By Osvaldo F. Torres and R. William Cornelius
The growing visa backlog for certain countries, especially those investors from Mainland China, has forced EB-5 investors, regional centers and new commercial enterprises (NCE) to reassess their expected “exit” from EB-5 projects. The requirement that investor funds need to be redeployed to maintain the investment “at risk” for those EB-5 investors that have yet to obtain conditional permanent residency has changed the EB-5 program’s landscape in ways that were not contemplated at the inception of the program.
Redeployment considerations have become almost as critical a component of an EB-5 offering as the original project and require careful analysis by the parties tasked with structuring redeployment strategies. While such parties almost certainly include, as applicable, the NCE’s general partner or manager (GP), it may also include foreign migration agents. A foreign migration agent’s exact role in the redeployment process is a source of contention and likely varies by project but is a key discussion point.
For example, should migration agents be actively involved in the decision-making? Are they relegated to serving as just an intermediary between the NCE and EB-5 investors? Let’s explore the relative considerations of the respective parties in the redeployment context regarding how fiduciary duties and broker-dealer considerations can affect both issuers and foreign migration agents. Investment advisor considerations are beyond the scope of this article, although it may have applicability under appropriate facts.
Redeployment is vexing because USCIS’s published guidance has created more questions than answers. In practice, this has confounded EB-5 issuers as they face mounting pressure from EB-5 investors and their migration agents. Worse, the GP is left to grapple with the fiduciary duties it owes to EB-5 investors as they try to effect redeployment strategies. Generally, the GP acts as a fiduciary to the NCE and its limited partners. As such, a GP owes certain legal duties to the limited partners who have entrusted the GP with control. Because limited partners have vested control with the GP under the auspices of trust and confidence, fiduciary duties are designed to ensure the GP places the interests of the NCE and its limited partners before its own interests. Although the exact standards for fiduciary duties can vary by state, a GP typically owes duties of care and loyalty as well as the obligation to operate in good-faith.
Consequently, a GP that must effect a redeployment cannot do so without considering the best interests of the NCE and its limited partners. The GP’s fiduciary duties will require the GP to act in a reasonably prudent manner and include not only the traditional duties of any other general partner, but also encompass elements that are unique to the EB-5 Program. In such regard, the GP’s consideration should include, the impact, if any, that the redeployment strategy will have on the immigration benefit sought by the limited partners, including ensuring that job creation requirements have been or are likely to be satisfied and maintenance of the “at risk” requirement.
But the GP is not alone. It is not unusual for foreign migration agents to want to intercede in the redeployment process. Given the emerging importance of redeployment and its potential impact to EB-5 investors, foreign migration agents may seek to negotiate redeployment terms in the migration agent agreement entered into between the NCE and the agent. Regional centers, developers and EB-5 issuers are likely to have to provide foreign migrations agents with certain contractual rights with respect to redeployment. Set forth below is an example of one such provision:
“As disclosed in the offering documents, finder understands that in the event that the EB-5 Borrower repays the loan made to it by the company using the proceeds of the financing, the company may be required to redeploy such repaid loan proceeds for the development of one or more projects (each a “Redeployment Project”) to remain in compliance with the requirement of the EB-5 Program (including satisfaction of the “at risk” requirements thereof). Upon the company identifying a redeployment project, the company shall provide written notice to finder of its intent to enter into definitive documentation to provide financing to a redeployment project (“Redeployment Notice”). The redeployment notice shall include a summary of the redeployment project and a copy of all information deemed relevant by the company to assess the financial viability of the redeployment project.
During the fifteen (15)-day period following delivery of the redeployment notice (the “Redeployment Review Period”), company shall consult with finder regarding the merits of the redeployment project. Subject to applicable law and the terms of the company’s operating agreement, if after finder has surveyed the disbursed subscribers and finder, before the termination of the redeployment review period, certifies to the company that at least two-thirds (2/3) of the disbursed subscribers object to the redeployment project (the “Certification”), the company shall terminate all discussions regarding the proposed redeployment project and shall not take any measures to consummate such redeployment project; provided, however, that upon written opinion of outside counsel, the company shall have the right, notwithstanding receipt of the certification, to consummate the proposed redeployment project if failing to do so would be contrary to applicable law or be deemed a breach of the company’s fiduciary duties to the disbursed subscribers.”
