By Mariza McKee and Robert Ahrenholz
Visa backlogs result from more people applying for a visa in a particular category or country than there are visas available.1 The drawn-out timeframe for completion of the EB-5 immigration process, from Form I-526 filing to Form I-829 adjudication, continues to create new problems for regional centers and project sponsors as the queue of EB-5 investors born in Mainland China grows longer. These EB-5 investors are estimated to face at least a six-year wait before a visa number is made available to them for immigration to the United States. Based on some common EB-5 deal structures (e.g. five-year loan transactions), EB-5 investments deployed by new commercial enterprises to job creating entities may be repaid to the new commercial enterprise (a “Repayment”), and available for ultimate repayment to EB-5 investors, during the visa number assignment waiting period.
Repayment is problematic. To remove conditions on an EB-5 investor’s conditional residence status, as set forth in 8 U.S.C. § 1186b(d)(1) and 8 C.F.R. § 216.6(a)(4), EB-5 investments must be “at risk” and “sustained throughout” the period of the EB-5 investor’s conditional permanent residence in the United States (including during Form I-829 adjudication). Many new commercial enterprises have provided for redeployment of Repayments (a “Redeployment”) received prior to removal of conditions to get ahead of this issue. The solution to these issues from an EB-5 regulatory compliance standpoint, however, is not as simple as adding a Redeployment right to the operative offering documents. Redeployments implicate several securities law considerations. This article addresses some of the more common securities law issues that should be considered in connection with structuring Redeployments in EB-5 transactions.
Sustained, “At Risk” Investment During Form I-526 and Form I-829 Adjudication
To reiterate, if EB-5 funds are repaid to a new commercial enterprise and adjudications of both the applicable Form I-526 and Form I-829 investor petitions have not yet occurred, the corresponding EB-5 investments to meet the “at risk” and “sustained investment” requirements if the invested funds remain in the new commercial enterprise as cash (whether held in the new commercial enterprise’s bank account or an escrow account) or even if they are invested by the new commercial enterprise in other investments that are ultimately determined not to be “at risk.” The USCIS May 30, 2013 Policy Memorandum stated that for EB-5 capital to be considered “at risk” the EB-5 investor must face both a risk of loss and a chance for gain relative to his or her investment. Although we expect further guidance on both the “sustainment” and “at risk” requirements in the form of a Policy Memorandum2 from the USCIS, which is forthcoming, present guidance from USCIS has not provided sufficient clarification. Some new commercial enterprises have determined that a prudent use of Repayment funds is to invest such funds into an additional job creating entity (an “Additional EB-5 Project”).3
EB-5 Investment Redeployment and Securities Law Issues
New commercial enterprises that elect Redeployment of EB-5 investor funds into Additional EB-5 Projects for the purpose of sustaining “at risk” investments should consider several securities law issues, depending primarily upon how the Redeployment is effectuated. The key consideration is whether Redeployment causes EB-5 investors to face a new investment decision for purposes of the Securities Act of 1933, as amended (the “1933 Act”) and, if investment company issues are involved, whether the Redeployment will continue to provide an exemption under the Investment Company Act of 1940, as amended (the “1940 Act”). Additionally, a Redeployment of funds may necessitate analysis of the Investment Advisers Act of 1940, as amended (the “Advisers Act”) and applicable state investment adviser laws.
1933 Act Guidance
The Securities and Exchange Commission (the “SEC”) has not provided any specific guidance on structuring a Redeployment in the context of EB-5 offerings. The SEC, however, has provided guidance in other related situations that are of some assistance in providing securities law guidance involving such restructurings. This guidance in some cases relates to registered offerings, but remains relevant because it also relates to guidance as to whether there is deemed to be the sale of new securities for which an exemption must be available if not registered.
The first to look to relates to blind pool offerings, which have generally involved real estate and oil and gas offerings. Registered blind pool offerings that describe the parameters of investments to be made by an issuer after investors have made their initial investment decision do not require that a new investment decision be made if the investments are made in accordance with the parameters set forth in the related offering document and if such investments are determined by the general partner or managing member, as the case may be. Likewise, in the context of registered asset-backed financings where the assets are not fully identified at the time of the initial offering, new investment decisions are not deemed to be made when those assets are later identified, so long as the parameters of such assets are identified in the offering materials and investors do not vote on their selection or inclusion. In these two situations, the SEC has taken the position that no new investment decision is being made upon the later purchase of assets by the issuer and, thus, a new offering of securities has not occurred for 1933 Act purposes.
