Proposed Bill by Senators Leahy and Grassley related to EB-5 Program

On Friday, a bill was introduced in the Senate by Senators Leahy and Grassley to totally revamp the EB 5 Program. It is noteworthy that Senator Leahy was the former chairman of the Judiciary Committee and is a Democrat – and also one of the major proponents of the EB 5 Program. Senator Grassley, a Republican, is currently the chairman of the Judiciary Committee and one of the senators more critical of the EB 5 Program.

The purpose of this post is not to discuss in great detail the immigration issues related to the proposed EB 5 Program Bill, since that has been extensively covered by various immigration law firms. Rather, the objective is to highlight some of the key elements of the bill and, in particular, focus on the corporate securities and regional center issues that have been addressed in the EB 5 Program Bill.

  1. From an immigration point of view, the good news would include the following:
    1. The extension of the program for five years;
    2. Shorter time periods for processing I 924 exemplars, I 526 petitions and I 829 petitions;
    3. The provisions that if a project exemplar is filed before the legislation becomes effective, then in effect, all investors investing under the project exemplar would be grandfathered with respect to the exemplar filing if the exemplar is eventually approved;
    4. Once an investor is fully invested and based upon the retrogression in China, there is the ability to directly attempt to have the temporary conditions removed upon the filing of an I 924, rather than waiting for the visa process to be concluded. This would necessitate funds being released from escrow at an earlier period of time in order to start the two-year process and have the investor being totally at risk; and
    5. TEA (Targeted Employment Area) designations would apply for two years instead of one year.
  2. The major changes and difficulties with the EB 5 Program Bill from an immigration standpoint include the following:
    1. The entire redefinition of how to calculate a TEA that could severely limit the ability of a project in certain metropolitan areas from obtaining a TEA approval;
    2. 5,000 of the 10,000 annual visas for a project must be in a TEA area; and
    3. TEA minimum investment amount increases to $800,000 and for non-TEA projects, the non-TEA investments could increase to $1,200,000. Furthermore, the secretary of Homeland Security would have the right to increase these amounts at any time during the five-year renewal term. If these amounts are not increased, then an automatic cost of living factor would apply to both numbers during the renewal term.
  3. Job Count. There is a provision that only 90% of indirect jobs count, and it was not discussed what the other 10% includes as to direct jobs based upon W 2 employees or another form of job count. Does that only mean direct jobs? There is a real issue whether the loan model would still work as presented under the EB 5 Program Bill. There are also limitations on the percentage of EB 5 capital funded to the project and limitations on the EB 5 jobs that are created based upon the new proposed formula.
  4. It is unclear as to the effective date of the job creation provision.

From a securities law standpoint, there seems to be a significant change in direction and the role of USCIS related thereto.

As part of the project approval process for either a I 924 exemplar or a I 526 petition, there are specific requirements as to the filing of documentation related thereto. This includes the following language:

“(IV) investment and offering documents, including subscription, investment, partnership, and operating agreements, private placement memoranda, term sheets, management biographies, the description of the business plan to be provided to potential alien entrepreneurs, and any marketing materials used or prepared for use in connection with the offering by the regional center or any associated commercial enterprise, which shall contain references, as appropriate, to any …

… (cc) the name and contact information of any person that has received or the commercial enterprise knows will receive any fees or transaction-based compensation in connection with the investment, and a description of the services performed or to be performed by such person which entitle them to the fees or transaction-based compensation; and

(dd) any pending litigation or bankruptcy or adverse judgments during the most recent 10-year period affecting regional center, new commercial enterprise, any other business subsequently receiving investment capital from the new commercial enterprise, or any other enterprise in which any principal of the aforementioned entities held majority ownership at the time;

(V) a description of the policies and procedures reasonably designed to ensure that the commercial enterprise, its agents, employees, and attorneys, and any persons in active concert or participation with the commercial enterprise, comply with the securities laws of the United States in connection with the offer, purchase, or sale of its securities;

(VI) a certification that the commercial enterprise and its agents, employees, and attorneys, and any persons in active concert or participation with the commercial enterprise, are in compliance with the securities laws of the United States in connection with the offer, purchase, or sale of its securities; and …”

In effect, this language provides that not only do the offering materials need to be filed, but also the marketing materials and any updates and changes related thereto. There are typically minor changes to any project that may not be material in nature, but may otherwise need to be filed with USCIS. What effect will this have on the application process? It is noteworthy that all marketing materials would need to be disclosed. How does one deal with this issue to the extent that the marketing materials may not have been created, which is very common in the industry?

  1. It is noteworthy that the offering documents need to disclose the specific items that are fairly consistent in any private placement offering, such as risk factors, conflicts of interest and the like. However, what is new in the equation is the disclosure of the name and contact information of any person receiving the compensation with respect to the offering program itself. Disclosure includes any party receiving transaction-based compensation. Basically, this would include any parties involved in the process and possibly could include professionals as well, since professionals are receiving fees for services rendered in connection with the transaction. How does one disclose the name and contact information of marketing agents that may not have been identified? How does one deal with the fact that the business terms with marketing agents may not have been finalized? These are critical issues that will need to be resolved to the extent that the legislation is enacted going forward.
  2. There are specific provisions concerning disclosure of litigation, criminal activities, bankruptcy issues and governmental enforcement actions for the prior 10 years affecting the regional center, the new commercial enterprise (the EB 5 company), or any business that subsequently received EB 5 capital either through a debt or equity model. This applies to any enterprise in which principals of the parties held the majority interests.
  3. There are additional requirements as part of the filing process, including that the new commercial enterprise (which probably includes the regional center) must include a description of the policies and procedures reasonably designed to ensure that the NCE and its agents, employees and attorneys and any persons acting with them are in compliance with US securities laws. It is difficult to predict at this time how this provision can be practically satisfied.
  4. The legislation also requires a certification that the NCE and its agents, even attorneys and other parties, complied with the securities laws. It is unclear who provides this certification, although it would seem to be the regional center or the manager/general partner of the NCE. This applies to all parties involved with the offer, purchase and sale of securities. Therefore, this could apply to migration agents as well.
  5. As one can see from the above requirements, both from an immigration and securities standpoint, there is a significant increase in regulations and administration with respect to the entire EB 5 process, necessitating that immigration and corporate securities attorneys actually play a much larger role in the EB 5 process.

