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Considerations in EB-5

In 1990 the United States Congress created a permanent residence category for investors who invest in a commercial enterprise that will benefit the United States economy and create at least ten full-time jobs. The minimum investment amount is $1 million of capital, although the minimum may be reduced to $500,000 if the investment is made in a “targeted employment area.” Congress set aside 10,000 immigrant visas annually for investors and their immediate family members.

The following is an overview explaining the process of an EB-5 investment for foreign nationals seeking permanent residence in the United States. Note: this is not legal advice and should not be considered as such. Every potential EB-5 investor is strongly advised to seek experienced legal advice as well as a tax counselor before considering an EB-5 investment.

1. General Requirements and Procedures

The EB-5 law authorizes issuance of an immigrant visa to an EB-5 investor who is coming to the United States to invest in a new commercial enterprise invested or is in the process of investing the requisite capital in the new commercial entity and which will benefit the United States economy and create new full-time employment for at least ten United States workers.

An investor must file a petition, Form I-526, with the United States Citizenship and Immigration Services (“USCIS”). Upon approval of the petition by the USCIS (the I-526 petition), the investor and the immediate family (spouse, and unmarried children under 21 years of age as of the date of granting conditional permanent residency) may continue to apply for permanent residence by processing at a United States consulate or if in the country “adjust their status” at a local USCIS office.

The United States Congress stipulated that the initial permanent residence status shall be conditional for approximately two years. Prior to the expiration of the two-year period, the conditional resident investor must file a petition, Form I-829, with the USCIS to request removal of the conditions and mark the visa permanent thus establishing permanent residence. The petition should be granted if the investor demonstrates that the investor invested the required amount of capital; the investor sustained the investment throughout the two-year period of conditional residence; additionally the investor created the ten new American jobs as a result of their investment.

2. Ways in which a foreign national investor may meet the EB-5 requirements

A.   Create a new commercial enterprise

I.       The law requires the investor-petitioner to invest in a new commercial enterprise. The enterprise must be “new,” i.e., established after November 29, 1990, the date the law was enacted.

II.     However, an investor’s contribution of capital to an existing business that was formed prior to November 29, 1990 may be acceptable in three situations.

B. Reorganize/Restructure

I.       This usually requires a substantial reorganization or restructure of the existing business. The USCIS has stated, however, that the mere change in ownership, cosmetic changes to the decor of the business site and implementation of a new marketing strategy are insufficient changes to constitute establishment of a new commercial enterprise. On the other hand, a complete transformation of the nature of the business is likely to be considered sufficient.

C. Expand by 40%

I.       An investor may invest and expand an existing business, resulting either in an increase of at least forty percent in the net worth of the business or in the number of employees in the business. The USCIS may require evidence in the form of income tax returns, audited financial statements, and employment tax returns. Any of the above described investments must be in 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 includes a holding company and its wholly-owned subsidiaries, if each 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 a personal residence.

D. Invest in a troubled business

I.      The investor may invest in a troubled business, this is an existing business and the business must have lost 20% of its net worth in the last 12 to 24 months.

Troubled Business/Saving Jobs

Special rules govern investments in a “troubled” business. A troubled business is one that has been in existence for at least two years, has incurred a net equity loss of 20% for accounting purposes during the twelve or twenty four month period before the petition was filed, and the loss for such period is at least equal to twenty percent of the business’s net worth before the loss. If the petition is based on investment in a troubled business, the investor is not required to create ten new jobs. Instead, the petition may be based on proof that the business will save American jobs thus the proof required will be that the target investment will maintain or increase the number of existing employees during the conditional status period.

The above discusses what will be approved as a new commercial enterprise, however all the other requirements such as TEA determination, ten new jobs created and all the other requirements under the EB-5 program must be met.

