Some EB-5 facts that have been forgotten

Some EB-5 Facts That Have Been Forgotten By Joseph P. Whalen (June 23, 2012)IntroductionIn the realm of employment-based fifth preference visas (EB-5) there are somestrange notions floating around among individuals seeking to get a piece of theaction. This admittedly simplistic essay will explore some major themes andperhaps a few nuances. It is not the end all and be all, it is merely one man’sobservations for the present time subject to modification.BackgroundEB-5 visas are authorized by INA 1 § 203(b)(5) which is entitled: “EmploymentCreation”. The INA has been placed within the United States Code (USC) where itforms the bulk of Chapter 12, which is entitled: “Immigration and Nationality”.The code equivalent is 8 USC § 1153(b)(5). The EB-5 visa as we know it todaywas created through the Immigration Act of 1990 (IMMACT90). EB-5 was areworking of an earlier category of labor certification exemption, which wascreated by an interpretive regulation in 1967 2. The former INS 3 wrote the initialregulations pertaining to EB-5 in response to IMMACT90 and the Final Rule waspublished at 56 FR 60897-609134, Friday November 29, 1991.Those original regulations were tough and restrictive. There was an outcry andCongress reacted by swiftly creating a “Pilot Immigration Program” to supplementand promote greater use of the EB-5 visa. This “Pilot Program” came into beingvia Pub. L. 102–395, title VI, §610, Oct. 6, 1992, 106 Stat. 1874, the Departmentsof Commerce, Justice, and State, the Judiciary, and Related AgenciesAppropriations Act, 1993. The statute has been repeatedly amended since passage.The “Pilot Program” legislation is not part of the INA but it is codified along withit as 8 USC § 1153 Note: Pilot Immigration Program. That “pilot program” wasvaguely defined in 1993, and remains vaguely defined nearly 20 years later. The1 Immigration and Nationality Act of 1952, as amended, is referred to as the INA or the Act.2 See: http://www.slideshare.net/BigJoe5/a-survey-of-the-immigrant-investor-visa-1966-2011-june-27-2011-jw3 Immigration and Naturalization Service (INS) was the agency under the Attorney General thathandled the bulk of INA matter prior to the creation of the Department of Homeland Security(DHS) and the standing up new agencies as of March 1, 2003. U.S. Citizenship and ImmigrationServices (USCIS) now administers this program.4 See: http://www.slideshare.net/BigJoe5/original-eb5-fr-notice-1991 Page 1 of 9

major concepts of the “pilot program” were and remain the introduction of anentity known as a “Regional Center” and the option to count “indirect jobs” forEB-5 visa petitioners who pool investments through a Regional Center.As has been proven time and again, people became involved in the creation ofRegional Centers for a variety of reasons. Some were well-meaning but naive.Others were unsavory and duplicitous. Those “bad actors” tarnished the pilotprogram and it has taken many years to regain momentum. That new foundmomentum snowballed beyond capacity. USCIS had to back up and take stock.That is where we are now in 2012. USCIS has poured much effort and newresources into the current reworking/reimagining of the EB-5 program.ConfusionIn the absence of numerous, substantial, historical successes, as well as cleardefinitions of certain major concepts and parameters, Regional Center Applicantshave experimented. Some have tried to apply familiar concepts to EB-5 RegionalCenters that they already understood in some other context. Some of theseexperiments have worked well and others have failed miserably. There are stillother concepts that remain in a state of flux (uncertainty) or in other words, thejury is still out.Beyond mere confusion, there are some unscrupulous and unsavory characters thatpurposely obfuscate or seek to confuse for a deceitful and dishonest purpose. Theyseek to ram through ill-conceived or downright improper and illegal processes andprocedures in an attempt to “get rich quick” or bilk the EB-5 investors. • Fortunately, the obfuscators are a distinct minority. • Unfortunately, the number of plain old “confused” people is not a minority!Very few “players” thoroughly understand the “rules” in the EB-5 Regional Center“game”. Some have learned enough to convince USCIS to let them try; and haveaided more than one “entity” in achieving Regional Center Designation. However,these attempts have brought highly variable results after designation. SomeRegional Centers can easily fulfill their “obligations and duties” to their EB-5investor partners while others have a more difficult time doing so. Much of that“difficulty” comes from the general lack of a clearly defined “role” for theRegional Center to play in concert with their EB-5 partners. Page 2 of 9

