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EB-5 IMMIGRANT INVESTORS
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updated by Stephen Yale-Loehr* Congress created the fifth employment-based preference (EB-5) immigrant visa category in 1990 for immigrants seeking to enter to engage in a commercial enterprise that will benefit the U.S. economy and create at least 10 full-time jobs. The basic amount required to invest is $1 million, although that amount may be $500,000 if the investment is made in a "targeted employment area." Of the approximately 10,000 numbers available for this preference each year, 3,000 are reserved for entrepreneurs who invest in targeted employment areas. A separate allocation of 3,000 visas is set aside for entrepreneurs who immigrate through a regional center pilot program discussed below.The statutory requirements of the EB-5 visa category are onerous. At most only about 1,000 people a year have immigrated in this category, just one-tenth of the visas available. The Immigration and Naturalization Service (INS) made it even harder to qualify in this category by issuing four precedent decisions in 1998 that significantly restricted eligibility for EB-5 status. Since then the INS’s Administrative Appeals Office (AAO) has issued numerous nonprecedent decisions that further tighten the screws on EB-5 cases. It is estimated that the INS approves only about 15 percent of EB-5 petitions. Immigration and Nationality Act (INA) §203(b)(5) provides a yearly maximum of approximately 10,000 visas for applicants to invest in a new commercial enterprise employing at least 10 full-time U.S. workers. To qualify under the EB-5 category, the new enterprise must: (1) have been established by the investor; (2) be one in which the person has invested (or is in the process of investing) at least $1 million (or at least $500,000 if investing in a "targeted employment area," discussed below) after November 29, 1990; (3) benefit the U.S. economy; and (4) create full-time employment for at least 10 U.S. workers. Moreover, the investor must have at least a policy-making role in the enterprise. To encourage immigration through the EB-5 category, Congress created a temporary pilot program in 1993. The pilot program directs the Attorney General and Secretary of State to set aside 3,000 visas each year for people who invest at least $500,000 in "designated regional centers." The pilot program is currently due to expire September 30, 2003.The pilot program does not require that the immigrant investor enterprise itself employ 10 U.S. workers, as long as the investor can reasonably demonstrate that the regional center has indirectly created 10 or more jobs and improved regional productivity. This program also differs from the regular EB-5 provisions in that it permits private and governmental agencies to be certified as regional centers if they meet certain criteria. (See Appendix, "Designated Regional Centers," infra at page *). Outside of the investment and employment requisites, the statute does not specifically address who may be a qualified applicant. The INS appears to preclude corporate or other nonindividual investors from this category. However, two or more individuals may join to make an EB-5 investment. A single new commercial enterprise may be used for investor/employment-creation classification by more than one investor, provided that: (1) each petitioning investor has invested (or is actively in the process of investing) the required amount; and (2) each investment results in the creation of at least 10 full-time positions for qualifying employees. In fact, a new commercial enterprise may be used for investor/employment-creation classification even though there are several owners of the enterprise, including persons not seeking classification, if: (1) the source(s) of all capital invested is identified; and (2) all invested capital has been derived by lawful means. The lawful source of funds issue is discussed in more detail infra at page *. There are three basic requirements for showing a new commercial enterprise. First, the enterprise must be "new," i.e., formed after November 29, 1990. Second, it must be a "commercial" enterprise. Any for-profit entity formed for the ongoing conduct of lawful business may serve as a commercial enterprise. This includes sole proprietorships, partnerships (whether limited or general), holding companies, joint ventures, corporations, business trusts, or other entities publicly or privately owned. This definition would even include a holding company and its wholly owned subsidiaries, if each such subsidiary is engaged in a for-profit activity formed for the ongoing conduct of a lawful business. However, the term "new commercial enterprise" does not include noncommercial activity, such as owning and operating a personal residence or nonprofit enterprise.Third, it must be an enterprise "established" by the petitioner. There are three ways to show "establishment": (1) creating an original business; (2) purchasing and restructuring an existing business; or (3) expanding, and thereby substantially changing the net worth or number of employees in a business so that there is a 40 percent increase in net worth or in the number of employees. Investing in a "troubled" business (discussed infra at page *) may also qualify an investor for EB-5 classification. Creating an Original Business—An EB-5 petitioner must have a hand in the creation of the enterprise and must be present at the enterprise’s inception. This poses particular problems for people investing in partnerships. The partnership will usually be created and then the general partner will seek individuals to invest as limited partners. Under the INS’s interpretation, such investors cannot qualify for EB-5 classification because they were not partners when the original partnership was created. Buying an Existing Business—By reorganizing or restructuring an existing business, an investor may create a "new commercial enterprise" and therefore