1. Engage in a New Commercial Enterprise

The law requires the investor to engage in a new commercial enterprise as described above. A passive investor cannot qualify for permanent residence in this visa category. The investor must be involved either in the day-to-day managerial control of the commercial enterprise, or in the management of the enterprise through policy formulation. The USCIS regulations state that if the investor is a corporate officer or board member, or, in the case of a limited partnership, is a limited partner with the rights and responsibilities typically provided under the provisions of the Uniform Limited Partnership Act, then the investor satisfies the requirement of engaging in the management of the new commercial enterprise. The USCIS has stated that the investor must actually engage in management rather than just carry the title. Limited partnerships are the most popular form of new commercial enterprises. Additionally CMB strongly encourages potential foreign nationals to perform extreme due diligence on any Regional Center investment contemplated. Additionally, as a Limited Partnership they should monitor the activities of the Regional Center.

2. Investment of Capital

The law requires an investor-petitioner to have invested or be in the process of investing the required capital. This requirement has several elements that require separate consideration. Note: Although the law states “In the progress of investing” this is a very dangerous path in the opinion of CMB. CMB requires all investors to deposit the full amount of capital in the new commercial enterprise before they are admitted as a limited partnership. CMB has seen petitioners and Regional Centers say they may just be in the “process” of investing however we have seen denials on the structure.

a. Amount of Capital

The amount of required capital is a minimum $1 million. The minimum amount is reduced to $500,000 in cases of investment in qualified “targeted employment areas” (TEA), which are areas which experience unemployment of at least 150 percent of the national average (and must be backed by statistical data showing the area is in fact 150% or more of the national unemployment level or those areas classified as rural). A “rural area” is an area not within either a metropolitan statistical area or the outer boundary of any city or town having a population of 20,000 or more. The assessment of whether the investment is in a targeted employment area is based on statistical information relating to the time of investment, and is based on the location where the enterprise is principally doing business.

b. Equity Capital

To “invest” is to contribute equity or capital to the enterprise. The individual investor cannot receive any bond, note, or other debt arrangement from the enterprise in exchange for the contribution of capital. This also includes the idea the investor buys a house or condo as this is prohibited also. This includes any stock redeemable at the holder’s request. Provision for guaranteed returns and redemptions will be classified by the USCIS as impermissible debt arrangements. Also, the petitioner’s personal guarantee of a loan that is the primary obligation of the enterprise does not constitute an equity investment of capital by the petitioner.

c. Kinds of Capital

“Capital” may include cash and cash equivalents, equipment, inventory, and other tangible property. Although capital does not include loans made by the petitioner to the enterprise, the investor’s contribution to the enterprise of the cash proceeds of indebtedness secured by assets owned by the investor may be considered capital, provided the investor is personally and primarily liable for repayment of the debt, and the assets of the enterprise upon which the petition is based are not used to secure any of the indebtedness. The loan must also meet the commercial viability test.

Separately, the use of a promissory note payable by the investor to the enterprise – as a present commitment to contribute cash to the enterprise in the future – may be considered capital in limited circumstances where the promissory note is secured by the assets of the petitioner, the obligation is a perfected security interest, and the promissory note is valued in fair market United States dollars at the time it is contributed to the enterprise. Valuation of the promissory note requires consideration of the value of the assets securing the note, the amenability of the assets to seizure, and the expenses of enforcing a foreign judgment if necessary. An investor also may use a schedule of payments or a promissory note as evidence of being “in the process of investing” the required capital, however, the USCIS requires that payments of the minimum-required capital must be substantially completed before the end of the two-year conditional residence period.

Note: as stated elsewhere in the web site arrangements involving payments in the process of investing receive heightened scrutiny by the USCIS and in the past CMB has seen denials of this type of structure.

d. Escrow

The investor may use an escrow, conditioning release of funds to the enterprise on approval of conditional residence status or approval of Form I-526. However, the USCIS has advised that the escrow must release funds directly into the enterprise’s accounts for job-creation purposes. The funds must be irrevocably in the escrow and additionally the USCIS has stated the use of escrow is not a requirement and is a self-imposed restriction and will not consider funds in escrow waiting for I-526 approval as a qualified financial hardship for faster adjudication.

e. “At Risk”

The USCIS requires proof that the capital invested is “at risk.” The USCIS focuses on actual and intended uses of capital to confirm the capital will be spent according to the submitted comprehensive business plan as outlined in the partnership documents. Further the USCIS will review documents submitted to show that all ($1,000,000 or $500,000 if qualified) EB-5 capital will be used for job creation and profit-generating activity. The USCIS requires more than a deposit of funds into a business account, instead requiring evidence of the actual undertaking of business activity. The USCIS has held that use of capital for partnership expenses and reserve accounts among other things are unrelated to job creation and eliminate that portion of the capital consideration in counting the amount invested by the petitioner.

f. Tracing and Lawful Source

The law requires proof that the required amount of capital is invested by the petitioner. Additionally the law requires proof the capital came from a lawful source. Thus, an investor-petitioner will be required to present evidence that traces capital invested into the new commercial enterprise back to the petitioner as a source.

