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Comments on EB-5 memo of Feb 14, 2013

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  • 1. Comments on EB-5 Memo Iteration of Feb 2013 By Joseph P. Whalen (March 25, 2013)These comments relate to the version of the EB-5 Policy Memo releasedon February 14, 2013, which is open for comment through April 1, 2013.I. In addition to what is stated, it might be noted that EB-5 itself was a codification by Congress of an earlier regulatory program for labor certification exemption through investment which dates back to 1967.II. While this is the correct “standard of proof”; it may be worthwhile reminding folks that “burden of proof” remains with the applicant/petitioner and that when “specific evidence is spelled out in the regulations” then it may be the key factor to meeting the burden of proof. Cite to Matter of Chawathe n.7.III. Vigilance against fraud is all well and good BUT warn against falling into a “Culture of No!” mentality.IV. no commentIV. A no commentIV. A.1 Hopefully, laying out all the complex considerations involved, this will help discourage the use of “promissory notes”.IV. A.2 The concept of disallowing “prospective investment” goes back to pre-IMMACT90 immigrant investors, for example: Matter of Shon Ning Lee, 15 I&N Dec. 439 (BIA 1975), Decided by the Board August 26, 1975, aff’d, Shon Ning Lee v. INS, 576 F.2d 1380 (9th Cir. 1978) or No. 77-2681 (June 13, 1978). 1
  • 2. From the Ninth Circuit: “The major issue is whether the motion to reopen is a new application or a renewal of a previously denied application. If it is a renewal, as Lee argues, a visa could be available to Lee. If the former, the BIA was correct in finding Lee ineligible for resident status. We have concluded that Lees motion to reopen was a new application.” At ¶ 2 “On April 3, 1973, Lee filed with the District Director an application for permanent resident status. A previous application, not relevant here, had already been denied. In this application, Lee sought admission as a nonpreference immigrant who was exempted from the labor certification requirements of 8 U.S.C. § 1182(a)(14) on the ground that she was an alien investor within the purview of 8 C.F.R. § 212.8(b)(4). The District Director found that Lee was not entitled to the claimed exemption because she had not invested in and was not actively in the process of investing in a commercial or agricultural enterprise. 8 C.F.R. § 212.8(b)(4). He denied the application.” At ¶ 6 [Emphasis added.] “At oral argument before the BIA in December 1974, Lees counsel stated that Lee owned no business at the time of argument and that no business relating to Lee was identifiable. Nine months after argument, in August 1975, the BIA affirmed the denial. During this nine-month period, visas for Chinese nonpreference immigrants apparently became available on three occasions.” At ¶ 8Lee claimed that she was “looking for a suitable investment” and by thatmere assertion she should be viewed as “actively in the process of investing”. Sheclaimed that on the advice of her attorney she should only commit to aninvestment after obtaining her LPR status. Neither the INS, BIA, nor 9th Circuitagreed with her “attorney’s advice” or that interpretation of the investor visa(labor cert exemption) eligibility requirements.Her later assertion that she had actually invested in November, a month prior tothe last BIA hearing (which heard oral argument from her so-called attorney inDecember) and was therefore entitled to recapture an earlier priority date wasfound unacceptable (and dubious). The Court (and everyone with half a brain)questioned why that information, if it was true, would conceivably have beenwithheld from the last BIA hearing in December 1974. 2
  • 3. “On February 25, 1976, the BIA received the motion to reopen in question here. The motion attempts to demonstrate once more Lees entitlement to permanent resident status as an alien investor and shows that Lee had actually purchased a business in November, 1974, one month before the oral argument mentioned above. The BIA treated the motion as a new application for permanent resident status with a filing date of February 25, 1976. Under the terms of 8 U.S.C. § 1255, the BIA found that Lee was not eligible for permanent resident status because a visa was not available to her on this filing date.” At ¶ 9 [Emphasis added.] BIA Decision at: http://www.justice.gov/eoir/vll/intdec/vol15/2424.pdf 9th Circuit Decision at: http://openjurist.org/576/f2d/1380IV. A.3 no commentIV. A.3.a no commentIV. A.3b It cannot be stressed enough that the “TEA” must meet BOTH prongs for a Rural Area TEA and that it is NOT an “either-or” situation.IV. B no commentIV. B.1 It boggles the mind how many developers and real estate agents are actually marketing residential properties as EB-5 investments.IV. B.2 no commentIV. B.2.a Restructuring: This concept confuses a great many would be investors who are offered investments by folks who have no clue how this works. Such offerings are usually by desperate individuals and/or businesses that need an influx of cash in order to survive “Troubled Businesses”. I would like to see an expanded discussion, examples of what WILL and WILL NOT work, and warnings. 3