qualify for a visa. The statute and regulations provide little insight into what degree of restructuring or reorganization must be done to establish a new enterprise. The AAO has held that simply changing the legal form of the enterprise does not satisfy this requirement. Regardless of the forms used to create a new enterprise, the focus of the law is on the creation of at least 10 new employment opportunities. Investments creating a new enterprise but failing to create 10 new jobs will also fail to qualify for investor/employment-creation classification. Expanding an Existing Business—An investor can also create a new enterprise by expanding an existing business. Only an expansion resulting in an increase of at least 40 percent in the net worth of the business or in the number of employees of the business will satisfy the visa requirements. This could require the investor to create more than 10 new jobs to qualify for a visa. The larger the business that the investor expands, the more onerous his or her burden to qualify for a visa under this standard. However, an investor need not show that his or her investment alone caused the 40 percent increase. Pooling Arrangements—The regulations specifically allow immigrant investors to pool their investments with others seeking EB-5 status. Each investor is required to invest the applicable statutory amount. All of the new jobs created by the new commercial enterprise will be allocated among those within the pool seeking permanent investor visas. The AAO has injected a restriction on pooling investments by requiring the petitioner to show that every investor in the partnership identify the source of their funds and prove that they were derived by lawful means. This evidentiary hurdle makes it almost impossible for members in a partnership to qualify for EB-5 status."Engaging" in a New Commercial Enterprise The statute requires an EB-5 applicant to enter the United States to engage in a new commercial enterprise. To qualify, an investor must maintain more than a passive role in the new enterprise upon which the petition is based. The regulations require an EB-5 immigrant to be involved in the management of the new commercial enterprise. The petitioner must either be involved in the day-to-day managerial control of the commercial enterprise or manage it through policy formulation. The degree of involvement by an EB-5 investor in the enterprise may be less than that required to qualify for a nonimmigrant E-2 treaty investor visa. The regulations state that if the petitioner is a corporate officer or board member, or, in the case of a limited partnership, is a limited partner under the provisions of the Uniform Limited Partnership Act (ULPA), he or she satisfies the requirement of engaging in the management of the new commercial enterprise. The AAO, however, has found that merely calling the investor a limited partner pursuant to the ULPA in a partnership agreement does not automatically mean that the person is involved in the management of the new commercial enterprise."Investing" or
"Actively in the The regulations define "capital" as cash and cash equivalents, equipment, inventory, and other tangible property. Capital does not include loans by the petitioner or other parties. Indebtedness secured by assets owned by the entrepreneur may be considered capital, provided the investor is personally and primarily liable for the debts and the assets of the enterprise upon which the petition is based are not used to secure any of the indebtedness. Indebtedness typically consists of a promissory note signed by the petitioner that specifies a payment schedule to the new commercial enterprise. Absent fraud, a signed promissory note that is secured by the petitioner’s personal assets constitutes a contribution of capital by the petitioner. The issuer of the promissory note, i.e., the investor, is considered to be "at risk" if the petitioner is clearly obligated to make all the required payments on the note and there are no "escape" clauses. The investor cannot receive any bond, note, or other debt arrangement from the enterprise for the capital contributed to it. This includes any stock redeemable at the holder’s request. All capital is valued at fair market value in U.S. dollars at the time they are given. Debt arrangements are extremely complicated. A prudent practitioner must do careful research and analysis to determine current INS positions and policies on this issue. The statute requires that investments "benefit the U.S. economy" to qualify the investor for an EB-5 visa or status. The statute provides no guidance on which investments benefit the economy. This silence means INS adjudicators are left to their subjective interpretations of the investment and its relative benefits when reviewing the petition. Arguably, the petitioner has benefited the economy by merely meeting the employment and investment requirements of the visa classification. However, because the statute specifically identifies the "benefit" element as distinct from other components of the visa, it appears that the applicant must independently show that the enterprise, in the conduct of its business, will benefit the U.S. economy. Therefore, a consulting firm exclusively serving customers abroad with no return benefit to the U.S. economy (other than employing the requisite number of workers), might not support an EB-5 petition. In contrast, showing that the new enterprise provides goods or services to U.S. markets should satisfy this requirement. Federal regulation of foreign investment is extensive. Some regulations restrict foreign investments in aviation, banking, shipping, communications, land use, energy resources, and government contracting. Additionally, Congress has imposed several disclosure and data requirements on foreign investments. An investment may not be deemed beneficial to the U.S. economy if it runs afoul of any statutory limitation on foreign investment. To qualify for EB-5 status, an investment normally must