Additionally, the USCIS also requires that a petitioner present evidence that the source of the capital is a lawful one. Regulations specify evidence requirements such as five years of income tax returns. The USCIS also has required evidence of the investor’s level of income or other evidence to prove the investor has sufficient lawful sources for the capital invested. Where the investor’s funds have been received by gift or loan, substantial evidence concerning the bona fides of the donor or lender will be required. The petitioner and the person who “Gifted” the funds will be required to prove the above. In the case of “Loaned on Borrowed Funds” the USCIS will require the loan to meet the requirements of a commercially acceptable loan.

3. Benefit the U.S. Economy

The investment must “benefit the United States economy” in order to qualify the investor for permanent residence status. Arguably, the petitioner has benefited the economy by meeting the employment and investment requirements of the visa classification. To this date no additional evidence is required in the typical case. However, considering that federal regulation of foreign investment is extensive (for example, in aviation, banking, communications and energy resources) and local economic factors vary widely, it is possible that an investment may not be deemed beneficial to the United States economy if it is made in a regulated industry sector or in a volatile local economy sector that protests the foreign investment such as the energy grid as an example. The law requires the investment to boost regional productivity. Care should be taken that the investment does this as the USCIS is ever increasing the regulations and enforcement of the law.

4. Create or Save Jobs

The investor must create full-time employment positions for at least ten new United States citizens, lawful permanent residents or other immigrants lawfully authorized to be employed in the United States. The investor, his or her spouse and children do not count toward the ten employee minimum. Nonimmigrants (i.e., those with E, H, L and other temporary worker visas) are also excluded from the count. An “employee” is an individual who provides services or labor for the new commercial enterprise, and receives wages or other remuneration directly from the new commercial enterprise. This definition excludes independent contractors. Under the investor Regional Center Program the job creation is not restricted to employees of the new commercial enterprise, but rather the investor’s petition may include evidence of indirect creation of jobs throughout the economy. There are many economists who have opined on job creation and the USCIS has denied petitions simply because the job creation methodology is not verifiable. A potential investor should carefully study the methodology used by the Regional Center as job creation equals success and the opposite is true failure to adequately show the required job creation means failure and the petitioner upon failure will be placed in removal procedures. This is why CMB stresses job creation as the single most important factor in considering an EB-5 Regional Center.

a. Types of Jobs

The jobs created must be full-time, i.e., a position that requires a minimum of thirty five working hours per week. Part-time jobs do not count. However, job sharing arrangements, where two or more qualifying employees share one full-time position, will be counted.

b. When Jobs Must Exist

The petitioner may base the Form I-526 on proof that the required jobs have been created, or on proof that the required jobs will be created before the end of the two-year conditional residence period. In each case the investor must support the Form I-526 with a comprehensive business plan demonstrating the creation for at least ten employees before the end of the conditional residence period. The plan must describe the business, its products and services; must include a marketing analysis, including an analysis of the competition’s products and pricing; must include a marketing strategy; must identify the organizational structure and specific plans for hiring of staffing; and must provide financial projections.