  • 4. IV. B.2.b Expansion: This approach is also quite difficult for the investors and developers to grasp. Most often the project will involve multiple EB-5 investors. There is an inherent danger that some folks may have overlooked. When the business itself seeks “stand-alone” investors and those investors come on board in a piecemeal fashion, then each additional EB-5 investor has a higher bar than the one before. They would be better off pooling their investments and investing as one Limited Partnership. Also, the businesses seeking the EB-5 funds don’t realize that a “loan model” will not work outside the Regional Center context and the EB-5 investors must obtain partial ownership (equity) in the business because they may only count EB-5 Direct Jobs!.IV. B.3 Pooled investment outside of Regional Centers (see above) demands that ALL the money be sourced and shown to be clean. That includes the non-EB-5 investors as well including domestic investors as well. The alien investor cannot get in bed with the mob and expect to get a visa out of such a deal.IV. B.4 Evidence of Investment: USCIS and all major bureaucracies just LOVE paper! So much for the Paperwork Reduction Act. That said, it is critical to select and submit the appropriate paperwork and avoid submitting contradictory materials!IV. B.5 Engaged in Mgmt: There is an inherent danger in that certain offerings have to be registered with the SEC however there are exceptions to registration BUT the investor cannot have a say in mgmt for some of those exceptions. It is a sticky situation and some banks are refusing bridge loans to folks who have painted themselves into this particular corner. 4
  • 5. IV. B.6 Only one small but significant comment: A Regional Center proposal should address more than one commercial enterprise even if all are hypothetical (or archetypal). § 610 calls for a proposal that identifies the “kinds of commercial enterprises that will receive capital from aliens”. As the STATUTE is written in the plural, it is not reasonable to allow an overly narrow single project proposal to be approved as a Regional Center unless it is multifaceted and addresses numerous kinds of commercial enterprises such as in a “mixed-use” development of some sort (easy examples: mall/shopping center; or office/professional building; or commerce park).IV. C I would point out under this heading that IF the 10 jobs have not yet been created upon I-526 filing THEN, as per regulation, a comprehensive detailed and credible Business Plan is required. 8 CFR § 204.6 (j)(4)(i)(B) (4) Job creation— (i) General. To show that a new commercial enterprise will create not fewer than ten (10) full­time positions for qualifying employees, the petition must be accompanied by: (A) Documentation consisting of photocopies of relevant tax records, Form I­9, or other similar documents for ten (10) qualifying employees, if such employees have already been hired following the establishment of the new commercial enterprise; or (B) A copy of a comprehensive business plan showing that, due to the nature and projected size of the new commercial enterprise, the need for not fewer than ten (10) qualifying employees will result, including approximate dates, within the next two years, and when such employees will be hired. (ii) Troubled business. To show that a new commercial enterprise which has been established through a capital investment in a troubled business meets the statutory employment creation requirement, the petition must be accompanied by evidence that the number of existing employees is being or will be maintained at no less than the pre­investment level for a period of at least two years. Photocopies of tax records, Forms I­9, or other relevant documents for the qualifying employees and a comprehensive business plan shall be submitted in support of the petition. 5
  • 6. (iii) Immigrant Investor Pilot Program. To show that the new commercial enterprise located within a regional center approved for participation in the Immigrant Investor Pilot Program meets the statutory employment creation requirement, the petition must be accompanied by evidence that the investment will create full­time positions for not fewer than 10 persons either directly or indirectly through revenues generated from increased exports resulting from the Pilot Program. Such evidence may be demonstrated by reasonable methodologies including those set forth in paragraph (m)(3) of this section.IV. C.1 Certain businesses traditionally rely upon a part-time work force while others may be seasonal or transient in nature. Such industries do not lend themselves to the realm of EB-5 investments. This point cannot be stressed enough. Also, “job-sharing” is