create full-time employment for at least 10 U.S. citizens, lawful permanent residents, or other immigrants lawfully authorized to be employed in the United States. Neither the investor nor the investor’s spouse and children count toward the 10-employee minimum. Nonimmigrants are also excluded from the count. The "other immigrants" provision means that conditional residents, temporary residents, asylees, refugees, and recipients of suspension of deportation or cancellation of removal may all be considered employees for EB-5 purposes.The regulations define an "employee" for EB-5 purposes as an individual who (1) provides services or labor for the new commercial enterprise and (2) receives wages or other remuneration directly from the new commercial enterprise. This definition excludes independent contractors. The EB-5 pilot program does not require the investment to directly create 10 U.S. jobs. Instead, pilot program investments only require an indirect creation of jobs and an improvement of the local economy. The Types of Jobs—The jobs created must be full-time. This means employment of a qualified employee in a position that requires a minimum of 35 working hours per week. Job-sharing arrangements, where two or more qualifying employees share a full-time position, will also serve as full-time employment if the hourly requirement per week is met. Job-sharing does not include combinations of part-time positions even if when combined such positions meet the hourly requirement per week. When the Jobs Must Exist—The law is unclear about when new jobs must exist. The statutory language is prospective and therefore does not require jobs to exist at the time of initial investment or before the I-526 petition is filed. The INS does not require retention of employees until a reasonable time after conditional visa issuance. In fact, a petitioner may support a petition with a comprehensive business plan demonstrating a need for at least 10 employees within the next two years. The business plan need only indicate the approximate dates during the following two years when the employees will be hired. The temporary vacancy of a position during the two-year conditional period does not disqualify an investor, as long as good-faith attempts to re-staff the position are made. Where the Jobs Must be Located—When enacting the EB-5 program, Congress took an affirmative step toward creating jobs in the geographic areas that need them most. The statute sets aside 3,000 of the approximately 10,000 EB-5 visas available annually for foreign citizens who invest in "targeted employment areas." The statute defines a "targeted employment area" as a rural area or an area that has experienced high unemployment of at least 150 percent of the national average. An area not within a metropolitan statistical area (as designated by the Office of Management and Budget) or the outer boundary of any city or town having a population of 20,000 or more is considered a rural area. Each state notifies the INS which state agency will apply these guidelines, and determines targeted employment areas for that state. Troubled Businesses—Special rules govern investments in "troubled" businesses. A troubled business is one that has been in existence for at least two years, has incurred a net loss for accounting purposes during the 12- or 24-month period before the petition was filed, and the loss for such period is at least equal to 20 percent of the business’s net worth before the loss. To establish an investment in a troubled business, the petitioner must show that the number of existing employees will be maintained at no less than the pre-investment level for at least two years. Thus, this provision includes a significant incentive in that it does not require the creation of 10 new jobs. Instead, it requires only that the business maintain the number of existing employees during the conditional status period. As a caveat, if the troubled business does not remain afloat for two years after the investment, the investor might lose his or her conditional residency status. EB-5 Procedures: Initial Evidence The regular EB-5 program and the pilot program have similar requirements to begin the process. The distinction between the two processes is that the former requires the petitioner to submit all of the described evidence; the latter requires the designated regional center to certify that the investor has met its criteria. In either case the investor files for EB-5 classification using INS Form I-526. The petition must be signed by the investor, not someone acting on his or her behalf. If the EB-5 commercial enterprise will primarily do business in a location within the ordinary jurisdiction of the Vermont or Texas Service Centers, the petition is filed with the Texas Service Center; otherwise it is filed with the California Service Center.Initial Evidence for the Regular EB-5 Program The following paragraphs detail the evidence that should be submitted with an I-526 petition for EB-5 classification under the regular program.The New Commercial Enterprise—To qualify for EB-5 classification an investor must establish a "new commercial enterprise" in one of three ways:
Capitalization—To show that the petitioner has invested (or is actively in the process of investing) the required amount of capital, the petition must be accompanied by evidence that the petitioner has placed the required amount of capital "at risk." A mere intention to invest will not demonstrate that the petitioner is actively in the process of investing. The investor must show actual commitment of the required amount of capital. Such evidence may include:
Legal Acquisition of Capital—The regulations require filing the following types of documentation to establish that capital used in the new enterprise was acquired by legitimate means:
Creating Employment—To show that a new commercial enterprise will create no fewer than 10 full-time positions for qualified employees, the petition must be accompanied by:
Troubled Business—To show that a new enterprise, established through capital investment in a troubled business, meets the statutory requirement, the petition must show that the number of existing employees will be maintained at no less than the pre-investment level for a period of at least two years. The applicant should include photocopies of the I-9 forms, tax records or payroll documents, and a comprehensive business plan. Managerial Capacity of the Investor—An investor/employment-creation immigrant must be involved in the management of a new commercial enterprise to qualify for a visa. The petitioner must either be involved in the day-to-day managerial control of the enterprise, or manage it through policy formulation. These requirements may be evidenced by:
Designation of a High Unemployment Area—The state government may designate a particular geographic or political subdivision as an area of high unemployment (at least 150 percent of the national average rate). Evidence of such designation may be provided with Form I-526. Such evidence should include:
The Investment Must Benefit the U.S. Economy—This requirement has not been fully defined in the regulations. Letters from local government officials, chambers of commerce, or regional development agencies should satisfy the requirement and should be included with the petition. Creation of Employment in a Targeted Employment Area—To show that the new commercial enterprise has created, or will create, employment in a targeted employment area, the petition must be accompanied by:
EB-5 Procedures: Removing the Conditions Assuming the INS approves an investor’s I-526 petition under either the regular or pilot program, he or she becomes a conditional resident for two years. The procedure to remove the conditions is analogous to that followed by people who obtain conditional residence through marriage to a U.S. citizen or lawful permanent resident. An immigrant investor’s petition to remove the conditions should be filed on INS Form I-829 with the relevant service center. It must be accompanied by evidence that a commercial enterprise was established, that the individual invested or was in the process of investing the required capital, and that the investment created or will create 10 full-time jobs. The individual also must show that he or she "sustained the actions required for removal of conditions" during the person’s residence in the United States. An entrepreneur will have met this requirement if he or she has "substantially met" the capital investment requirement and has continuously maintained this investment during the conditional period. An immigrant investor in conditional resident status must submit Form I-829 to the appropriate service center within the 90-day period immediately preceding the second anniversary of his or her admission to the United States as a conditional permanent resident. Failure to do so will result in automatic termination of the conditional resident’s status and initiation of removal proceedings.Adjudication of Form I-829 Initial Review of Form I-829—An INS service center may (1) approve an I-829 petition without review, (2) issue a request for further evidence, or (3) refer it for an adjudication (with or without the interview) by a district office. Approval of Form I-829 by the INS Service Center—A service center may approve an I-829 petition if the petition establishes the requirements for removing the conditions outlined above. If approved, the service center director will remove the conditions on the conditional resident’s status as of the second anniversary of his or her admission as a conditional resident. The approval notice will instruct the conditional resident to report to the appropriate district office for processing for a new permanent resident card (Form I-551). At the district office, the conditional resident will surrender any permanent resident card previously issued and receive interim documents valid for 12 months in the form of either a temporary I-551 stamp in his or her unexpired foreign passport, or a Form I-94 containing a temporary I-551 stamp and his or her photograph. Request for Further Evidence—An INS service center may also issue a request for further evidence (RFE). An RFE must be based on a determination by the service center director that the conditional resident must provide further documentation or answer certain questions in writing. If the questions cannot be answered in writing, the petition must be referred for an interview. An RFE will not be issued if the petition is clearly deniable on grounds other than those for which the RFE might be issued. A conditional resident has 12 weeks to respond to an RFE. Upon receipt of the RFE, the service center director must either approve or refer the Form I-829 petition to the district office. Determination that Referral to District Office is Appropriate—An INS service center will refer the petition to a district director if the initial review of the petition or the response to a request for additional evidence reveals that (1) the requirements for removal of conditions have not been met and the case should be denied without an interview or (2) an interview is necessary to approve or deny the petition. A petition will be denied without an interview if the service center determines that there is no material issue of fact in dispute and that the petition does not meet the requirements of the law and the regulations.Adjudication of Form I-829 by the District Office Approval of Form I-829 by the District Director—An INS district office may approve an I-829 petition if he or she is satisfied that the petition satisfies the requirements for removing the condition outlined above. Denial of Form I-829 by the District Director—A district director must deny an I-829 petition if the petition does not establish the requirements for removing the condition. There is no appeal from this decision. The conditional resident may seek review of the district director’s decision in removal proceedings. Status of Conditional