Perhaps the most relevant guidance from the SEC with respect to Redeployment relates to how the SEC has historically treated assessments,4 particularly with respect to oil and gas offerings. Assessments, in this context, can either be deemed mandatory or voluntary. Mandatory assessments generally arise as the result of the initial investment decision made by investors if they initially agreed to such further payments to the issuer within the parameters set forth in the offering materials. Thus, no new investment decisions are made when investors later determine whether or not to pay mandatory assessments.
The above-described scenarios all have one thing in common: no new investment decision is deemed to be made by investors when assets are later acquired or a mandatory assessment is subsequently called by the issuer and, therefore, there are no 1933 Act implications arising as a result thereof. However, there are other situations where new investment decisions are being asked of investors that do raise significant 1933 Act securities law issues, and that should be considered when structuring a Redeployment. These situations occur when, as a result of a Repayment made to a new commercial enterprise, investors are given a choice of (a) a dissolution of the new commercial enterprise and the receipt by investors of a proportionate share of the Repayment proceeds or (b) the approval of a new investment into a new and different job creating entity in order to preserve the sustained “at risk” and job creating requirements of the EB-5 Program.
The implications of making a new investment decision at the time of a Redeployment requires an analysis of the requirements for a new offering of securities at the time of making that decision.5 This raises many securities law issues for issuers, such as whether Regulation D, Regulation S, or Regulation A+ would then be available as an exemption for the new securities offering. Regulation D would be problematic because of the lapse of time since the original offering and determining whether all investors would then be accredited, and Regulation S would have related issues in determining whether all conditions of the Regulation could then be satisfied, which is unlikely since the EB-5 investors will most likely then be in the United States.
1940 Act Considerations
If a Repayment is made and the new commercial enterprise originally relied upon an exemption under the 1940 Act, then the new commercial enterprise will be required to consider a new 1940 Act exemption or operate so as not to be deemed an investment company when structuring a Redeployment.
If the new commercial enterprise initially relied upon the exemption provided by Section 3(c)(1) of the 1940 Act, then it will need to ensure continued reliance or find another exemption by analyzing whether the number of investors remains at no more than 100 people. The more difficult analysis would involve an initial reliance on Section 3(c) (5)(C) (the qualified real estate exemption) and whether an investment in an Additional EB-5 project would continue to be so qualified. If not so qualified, then the Section 3(c)(1) exemption may be available but only if there are no more than 100 investors. Other 1940 Act exemptions may be available, but if not structured into the initial investment, they may prove difficult to satisfy.
Investment Adviser Considerations
A Redeployment also raises Advisers Act and state investment adviser law issues, an analysis of which depends upon how the Redeployment is effectuated, as well as other factors including the number of other clients being advised and the value of the assets under management with respect thereto. This is important because the Advisers Act exempts an adviser from registration if it has fewer than 15 clients during the preceding 12 months, and state adviser laws are also triggered depending upon the number of clients under advisement and the amount of assets under management.
For purposes of counting the number of clients, all types of clients are counted without regard to accreditation and, after the threshold of 15 clients is met, registration under the Advisers Act or applicable state laws is required unless the value of assets under management threshold is not met and the adviser does not hold itself out generally to the public as an investment adviser. The SEC has provided some, but not a significant amount of, guidance regarding whether the general partner or managing member of a new commercial enterprise is advising a single client (e.g. the LP or the LLC) or multiple clients (e.g. the individual limited partners or members). If multiple clients are deemed to be advised, then all limited partners or LLC members must be counted as clients for purposes of the Adviser Act. Rule 203(b)(3)-1 of the Advisers Act provides that a new commercial enterprise would likely be considered a single client if that entity receives investment advice based on its investment objective or stated purposes as opposed to the individual objective of its limited partners or members. In addition, the SEC has provided no-action letter relief where a general partner has offered limited partners a choice between receiving a distribution in kind or in cash where no recommendation between the two alternatives was provided by the general partner. 6 On the other hand, no-action relief was not granted in a number of situations where the general partner contracted with individual limited partners with respect to investments (Six Pack, SEC No-Action Letter (Nov. 13, 1998)); investment amounts (WR Investment Partners Diversified Strategies Fund, LP SEC No-Action Letter (Apr. 15, 1992)); and tax issues (Burr, Egan, Deleage & Co., Inc. SEC No-Action Letter (Apr. 27, 1987)). When applying this guidance to a Redeployment where EB-5 investors are asked to make a new investment decision, careful consideration should be given during the structural analysis.
