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What should EB-5 investors be wary about when it comes to a redemption agreement?

Recently I read about the policy alert of USCIS regarding a redemption agreement in an EB-5 deal, but I am not clear about the difference between a “sell option” and a “buy option,” and how it might conflict with the “at-risk” requirements of USCIS. What are the differences?

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    A Olusanjo Omoniyi

    Immigration Attorney
    Answered on

    The redemption agreement deals with terms and conditions of how your investment should be returned, but with a guaranteed term. This is diametrically opposite of what EB-5 investment stands for as an "investment at-risk" in which an investor is not guaranteed any successful investment. Any EB-5 agreement may not specifically call for any precedent event to occur before the refund/return is accomplished, and the subscription agreement cannot guarantee a profit return of the investment to any EB-5 investor. Furthermore, no EB-5 investor in a project can be given a preferential treatment over other investors in the project. With regards to sell and buy options, the investors are not necessarily in a fixed project. The investor's decisions for either of the call options can vary depending on the conditions/terms governing their initial acquisitions.

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    Julia Roussinova

    Immigration Attorney
    Answered on

    Redemption arrangements are not allowed under current law because they go against the requirement that EB-5 funds be placed "at-risk." Redemption generally gives an investor a right to obtain investment capital back for a fixed price at a fixed date. Permissible sell option would be to have an option to sell an investor's interest back to the enterprise for its fair market value after a condition on the green card is removed.

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    Debbie Klis

    Securities Attorney
    Answered on

    The buy or sell option arises from the requirement that the capital must be at-risk for an investment to have occurred. Many EB-5 investors want to protect their money through strategic use of redemption language in their investment contracts. These redemption clauses created a duality of protecting investors yet potentially jeopardizing their permanent green card approval because a guarantee of return on investment of return of investment could undermine the vestiges of a bona fide investment thus no fulfillment of the requirements of a permanent residency card. USCIS clarifies which redemption agreements are debt arrangements and therefore are not qualifying investments where the investor holds a redemption right or the new commercial enterprise is otherwise obligated to redeem the investor's equity interest. Thereby making the funds not at-risk. In contrast, USCIS was clear that an option held by the new enterprise to redeem all or a part of the investment to the EB-5 applicant is a permissible agreement. USCIS previously believed that sell options and buy options constituted impermissible debt arrangements, with USCIS siting that for money to be at-risk, the applicant cannot enter into an investment knowing she or he already has a willing buyer in a defined number of years or at a certain price. Thus, when the investor has the right to require the company to buy his or her interest that is a prohibit sell option. When the company has a unilateral right to purchase in the future, then investor cannot compel the purchase, that is a permissible buy option.

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    Phuong Le

    Immigration Attorney
    Answered on

    Short answer is if you, as the EB-5 investor, has the ability to trigger the buy/sell option, there's a good chance that you're violating the "at-risk" requirements under Matter of Izummi. Those rights are typically wielded by the manager or the general partner of the NCE, not the investors themselves.

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    Marko Issever

    EB-5 Broker Dealer
    Answered on

    Are you referring to the Chang vs. USCIS case? If the Newly Created Entity (NCE) has a "call option", otherwise known as a "buy option" that does not give a definite date of contractual redemption, maturity, to the investor. The investor''s money is at risk until such time the NCE chooses to redeem their investment. Therefore, in this case the court ruled that "this does not provide the investors with any right to repayment" and therefore their money is still at risk. Had the investor been granted a "put option," otherwise known as a "sell option," then that would have potentially mitigated or eliminated the money at-risk because that would have given the right but not the obligation to the investor to receive their investment back at the strike price of the option. Therefore, that would have been reason to deny the I-526 petition. Since then, USCIS updated the Policy Manual. Call options by the NCEs are no longer reason to deny I-526 petitions.

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    BoBi Ahn

    Immigration Attorney
    Answered on

    EB-5 investors should be cautious of redemption agreements and guaranteed returns of the capital investment written in the EB-5 project documents because that language negates the required "at-risk" element of an EB-5 investment. Generally, the new commercial enterprise cannot promise or guarantee to pay back the immigrant investor's capital investment because USCIS does not consider the investment to be at risk if that type of language is included in the project documents.

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    Fredrick W Voigtmann

    Immigration Attorney
    Answered on

    Redemption agreements are impermissible because they violate the EB-5 requirement that the invested capital must be placed "at-risk." USCIS looks at redemption agreements as transforming the investment into a loan or other debt arrangement, which does not qualify for EB-5. A good way to think of a redemption agreement is that the project developer promises to pay the investor back a certain amount of capital on a certain date. The agreement is legally binding and looks a lot like a loan to the project and an obligation to repay that loan to the investor. A sell option or buy option could wind up looking like (and being considered as) a redemption agreement if it has these features (fixed price on a fixed date, regardless of when the condition is removed). An acceptable sell option (also called a "put option") would be if the investor has the option, but not the obligation, to sell his/her interest back to the project developer after the condition is removed and for the fair market value of the interest at that time. An acceptable buy option (also called a "call option") would be if the project developer has the option, but not the obligation, to buy back the investor's interest at fair market value and after the investor's condition is removed.

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