Regional Center Issues

  1. There are enhanced provisions involving the maintenance of regional centers and a new requirement of an annual fee of $20,000, beginning the next calendar year. If the regional center is approved during the year, then the $20,000 fee does not apply until the subsequent calendar year.
  2. In addition, regional centers have a much more heightened reporting responsibility.
  3. The grounds for revocation and denial have changed significantly. It is noteworthy that if a regional center is denied or revoked, then the investors would have 180 days to affiliate with a new regional center in order to not lose their immigration status. This is a logical and appropriate provision that is not addressed in current legislation.
  4. Status of Regional Center Principals. The EB-5 Program Bill goes on to state that anyone directly or indirectly involved as a principal, administrator, owner, officer, board member, general partner, fiduciary or anyone who is otherwise associated with the regional center must be a U.S. citizen or lawful U.S. permanent resident. This would, in effect, exclude ownership or involvement by foreign nationals who are not residents of the United States. This also excludes the involvement of a foreign government entity. The secretary of Homeland Security can require various verifications and the like which, in turn, results in a compliance issue.
  5. Regional Center Compliance with Securities Laws. There would be a new obligation on the part of the regional center to comply with securities laws. This will have a significant impact on the so-called “regional center rental” model, since the regional center under the EB-5 Program Bill would take on direct responsibility for overseeing securities compliance, whether or not the regional center is engaged to even manage the NCE; provide services related to marketing; or has any active involvement in the securities offering. At this time, many regional centers provide the utilization of their regional centers and are not involved with the management of the NCE or the securities offering. This new EB-5 Program Bill will, in effect, negate the ability of a regional center to disclaim any responsibility related thereto.
  6. There is another interesting issue concerning compliance with securities laws and jurisdiction. The EB-5 Program Bill provides as follows:

“(I) Compliance with Securities Laws. – 

(i) Jurisdiction. – In view of the objective of promoting investment in the United States, in an action filed by the Securities and Exchange Commission, the purchase or sale of securities offered or sold by any regional center or any party associated with a regional center shall be deemed to have occurred within the territory of the United States for purposes of the securities laws, and subject matter jurisdiction shall also lie within the United States.”

One could interpret the above language as, in effect, eliminating the Regulation S exemption if it is interpreted that the applicable EB 5 security has been sold jurisdictionally from the United States. However, it is our opinion that the purpose of this language is to, in effect, address the outcome of the “Chicago Convention case” and provide that with respect to any violation of the Securities Act of 1933 related to the offering documents themselves, such as fraud, misrepresentation, non-disclosure or the like, that the SEC retains jurisdiction over all individuals involved in the process of violating the Securities Act of 1934 even if the marketing activities are undertaken offshore. It is our belief that this language is not intended to otherwise regulate sales of securities under the Securities Exchange Act 1934 in accordance with the Regulation S exemption and the exemption related to broker/dealer registration with respect to offshore agents.

Elsewhere in EB-5 Program Bill, the term “party associated with the regional center” is defined to include, among other things, “agents,” although the term “agents” is not defined. It is our position that the concept of “agents” herein should take into account the term “agent” in the context of principal-agency law in the United States, which generally means that an agent only includes a party that is authorized to act on behalf of another party (the principal). This should not include independent contractors who are not generally authorized to act on behalf of the principal. Therefore, it is our belief that the term “agent” should not include offshore migration agents that are really independent contractors and have no authority to act on behalf of a regional center, an NCE or a developer.

As noted above, there is a requirement of the regional center to provide a certification as to compliance with securities laws, which must be provided on an annual basis.

Conclusion

As is apparent, the new proposed legislation is extraordinarily complicated, confusing and, to some degree, unclear as to certain provisions. After discussion with various immigration practitioners, it is believed that there will be strong opposition to the proposed legislation, given the fact that it seems to have been drafted by Senator Grassley’s staff and supported by Senator Leahy, both of whom are bent on favoring rural areas.

It is difficult to determine if and when new legislation will be passed, since the existing Pilot Program sunsets on September 30, 2015. It is possible that there will be a short-term extension of the Pilot Program consistent with prior renewal situations until new legislation can be finalized. It is also possible that the new legislation may be finalized by the deadline, although this would seem quite difficult given the extraordinary number of open issues that will need to be debated, negotiated and resolved.

As a matter of caution, it may be advisable, for all pending projects currently on the drawing board and ready to go to market in the near future and which are otherwise being marketed now, to file an I 924 exemplar in order to obtain the benefit of the proposed grandfathering provisions of the new EB-5 Program Bill. The implications here are that if a modified form of the bill is eventually adopted, then any project that would be grandfathered would have a major advantage in going to market compared to a new project that obtains subsequent project approval. Until all the pending grandfathered inventory has been absorbed (given the significant advantage as to the investment amount and the TEA designation and job creation criteria), the new projects will probably lag behind with respect to going to market with higher investment amounts per investor. It will be interesting to see how these marketing issues unfold.