As indicated above, investment adviser analysis applies not only to the Advisers Act, but also to state adviser laws, depending on assets under management or otherwise, registration may be required thereunder.
If possible, new commercial enterprises should analyze and consider having all potential future Redeployment scenarios made part of the initial investment decision and having the general partner or managing member, as the case may be, determine the action to be taken if a Repayment and Redeployment occurs without the necessity for an investor vote or consent to such action. Thus, the initial offering document and the applicable organizational document should be drafted to include the general parameters for an investment in an Additional EB-5 Project and clearly provide that the general partner or managing member has wide latitude in any Redeployment in order to satisfy the requirements of the EB-5 program and securities law issues. For purposes of the 1940 Act, if applicable, a Repayment and Redeployment will require a fact intensive analysis to ensure a continued exemption thereunder. Likewise, such an analysis will also be required to ensure compliance with the Advisers Act. The SEC has not provided direct guidance on the 1933 Act or Adviser Act consequences of a new investment decision being made in the context of a Repayment and subsequent Redeployment into an Additional EB-5 Project. However, existing precedents in other similar situations provide guidance to issuers that should be strongly considered by new commercial enterprises when investors are asked to make new investment decisions after their initial investment decision has been made. A new investment decision may pose significant securities law issues under the 1933 Act and the Adviser Act on the basis of the precedents discussed above; therefore, thoughtful planning, structuring, and disclosure are necessary.
1 https://www.uscis.gov/green-card/green-card-processes-and-procedures/visa-availability-priority-dates/ visa-retrogression
2 See Draft PM-602-0121 USCIS Policy Memorandum posted August 10, 2015, Subject: Guidance on the Job Creation Requirement and Sustainment of the Investment for EB-5 Adjudication of Form I-526 and Form I-829
3 It should be noted that investments in Additional EB-5 Projects present many non-securities law issues that are not discussed in this article, such as the availability and timing of qualifying projects, the amount of funds available versus the amount of funds needed for investment in the Additional EB-5 Projects, investment term issues, and conflicts of interest in identifying Additional EB-5 Projects.
4 Assessments are basically calls on investors to pay additional amounts of money to an issuer for the purpose of completing projects undertaken by the issuer that were either (a) contemplated in the original offering materials or (b) not so contemplated but relate generally to the purpose for which the issuer was formed.
5 The SEC has provided some guidance on this issue in the form of Rules 136 and 145 under the 1933 Act, as well as the SEC’s analysis of voluntary assessments in the context of oil and gas offerings. Rule 136 relates to assessable securities being deemed to be the offer and sale of securities and Rule 145 relates to certain situations where offers or sales occur when investors elect what is in substance a new investment decision. Voluntary assessments have traditionally been viewed by the SEC as not being part of the initial investment decision made when acquiring assessable securities, as opposed to mandatory assessments, which are generally deemed part of the initial investment decision. Thus, whether or not to pay a voluntary assessment is a new investment decision involving the sale of a new security. Likewise, a decision whether to dissolve an entity or to make a new investment in another project has also been considered a new investment decision by the courts. See, Goodman v. Epstein, 582 F. 2d 388 (7th Cir. 1978) and Ingenito v. Bermec Corp., 376 F. Supp. 1154 (S.D.N.Y. 1974).
6 Latham & Watkins, SEC No-Action Letter (August 24, 1998).
About the Authors
Mariza McKee is a partner at Kutak Rock LLP. She focuses her practice on the structure, negotiations and documentation of EB-5 filings. She works with developers, private equity funds, regional centers, lenders, issuers, investment banks, borrowers, and mortgage lenders. Her expertise focuses on registration and exemptions for investment advisers, broker dealers, and investment companies. She is skilled in handling matters related to federal and state securities exemptions and compliance.
Robert Ahrenholz is a partner in the Denver, Colo. Office of Kutak Rock LLP. He is a corporate and securities attorney with more than 35 years of experience. His practice is geared towards securities, corporate finance, securitizations and structured finance. Ahrenholz has served as securities counsel for numerous EB-5 offerings and has assisted developers extensively on documenting and structuring EB-5 offering programs. His EB-5 expertise include drafting private placement memoranda, subscription agreements, organizational documents, foreign placement consultant agreements and related documents.