Keeping their word to significantly enhance the oversight, operation, and transparency of the U.S. EB-5 Regional Center Program (“RCP”), on June 3rd the Chairman and Ranking Member of the U.S. Senate Judiciary Committee introduced a bipartisan proposal to radically change the way the RCP operates.
Set to expire on September 30, 2015, the RCP’s future has long been in doubt; leaving very worried Regional Center operators and their prospective investors wondering aloud what the future holds for the program. The bill introduced by Senators Grassley and Leahy answers those questions, and while it would extend the RCP, it does not make it permanent, as the industry had hoped. The bill, if approved, would only extend the Regional Center Program until September 30, 2020.
It is also important to note that the EB-5 Direct Investment Program (“DIP”), through which entrepreneurs can invest in their own projects or through pooled investments with other entrepreneurs (but without the participation of a Regional Center), does not expire in September, as it is already permanent. Nonetheless, even the DIP would be affected by the proposed legislation in terms of the minimum amounts required for an investment arising from that program as well.
Why is the Legislation Truly Welcomed?
Underlying the need for the extension of the RCP itself, the EB-5 Program has experienced enormous growth and justified success over the last few years (in stark contrast to its often storied and dark past). But with that success has come criticism from informed observers, and concern from prospective and existing investors, about some of the marketing techniques used to recruit foreign investors, as well as the lack of transparency from many Regional Centers about the way investor funds are used and to whom they are being paid; and as a result, there has been increased scrutiny from U.S. law enforcement (USCIS, the SEC and FINRA).
The Grassley-Leahy proposal properly seeks to respond to those issues, and in the process strengthen the RCP, by enhancing USCIS’ enforcement role, and creating new disclosure obligations for the Regional Centers. It also makes clear to Regional Center operators, and their foreign marketing adjuncts, that USCIS and the SEC have, and will be expected by Congress to exercise, the enforcement capabilities needed to properly police a program that has recently become threatened by questionable marketing practices, and which is rife with undisclosed conflicts.
The result is that those suspect techniques have left some EB-5 investors unprotected and at the mercy of unregulated and unscrupulous foreign finders, conflicted lawyers, and Regional Centers that are less than transparent issuers of securities. And while it is clear that these bad practices are not engaged in by every Regional Center, foreign finder, or lawyer, there are more than a few that do, to be sure.
The Grassley-Leahy proposal is a positive and welcome step forward toward weeding those bad apples out of the industry; and if passed by Congress and signed into law by the President, it will make great strides in reasonably regulating the RCP and thereby ensuring global investor confidence in the growing U.S. EB-5 market.
Several of the most interesting highlights include:
1. Required Investment Raised Significantly: Increasing the minimum investment from $500,000 to $800,000 (for targeted employment areas) and from $1,000,000 to $1,200,000 (for non-targeted employment areas). While this increase will prevent some investors from participating in the program, the minimum investment had not been increased in the 25-year history of the program. It is therefore a logical reform that will also make more endurable the stricter job-creation requirements [see, Paragraph 2 below] in the proposal (by making it easier to produce the 10 jobs per investor, because less investors will now be needed to raise the same amount of project funds).
2. Reduced Apportionment of Jobs in Ratio to Non-EB-5 Capital: One of the stricter job-creation reforms in the proposal is the limitation on job credit for alien entrepreneurs based on the non-EB-5 capital in the each project. Currently, EB-5 petitioners receive 100% credit for new job creation from the entire project, even if EB-5 funds were only a small percentage of the total capital invested.
The legislation narrows the ability to receive credit for indirect job creation. It would: 1) make ineligible indirect jobs counted under tenant-occupancy methodology; 2) restrict EB-5 petitioners to receive no more than 30% credit for new jobs created by the non-EB-5 money in each project; 3) require that Business Plans expect 50% of estimated jobs to be created within a Targeted Employment Area (TEA); and 4) require that at least 10% of the jobs created be direct jobs. These reforms will put much pressure on Regional Centers to ensure that the projects they are investing EB-5 petitioners’ money in can create the needed 10 jobs per investor (because the margin of error to reach that number would be reduced under the proposed legislation).
3. New Business Plan Requirements: Regional Centers must currently file I-924 applications and get approval for each investment offering; but there is little guidance as to what the associated business plan must include. Under the new legislative proposal, Regional Centers will now be required to submit to USCIS for their approval business plans for each project. The legislation also stipulates for the first time, very specifically what each business plan must include.
Most importantly, the proposal requires Regional Centers to disclose as part of the business plan approval process any marketing materials to be used or prepared in the offering, which must contain:
a. References to investment risks;
b. Conflicts of interest that currently exist among the Regional Center and the New Commercial Enterprise (and any other business receiving EB-5 investor capital);
c. Any pending litigation against any party in the EB-5 project; and,
d. The names and contact information of anyone whom the Regional Center knows will receive a "finder's fee," alone with a description of what that party did to deserve receiving such a fee.
Of these reforms, letters (b) and (d), are particularly welcomed.
One of the worst current practices in the EB-5 industry is the lack of transparency when it comes to foreign finders or U.S. lawyers failing to disclose to their clients that they are being paid by Regional Centers. Regardless of whether such practice may be legal with a waiver, only a foolish EB-5 investor would accept the advice of a foreign finder or U.S. immigration counsel who is being paid by someone other than themselves.
4. Source of Funds: The proposal tightens the allowable source of funds for investors to use for their EB-5 investment (if investing with a Regional Center), and for the first time, it also requires investors to prove the legal source of the management fees paid by the investor to Regional Centers.
The gift and loan restrictions are greatly altered. For gifts, the capital must be gifted only from a spouse, parent, child, sibling, or grandparent, and it must be made in good faith and not to circumvent limitations imposed on permissible sources of capital. The records of the source of funds from the donor is required. For loans, capital from indebtedness will only count if the loan is secured by assets owned by the entrepreneur, and if the loan is issued by a reputable and registered lending institution (for which DHS will consult the Office of Foreign Asset Control, the Office of Terrorist Financing and Financial Crimes, and the Financial Crimes Enforcement Network).
5. Treatment of Entrepreneurs if Regional Center Terminated: Under this proposal, if a Regional Center (or a Commercial Enterprise) is terminated, an investor with conditional Permanent Residency Status would have 180 days to re-file a new I-526 petition in an entirely new investment, with a properly-authorized Regional Center and Commercial Enterprise. While the investor’s status would remain valid if the new petition is approved, the 2-year removal period would restart on the date of the subsequent investment.
In the bill, USCIS has been presented with many new justifications and mechanisms with which to terminate Regional Centers and Commercial Enterprises. This greatly compounds the importance of avoiding conflicts of interest involving attorneys. One must ask: if a Regional Center that pays an attorney is terminated, and that attorney also represents investors in its projects, how can that attorney possibly represent the investor’s best interests and the Regional Center’s best interests when he or she was paid by the same Regional Center that committed the acts for which it was terminated by USCIS?
William P. Cook is the Managing Member of the Global Migration Law Group, PLLC and is resident in the Firm’s Washington, D.C. office. He is the former General Counsel of the U.S. Immigration & Naturalization Service, and served as such when the EB-5 program was created in 1990.
Benjamin M. Cook is a law clerk for the Global Migration Law Group, PLLC and a second year student at Washington College of Law at American University in Washington, D.C. Prior to GMLG, he was a Legislative Assistant for Congressman Chris Van Hollen (D-MD).
Managing Member William P. Cook quoted in Washington Post Article
April 28, 2017
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