rare and not to be confused with adding up multiple part-time positions and dividing by 35 hrs/wk. People who work consecutively might share one position would count but people who work side-by-side cannot share the same position.IV. C.2 Job Creation, Job Preservation, or a Combination of them. Also, rather than saying “three measures” it appears to really be “three contexts”.IV. C.2.a A basic underlying premise in legal analysis and interpretation is that each word and each part of a statute and its implementing regulations. etc... is to be given full effect in harmony with the rest of the legal framework. With this in mind, there are certain threshold issues to be determined. To put it another way, preliminary questions need to be asked and satisfactorily answered, in order to move forward with the EB-5 project evaluation and/or adjudication. The business has to have been in existence for at least two years upon filing the I-526 in order to be in the running as a possibly “troubled business”. It has 6
  • 7. not been settled as to what will prove the establishment of thebusiness in order to meet the regulatory requirement ofhaving existed for at least two years. Was it established uponfiling certain paperwork? Which paperwork? With whom?Was it established after that point when physical premiseswere secured? Was it established when the “business owner”took possession/occupancy of the commercial space? Did itnot fall under the definition until it was “operational”?The troubled business needs to show a 20% orgreater loss in “net worth” in the prior 12 or 24-month period as of the I-526 filing date. How is networth being calculated? At what point in the existence of thebusiness can one start counting losses? Set up costs are notlosses, they are the investment needed to begin doingbusiness. How can you show a net loss if you never had aprofit and/or never actually got around to doing any business?A commercial enterprise is a “for-profit activityformed for the ongoing conduct of lawful business”.In order to show a loss, the business must at the very least,have been operational to the point of conducting ongoinglawful business of some sort and to some degree. An EB-5investor can buy a troubled business and be considered thesuccessor-in-interest but must be careful to make sure thatthe entity purchased was actually operational and conductingbusiness at some point during its minimum two-years ofexistence. Although it would be easiest if the troubledbusiness actually had made a profit at some point, I am notconvinced that it is an absolute requirement as long as thebusiness was actually operational and running at a loss whilestriving to turn a profit. You do have to have, and spend,money in order to make money in the vast majority of 7
  • 8. businesses in the world. Many businesses are after all initially funded with savings and/or borrowed money. For the concepts of how to examine and describe business activities, profitability and the reason(s) for a temporary or short-term loss in revenue, I suggest studying Matter of Sonegawa, 12 I&N Dec. 612 (Reg’l Comm’r 1967). While Sonegawa is best known for its interpretive value on the concept of “an employer’s ability to pay the proffered wage” it should not be overlooked for its potential for describing and discussing EB-5 troubled businesses. In addition to what may be “borrowed” from Sonegawa, certain nonimmigrant categories may offer guidance on related concepts useful to the EB-5 “troubled business” context.IV. C.2.b USCIS recently posted a non-precedential AAO Dismissal that spoke to the issue of wholly-owned subsidiaries. This memo is not as informative on this topic. See the following article and the AAO Decision. http://www.slideshare.net/BigJoe5/further-research-sheds-light-on -the-choice-of-tenant-occupancy-methodology-as-a-label AND http://www.uscis.gov/err/B7%20-%20Form%20I-526%20and%20 I-829/Decisions_Issued_in_2010/Dec082010_01B7203.pdfIV. C.2.c Regional Center “affiliation” is addressed in the regulations and in the article linked below and in the regs at 8 CFR § 204.6 (m) (7). Basically, one cannot become affiliated with a Regional Center that does not yet exist. Some folks have jumped the gun on this and dug themselves into holes. 8
