An excellent webinar took place on April 16, 2015 in response to EB-5 diligence [Kurt Reuss]. Kurt puts on an outstanding series of webinars that take place every other week and deal primarily with serious issues involving the EB-5 program. He tends to have an exceptional panel of speakers, and I was very privileged to be on the panel along with John Tishler of Sheppard Mullin, Robert Divine of Baker Donelson, Carolyn Lee of Miller Mayor and Rupy Cheema of EB 5 Diligence.
The webinar dealt with the redeployment of repaid funds. The assumptions for the webinar included the following:
“The borrower of the EB-5 funds
- has the opportunity to sell or refinance the underlying asset;
- has the right to repay the loan to the NCE;
- the job creation requirements have been met; and
- all I 829s have not been adjudicated.”
The panel members discussed the various options on what to do when the loan is scheduled to be repaid, but I 829 petition approvals have not been received. This is one of the major topics relating to the EB-5 program today from an immigration, corporate and securities standpoint. How does one disclose the risk factors as well as the alternatives in connection with a situation that has not been clearly delineated or defined by USCIS?
Those on the panel debated these issues extensively. It was noted that there was some confusion from USCIS’s standpoint as to the entities involved in the program and whether the at-risk must be maintained at the JCE [Job Creation Enterprise – which is a developer] or the NCE [New Commercial Enterprise – the EB 5 entity] level. One could argue under USCIS guidelines that the investment must remain at the JCE level and not the NCE level. However, that seems illogical because that would mean that a loan could never be repaid until all I 829 petition approvals are obtained, which makes no sense. Therefore, it was generally agreed that a payment of the loan to the NCE and the reinvestment of capital would be a viable option in connection with an EB 5 transaction. Many of the issues discussed involve the concerns about any type of early redemption and the maintenance of the at-risk requirements taking into account the practicalities of the loan model and the necessity to repay the loan and eventually reinvest the funds.
The panel members discussed the concept that if an I 526 petition is approved with a loan repayment model at maturity, then at the I 829 approval stage, one could then argue that USCIS would be prevented from taking a contrary position in connection with the I 829 petition approval process. The “Chang” case was cited that was upheld by the 9th Circuit Federal Appeal Court dealing with the issue of an I 526 petition approval and the fact that USCIS could not thereafter change its position in connection with a business model that was later challenged by it.
There was also detailed discussion about the Izummi issue, and the need for clarification of the at-risk situation. It was acknowledged that USCIS is not consistent in its administration of the issues, especially involving redeployment of funds. During the conference, I addressed the following issues:
- The reliance on I 526 petition approval as being a basis to clearly take a position of estoppel in connection with USCIS procedure.
- The ability to repay a loan once the jobs have been created. To the extent that the I 829 petitions have been approved, since those funds would be used to redeem the interests of I 829 approved investors that should not otherwise result in any negation of the provisions of Izummi, since again, the I 829 petition would have been approved.
- The loan model options could involve the developer substituting collateral for the project rather than repaying the loan, especially which respect to a condominium project where there are no assets left but cash after the sell-out. The Developer could substitute collateral that is already pre-existing and operating since job creation would no longer be a component in this process. This alternative seemed to be the most desirable under the circumstances given the fact that the money is always maintained by the JCE and never used for repayment of the loan.
- Another option would be for the JCE to keep the money in a reserve account, with the interest paid at a lower rate equivalent to a savings account rate so that the developer should not be prejudiced in not prepaying the loan under these circumstances.
- Assuming that the loan is repaid and the funds are not relent to the developer, then the NCE would have the ability to reinvest the funds in an at-risk situation that would qualify for USCIS guidelines.
I recommend that a sort of “savings clause” be drafted that would enable the NCE to redeploy funds on an at-risk basis in accordance with USCIS guidelines, as same may be determined from time to time. We understand that these guidelines have yet to be established, but it is hopeful that in the near future these guidelines will be established and will provide more clarification on this issue. The goal here is to keep documents flexible so that if there are any issues involving USCIS regulations, the parties have the automatic right to modify the documents to comply with USCIS guidelines.
Again, this is a very hot topic and one that needs further guidance from USCIS.
Please click here to view the webinar.