Residents
Deterring Fraudulent Investments In enacting the EB-5 program, Congress expressed concern about the possibility of fraudulent investments. To deter such fraud, establishing a commercial enterprise for the purpose of "evading any provision of the immigration laws" is a felony punishable by up to five years imprisonment. One reason Congress provided for two-year conditional permanent residency status for EB-5 investors is to aid in this deterrence. This two-year continuum for business activity and investment requires a significant investment and is a strong deterrent to fraud. Nonetheless, should fraud be discovered by the INS before the two-year conditional period ends, the investor’s status will be terminated. So far it appears that the INS has not prosecuted any EB-5 investors for fraud.EB-5 Petitions: Theory vs. Reality The statutory and regulatory provisions discussed above are onerous. For this reason, immigration through the EB-5 category has never approached the maximum of about 10,000 a year. Yet the INS radically restricted the EB-5 program even further in 1998 by issuing four precedent AAO decisions that make it even harder to obtain EB-5 status. Based on informal INS data, it appears that the INS approves only about 15 percent of I-526 petitions currently filed. A complete discussion of the four precedent decisions is beyond the scope of this article. Below is a summary of the changes created by the four decisions. The post-1998 requirements are listed first; prior law or policy is listed in italics. New: Promissory note valued at fair market value. Old: Promissory note valued at face value. New: Promissory note must generally be paid after two years. Old: No limit on term of promissory note. New: Security for promissory note needs to be perfected under the UCC. Old: Security does not need to meet UCC perfected security interest requirements. New: Bank accounts cannot be used as security. Old: Bank accounts can be used as security. New: Reduce the fair market value of promissory note by "considerable expense and effort" to execute on foreign assets. Old: Promissory note valued at face value. New: No redemption provisions can be agreed to prior to end of conditional residence and prior to conclusion of payments on promissory note. Old: Redemption provisions can be agreed to so long as redemption does not occur until after promissory note has been paid in full. New: Third party guarantees to investor prohibited. Old: Third party guarantee allowed unless backed by government obligation. New: Amounts attributable to expenses to start new commercial enterprise must be deducted from capital contribution. Old: Start-up costs and expenses included in amount of capital contribution. New: Investor must be "present at inception" of new commercial enterprise. Old: No such requirement previously. New: New ownership and new corporation are not sufficient to establish new commercial enterprise. Old: Restructuring or reorganization sufficient to establish new commercial enterprise. New: All of the activities must benefit the targeted geographical area to count indirect employment. Old: The qualifying investment must be within the approved regional center; there is no separate requirement to prove benefit solely to the regional center. Below is a summary of additional restrictive interpretations created by the AAO in recent nonprecedent decisions: New: Money earned or assets acquired while in the United States in an unlawful status are not considered lawful means to acquire capital. Old: Drug smugglers or other criminals cannot use their ill-gotten gains to obtain permanent resident status in the United States through the EB-5 category. New: All investors in the partnership must identify the source of their funds to prove that they were derived by lawful means. Old: The petitioning investor must identify the source of his or her funds in the partnership to prove that they were derived by lawful means. New: Merely injecting cash into the corporate account of a business does not show that the capital is "at risk" for the purpose of generating a return. Old: Injecting cash into a corporate account could show that the capital is "at risk" for the purpose of generating a return. Qualifying a person for EB-5 status is one of the most complicated subspecialties in immigration law. A sophisticated knowledge of corporate, tax, investment, and immigration law are all required. Moreover, the four 1998 precedent AAO decisions and subsequent nonprecedent decisions have made it even harder to obtain approvals of EB-5 petitions. Investors must discard normal investment opportunities in favor of investments structured to meet the unrealistic requirements of the precedent decisions. Attorneys, in turn, must proceed at their peril in advising clients. Hopefully the courts or Congress will clarify this area of the law to make permanent residence through investment a realistic visa option. Until then, practitioners should consider advising investors to come to the United States through other visa categories such as the E-2 investor, L-1 intracompany transferee, or EB-1-3 multinational executive or manager routes.Appendix: World Trade Center/Greenville-Spartenburg Inc. Beacon U.S. Studios Inc. City of New Orleans North Country Alliance Aero-Space Port International Group North Texas Commission Legacy Project Abacus Advisors, Inc. American Export Partners Danou Enterprises Pueblo Economic Development Corporation GV Development Unibex Global Corporation State of Hawaii, Department of Business, Atlanta International Center for Academic [sic] and Athletics The Gateway Freedom Fund (aka Golden Rainbow Freedom Fund) West Rand Gold Trust Miami Chinese Community Center, Ltd. CKS Western Inc. World Trade Center Empirical Entertainment State of Vermont Trading Partners International of California LLC CMB Export LLC Alameda Trade Center Matrix International, LLC California Consortium for Agricultural Export
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