INS General Counsel David Martin has issued a memorandum that will surely be a major blow to a number of EB-5 Immigrant Investor Programs. Generally speaking, EB-5 green cards are available to persons who invest a million dollars in a commercial enterprise (or $500,000 in an enterprise in a high unemployment or rural area) and create ten jobs. Martin reviewed a number of different EB-5 petitions and determined that some of the most common types of EB-5 investments do not comply with the existing statute and regulations.
The plans reviewed by the INS involve some combination of the following:
1) the use of a down payment of cash with the remainder of the alien’s contribution in the form of a promissory note;
2) a multi-year installment payment plan on a promissory note with a substantial balloon payment after the conditions on the alien’s lawful permanent resident status are removed;
3) an option given to the alien to sell his or her investment for a fixed price that may be less than, equal to or greater than the alien’s cash contribution (usually exercisable before or at the same time as the balloon payment on the promissory note is due);
4) an option given to the enterprise or limited partnership to buy the investment at a fixed price (usually exercisable before or at the same time as the balloon payment on the promissory note is due);
5) a provision that allows or requires the commercial enterprise to place sufficient cash into a bank account to guarantee that funds will be available to repay the alien if the alien exercises the sell option;
6) withholding of a portion of the alien’s capital contribution for attorneys’ and finders’ fees and other administrative costs; and
7) a guaranteed return on the cash portion of the alien’s “investment.”
Martin noted that the business plans in question typically involve the creation of a limited partnership that pools the money of alien investors to invest in either a new or troubled business in the United States, frequently in a “regional center.”
The first basic problem noted by Martin with these plans is that the new commercial enterprise being established involves a partnership that is supposed to serve as a conduit for placing the aliens’ capital to start-up or existing businesses that will create or sustain employment, but, because of various provisions in the investment or limited partnership agreements, only a small amount of the alien investor’s money or other capital is actually able to reach the operations of the employment-creating or preserving business. Furthermore, the aliens appear to receive relatively risk-free debt interests rather than equity interests in the new business.
Martin addressed seven legal questions and provided summary answers as well as an extensive legal analysis. We will shortly be posting the entire memo in the Documents Collection of our web page (https://www.visalaw.com/docs).
The following are Martin’s summary comments:
1. Do investment plans that involve guaranteed interest payments, buy and sell options at a fixed price other fair market value, and other debt features comport with the statutory and regulatory requirements?
No. Such plans appear in fact to constitute “loans” or other debt agreements, and therefore fail to meet the definition of “invest” in our regulations. The regulations expressly prohibit the use of debt arrangements as part of contributions of capital being invested.
2. Do investment plans involving different combinations of provisions designed to reduce or eliminate the risk to the alien’s capital by limiting the amount of capital actually available for the operations of the job-creating enterprise comport with the statutory and regulatory requirements?
No. Such plans impermissibly prevent the alien from placing the
required amount of capital at risk of loss in the employment-generating
business. This is equally true where the new commercial enterprise is in
the business of lending capital to job creating businesses and acting as a
mere conduit between the alien and the job-creating business. Such plans
use a number provision to shield the alien’s capital from risk including
the deposit of cash in bank accounts to guarantee repayment of the alien’s
money, the use of promissory notes with large final “balloon” payments
combined with the option to “sell” the alien’s investment in the business
at a fixed price and guaranteed returns on the alien’s cash outlays. Such
plans appear to continue to allow the alien to withdraw his or her capital
prior to the time the balloon payment is due. In addition, the use of
promissory notes in such plans fails to meet the requirement that an alien
invest “capital” having a fair market value equal to or greater than the
amount required in the statute.
3. Do investment plans that allow an alien to earn a fixed return on his
investment at the same time that he or she continues to make installment
payments on a promissory note comport with statutory and regulatory
requirements?
No. These plans effectively permit the alien to reinvest his or her
return on the initial cash contribution in the new commercial enterprise.
Therefore the alien is not infusing new capital into the enterprise or the
U.S. economy in the statutorily required amount.
4. Should the Service request that the Department of State cease issuing
visas and return petitions for revocation based on investment plans
involving these terms.
Yes, for the reasons stated in summary conclusions 1, 2 and 3.
5. Do plans like those reviewed by our office comport with existing law?
No. Based on our review of a number of approved and pending petitions
filed with the Texas Service Center, we have concluded that they fail to
meet the requirements of the statute or the Service’s regulations. Any
plans which involve similar terms would also fail to meet current statutory
and regulatory requirements.
6. Is the Service estopped or otherwise precluded from denying or
revoking petitions filed by aliens investing in the plans like those under
review based on past approval of petitions earlier policy statements, or
informal statements by Service officials?
No. Under the Administrative Procedure Act and relevant cases, the
Service is not bound by its pervious decisions in adjudicating visa petitions. We recommend, however, that the Service issue a memorandum to the field
consistent with this memorandum and publish that memorandum in the
Federal Register.
7. Is the Service estopped or otherwise precluded from terminating the
status of a conditional resident alien who has invested in plans like those
under review based on past approval of petitions, policy statements, or
informal statements by Service officials?
No. Under the Administrative Procedure Act and relevant case law, the
Service is not bound by its initial grant of a petition when terminating
conditional residence status based on a visa petition that was granted in
error or based on the fact that the alien is subject to termination under
section 216A of the Act. We recommend, however, that the Service issue a
memorandum to the field consistent with this memorandum and publish that
memorandum in the Federal Register.
The last two findings will be especially disturbing to persons who have already come to the US with EB-5 visas covered in the memorandum. Whether the INS will, in fact, actually go back and revoke previously approved green cards remains to be seen.
The INS and State Department have already, however, circulated memos to the field asking that EB-5 visas be reviewed using the General Counsel memorandum for guidance.
In a related matter, the California Commissioner of Corporations Dale Bonner announced last month that he ordered InterBank Immigration Services, Inc. of Herndon, Virginia, one of the best known EB-5 investment firms, to stop offering investments to non-US citizens. Bonner noted that while no fraud is alleged, the firm is illegally selling securities in California. Bonner noted that the state securities laws are intended ensure that investors are investing in something real. According to Bonner, the protections are particularly important where the offering is targeted to non-US citizens who may be desperate to find a legal way to stay in this country.
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