In the example above, the foreign migration agent negotiated for the right to receive notice and the opportunity to consult with the NCE and its EB-5 investors regarding any contemplated redeployment projects. Though ultimately this sample provision permits the NCE to effect a redeployment despite investor revolt if not doing so would constitute a breach of its fiduciary duties, this provision makes clear that the role of the migration agent can extend far beyond merely identifying or procuring investors. In fact, granting such rights to foreign agents quite possibly affords these agents even greater rights with respect to a redeployment decision than limited partners themselves may be granted in the NCE’s limited partnership agreement. By accepting the grant of such rights—and this is a precautionary note to foreign migration agents—one could argue that any foreign migration agent that negotiates for the types of rights noted above may be taking on the same fiduciary duties of care and loyalty, and thus the attendant liabilities for any breach thereof, that the GP owes to its investors.
Ultimately, courts may be tasked with determining whether foreign migration agents owe investors fiduciary duties, but the role of agents within redeployment certainly should include the obligation that they act in the best interests of the EB-5 investors they recruited into the deal. The agent’s role should include conducting an objective review of potential redeployment projects, weighing the perceived risks and benefits of such projects and disclosing any potential conflicts of interest, including any additional compensation payable to agents, if any, during the extended “at risk” period of redeployment.
In addition to having to consider fiduciary duties, there are possibly broker-dealer considerations for issuers and possibly foreign migration agents acting for, or on behalf of, investors in the context of redeployment. The Securities Exchange Act of 1934, as amended (Exchange Act) defines a “broker” as someone who is engaged in the business of “effecting securities transactions” for the account of others. While a broker must clearly be acting for the account of others, the Exchange Act does not expressly define “engaged in the business” or “effecting securities transactions.” However, courts have generally given broad meaning to such terms and have held that the following could constitute broker-dealer activities: assisting in the structuring of a prospective securities transactions; helping an issuer to identify potential purchasers of securities; screening potential participants; soliciting securities transactions, including marketing and advertising activities; negotiating between the investors and issuer; assessing or making valuations as to the merits of a proposed investment or giving advice in connection therewith; taking orders or facilitating the execution of a securities transaction; handling customer funds and securities; and preparing and transmitting transaction confirmations.
To the extent foreign migration agents take an active role in the redeployment decision making process, it is possible that they may become so intertwined with the issuer that they either become fiduciaries themselves or could be deemed broker-dealers who are effecting securities for the account of the NCE’s EB-5 investors. Since a foreign migration agent, who has been granted the right to approve a redeployment is likely to evaluate the merits of such project, it is possible that a foreign migration agent’s role in such redeployment could bring them within the scope of a broker under the Exchange Act to the extent that they are “effecting securities transactions.” This is especially true where the original offering did not contemplate redeployment and investor consent is necessary and/or an additional offering is required to be effected to proceed with a redeployment project.
Importantly, however, it has been the general view that overseas migration agents that remain strictly offshore are not subject to the jurisdiction of the Securities and Exchange Commission (SEC). While that may be the case in practice to date, one should keep in mind that SEC may, nonetheless, bring an enforcement action against the NCE for unlawfully engaging an unlicensed broker-dealer -- even if that broker-dealer is acted entirely off-shore. As a result, both issuers and migration agents may not fully focus on or completely understand the full impact of improperly engaging an unregistered broker-dealer and the adverse impact that an SEC claim would have on a project (and by extension, its investors).
Since the redeployment landscape continues to evolve, it is increasingly important for investors and project principals to understand the mechanics of redeployments and the impact a redeployment may have on the investors and the project. It is also critical to identify the roles of the different parties involved and the ramifications for failing to abide by fiduciary duties or comply with existing securities laws. As a result, EB-5 investors and project principals are well advised to seek competent counsel to review redeployment mechanics in order to account for fiduciary duties and broker-dealer considerations and to help avoid potential liability for the NCE, the GP and potentially the foreign migration agent.
 For ease of reference, this article describes fiduciary duties as they apply to the general partner of a limited partnership since USCIS has recognized limited partnerships as appropriate investment vehicles for the purposes of satisfying certain management requirements under the EB-5 program. However, the fiduciary duties that the manager of a limited liability company owes to its members are substantially similar to the fiduciary duties described in this article.