsuit, filed by 450 mainland Chinese investors and joined by at least one active regional center, challenging the way the DOS counts the spouses and children of investors (called derivatives) against the roughly 10,000 annual visa quota. The lawsuit explains that because the DOS counts each immediate family member of an investor against the annual 10,000 visa quota, this severely restricts the number of visas subject to the limits that actually go to investors. This DOS interpretation significantly increases visa wait times and thereby reduces the potential additional positive economic impact of the program which could be more effectively realized by counting only the investors’ visas against the annual visa limit. If the lawsuit prevails (or perhaps compels a policy change), instead of discouraging foreign investment by limiting the number of investors to only about a third of the annual visa limit total, a greater number of visas would be available for the project investors themselves. This would ideally lead to a significant reduction in the current visa backlog that is currently extending wait times and discouraging new foreign investment under the EB-5 program.
THE PROGRAM’S ECONOMIC IMPACT
To understand the economic significance of having an unconstrained EB-5 program, one peer-reviewed study of the contribution to the U.S. economy by the EB-5 program comes from the industry group Invest in the USA (IIUSA). The IIUSA study, which was conducted by the Center of Economic and Business Research at Western Washington University, estimated that the EB-5 program over the 2014-2015 time frame resulted in more than $11.23 billion in new investment and the creation of nearly 185,000 jobs for the U.S. economy. The 2014-15 period was a good one for the analysis of the EB-5 program’s economic potential, because it reflected a time when visa numbers were not limited by any visa caps. Overall, the study pointed out that an unconstrained EB-5 program’s new job creation alone amounted to roughly four percent of all private sector job growth for the U.S. economy over the two-year period examined.
Numbers like the above are simply too big to be ignored. They should be a clarion call to the EB-5 industry to set aside any differences and come together in agreement on a broad consensus of needed reforms as a critical first step to solving the program’s activity-curtailing, visa numbers shortage. A united industry front is perhaps the best way to break the current EB-5 reform logjam—where some in the past have exploited inter-industry differences to keep the program in limbo. Without a consensus that ensures the long-term viability of the program, an unconstrained EB-5 program’s potential impact on U.S. job creation and capital investment will amount to nothing but “lost opportunity.” As such, it appears that quite literally billions of foreign investment dollars and hundreds of thousands of new U.S. job opportunities over the next five years hang in the balance—dependent on the success of the industry’s 2019 efforts in this regard.
 “Invest in the USA” (or IIUSA). See https://iiusa.org/.
 The EB-5 Program is entitled to 7.1% of the 140,000 employment-based visas in a given year.
 It should also be recognized that there are also re-allocations to over-subscribed countries if there are unused visas in a particular program.
 Based on an average of roughly two family members that have historically accompanied each EB-5 Program investor.