  • 9. http://www.slideshare.net/BigJoe5/on-matters-pertaining-to -regional-center-affiliationIV. C.3 Evidence of job creation can come into play in the I-526 IF said jobs have already been created however, most often such evidence is associated with the I-829. In the I-526 filing, most investors will put for a Matter of Ho-compliant business plan. Later on, when an I-829 is filed, the stand-alone investor will be dealing with the same specific evidence stated in the regulations. In the Regional Center affiliated I-829, evidence is usually highly variable. The evidence required must support the underlying assumptions laid out as indicative of the accomplishment of a stated goal, i.e., creation of a certain number of jobs as indicated in the economic analysis which was based on the business plan. Once an assumption has been supported with evidence indicating that is has come to pass and thus shown to be true then the presumption of job creation becomes not only possible and plausible but is also accepted as probable and is a reasonable inference, and thereby accepted as true.V. There is much confusion about the proper sequence of events in BE-5 among not only the EB-5 investors, RC applicants and associated “developers”, economists, and business plan writers, but also, immigration attorneys and some adjudicators.V.A The would-be immigrant may stand-alone, group together in a “direct investment”, or join in a Regional Center project.V.A.1 The regs specifically address this. IF the jobs have been already created THEN they show specific evidence. IF the jobs have not yet been created THEN they submit a Matter of 9
  • 10. Ho-complaint Business Plan. Also, showing a “commitment to invest” is a little more than merely having the money in the bank. See Matter of Shon Ning Lee, 15 I&N Dec. 439 (BIA 1975).V.A.2 One minor comment: define force majeure. Definition of Force Majeure A French term literally translated as "greater force", this clause is included in contracts to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and restrict participants from fulfilling obligations. From: http://www.investopedia.com/terms/f/forcemajeure.asp Also: “an act of God”V.B I-924 Amendments: It is interesting to note that the “exemplar” or “Dummy I-526” is not mentioned. In essence, an amendment is primarily to be used to alter the “scope” of the Regional Center in some substantive respect. Note: The words “exemplar” and “hypothetical” do not appear in a simple word search of this memo.V.C “USCIS will continue to afford deference to this determination for all related adjudications, so long as the related adjudication is directly linked to the specific project for which the economic methodology was previously approved.” memo p. 21 In the Carlsson minutes order denying the restraining order and injunction, against USCIS, Judge Snyder spoke to the “deviation” from what was previously put forth and I have written previously about the “within the scope analysis” for determining whether a materially changed project could still be used to count indirect jobs, and Chang discussed “reasonable reliance”. 10
  • 11. Grammar Check: Last sentence of 2nd paragraph: “... USCIS will still conduct a de novo of inquiry of each prospective immigrant investor’s lawful source of funds and other individualized eligibility criteria.” “.... A change in fact is material if the changed circumstances would have a natural tendency to influence or are predictably capable of affecting the decision. See Kungys v. United States, 485 U.S. 759, 770-72 (1988) (defining materiality in the context of denaturalization). ....” This cannot be emphasized enough or too often!V.D The point that the timing aspect of a material change is key to determining how to proceed cannot be emphasized too much because far too many people, including immigration lawyers, just don’t understand the concept. This discussion should help clear the air.V.D.1 “A deficient Form I-526 petition may not be cured by subsequent changes to the business plan or factual changes made to address any other deficiency. The only way to perfect material changes under these circumstances is for the immigrant investor to file a new Form I-526 petition to correspond to the changed plans.” p. 22 I agree, however, it should be pointed out that minor “non-substantive” and “non-material” changes such as “supplementing the record” with existing but missing evidence is acceptable. Also, certain minor updates are acceptable, such as renewing a permit previously held when lengthy adjudication has seen the evidence of record expire. The use of scenarios is helpful to understanding this stuff! 11
  • 12. V.D.2 “.... USCIS will no longer deny petitions to remove conditions solely based on failure to adhere to the plan contained in the Form I-526, though in the regional center context, final projects must still fall within I-924 approved industries.” p. 23 This is where the “within the scope analysis” comes into play. It is nice to see that it remains written into Policy. It was in the earlier draft also. “.... even in the event of a change in course, a petitioner must always be able to demonstrate: (1) that the required funds were placed “at risk” throughout the period of the petitioner’s residence in the United States, and (2) that the required amount of capital was transferred to the business or businesses most closely responsible for creating the employment; and (3) that this “at risk” investment was “sustained throughout” the period of the applicant’s residence in the United States....” It would seem that this might be a good place to ALSO restate that the other thing considered at this stage is overall job creation and/or preservation.VI. no commentVIII. no comment 12