I. Troubled Business/Saving Jobs

Special rules govern investments in a “troubled” business. A troubled business is one that has been in existence for at least two years, has incurred a net equity loss of 20% for accounting purposes during the twelve or twenty four month period before the petition was filed, and the loss for such period is at least equal to twenty percent of the business’s net worth before the loss. If the petition is based on investment in a troubled business, the investor is not required to create ten new jobs. Instead, the petition may be based on proof that the business will save American jobs thus the proof required will be that the target investment will maintain or increase the number of existing employees during the conditional status period.

c. Regional Center/Indirect Jobs

To encourage immigration through investment, and to concentrate investment in specific regions, Congress created a temporary Pilot Program in 1993, directing the USCIS to set aside visas for people who invest in a designated “Regional Center.” The Pilot Program now known to only as the Regional Center Program currently sets aside 10,000 visas annually. The Regional Center Program does not specifically require that the commercial enterprise actually employ ten new United States workers, as long as the investor can reasonably demonstrate that the investment itself has created ten new or more jobs directly or indirectly. The USCIS to date has designated more than 700 Regional Centers located throughout the country.

A note on the growth of Regional Centers; in 2007 there were 11 Regional Centers and it is estimated only about 5-6 were active (CMB was active in 2007).

5. Conditional Permanent Residence Status

An investor obtains permanent residence status on a conditional basis although it is called “conditional permanent” it is conditional. The rights, privileges, responsibilities and duties that apply to all other lawful permanent residents, including the right to enter and live in the United States as a resident, to apply for naturalization and to petition for qualifying relatives, apply equally to conditional permanent residents. The investor must apply for removal of the conditions within the ninety days immediately preceding the second anniversary of obtaining resident status.

The EB-5 investor is applying for permanent residency. There is during this conditional status, a residency requirement. As with other permanent residents, the investor should establish family and economic ties to the United States and must be careful not to be absent from the United States for a continuous period exceeding 180 days, unless the investor has obtained a reentry permit. Upon removal of the conditions on the Visa there is no strict annual residency requirement. Yet, if the visa holder is absent from the U.S. for over one year there is precedent for revoking the permanent residency visa. Therefore, there are restrictions and one should seek advice from their immigration attorney.

6. Removal of Conditions

Within the ninety days immediately preceding the second anniversary of obtaining conditional permanent residence status an immigrant investor must file a petition, Form I-829, to remove the conditions. The petition must be accompanied by evidence that the petitioner invested or was in the process of investing the required capital, that the enterprise and investment were sustained throughout the two-year conditional period, and that the investor created or can be expected to create within a reasonable period of time ten full-time jobs. The USCIS will issue a receipt notice for the filing of the I-829 petition. The receipt notice typically is valid for one year, and can be used as a travel document. Thereafter, if the I-829 petition remains pending the investor must obtain a stamp in the passport to document continuing lawful status, until the conditions are removed.

a. Failure to File Form I-829

Failure to file the I-829 petition timely will result in automatic termination of the conditional resident’s status and initiation of removal proceedings from the country. This essentially negated the conditional/permanent visa of the petitioner.

b. Adjudication of Form I-829

A USCIS service center may approve an I-829 petition without a request for additional information, issue a request for further evidence, or deny the petition.

A USCIS service center may approve an I-829 petition if the petition establishes the requirements for removing the conditions, as 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 may instruct the conditional resident to report to the appropriate USCIS district office for processing of a new permanent resident card (Form I-551). At the district office, the conditional resident may receive in their unexpired foreign passport a temporary I-551 stamp valid for up to twelve months.

A district director must deny an I-829 petition if the petition does not establish the requirements for removing the conditions. There is no appeal from this decision. The single largest failure at the I-829 is the inability to show ten new American jobs were created. Again CMB has long stated this is not really an investment vehicle, rather a jobs creation program. Ensure the Regional Center you choose has experience in success on obtaining approvals of I-829 for its investors. Additionally, ensure the Regional Center is not altering data to show a high unemployment level because if this is done the USCIS could rule the requisite capital of $1 million should have been invested and was not invested because only $500,000 was invested. The conditional resident may seek review of the district director’s decision in removal proceedings before an immigration judge.

c. Status of Conditional Residents While I-829 Is Pending

Immigrant investors and immediate family members remain in conditional permanent residence status while the I-829 petition is pending. Status should be extended automatically in one-year increments until the USCIS acts on the I-829 petition. During this time, the investor and family members are authorized to travel abroad and work in the United States. In practice, the USCIS will stamp the passports of the investor and qualified family members to document the continuing resident status. Today however the I-829’s are being processed in approximately 5.7 months as posted on the USCIS web site as of June 30, 2014.