Points of ConfusionThe following is an attempt to identify some of the prevalent concepts wheredeeper discussion and study might help clear a few cobwebs and shine a sorelyneeded light. Role of the Regional CenterThe Regional Center is supposed to do the hard work of project planning andcoordination in order to provide EB-5 compliant pooled investment opportunitiesfor their EB-5 investors. It is the individual EB-5 investor who will self-petition forhim/herself and qualifying spouse and unmarried minor children on USCIS FormI-526. The Form I-526 is a “preference visa petition” and as such must be“approvable when filed” by an alien who is “eligible at time of filing” for the visaclassification sought via that petition. The filing date becomes the priority date forlater visa issuance purposes. Although this has been the case since 1990, it has yetto become a real consideration. That situation may change within a year or two.The Regional Center may include non-EB-5 investors who may be domestic,foreign, and/or non-natural entities (institutional investors). Each EB-5 investormust show the lawful source of his or her own funds AND for the entire project! Itis therefore incumbent on the Regional Center to source all project funds throughdocumentary evidence which it must supply to the I-526 petitioners (or USCISmay soon allow a “bulk submission” on behalf of a “project”).The Regional Center sponsored and coordinated “project” has to make goodbusiness sense. The “business decisions” must come first! There must be a need forthat project, in that place, at that time, and it must create numerous jobs. This is sobecause the EB-5 visa requires the creation (or preservation) of ten (10) jobs foreach EB-5 investor. Certain projects might be great money-making opportunitiesbut lack sufficient job creation for EB-5 purposes. The above ONLY speaks to theinitial responsibilities and obligations of the Regional Center towards its EB-5investors. There is more to it than that which will be discussed further along in thisessay. Operational Parameters or “Scope” of the Regional CenterThe I-924 applicant may eventually be designated as a USCIS sanctioned orauthorized Regional Center and given express permission to advertise to, and seekto attract, EB-5 investors into certain types of projects in a defined geographic Page 3 of 9

area. Who defines that “scope”? Primarily the Regional Center defines its ownscope subject to confirmation by, and approval from, USCIS. The individual whofiles the the I-924 application seeking designation as a Regional Center is anindividual acting as, or on behalf of, the sponsor, principal, or applicant entity.That “entity” must actually exist at time of filing and be authorized in accordancewith law. That is, the entity, as applicable, must be incorporated, have filed a DBA(doing-business-as) form, has filed for registration and/or recognition, obtained apermit or license, or is otherwise authorized by some legal mechanism to act in thename used on the Form I-924. People sometimes forget that a non-existent entityhas no legal basis to file anything. It is similar to the plight of the undocumentedperson in any country in the world and undocumented aliens in the United States.The Approval Notice that is issued by USCIS will specify the the type ofapplication that the Notice addresses such as: an initial request for designation; oran amendment to their operating parameters or scope of the Regional Center(geography/industries/ reasonable methodologies/investment structure and/orinstruments, etc...); or a project-specific I-526 Exemplar (submitted as an I-924amendment). For the more in-depth requests, especially for older Regional Centerswith a longer history, some very specific (and sometimes complicated and/orconvoluted) procedural history is presented. The “reasonable methodologies”proffered as to the attributable “positive economic benefits” and especially the“indirect job creation” will be specifically identified in the Approval Notice. Regional Center Designation is essentially “Licensing”When USCIS issues an Approval Notice to a Regional Center, it is in essencelicensing that entity, or in the beginning it may be more helpful to think of it as alearner’s permit subject to a “road test”. That entity might easily pass the “roadtest” and find the rest to be smooth sailing forever, or as sometimes happens,violations may occur, or skills diminish over time. When that happens to a driver,they might be “pulled over”, cited, and either made to take remedial action (drivingschool, get a pair of glasses, whatever) or their license may be revoked. If over thecourse of time, USCIS sees problems with a Regional Center it may issue a Noticeof Intent to Terminate. At that point, the Regional Center may submit a response inan effort to take corrective action or to correct a misconception on the part ofUSCIS. What might USCIS see that causes it to issue such a notice? Read on. Page 4 of 9

Show USCIS the Money...PathwaysIndirect jobs start out with the presumption of being tenuously connected to theinvestor. See Izummi, at 179. This presumption must be rebutted, or at leastattenuated, through the establishment, demonstration, and explanation of asufficient nexus between the EB-5 funds and the newly created jobs. The extent ofthe acceptable level of that connection is highly variable to the individual project.Think of EB-5 nexus as a rubber band. Ask yourself how far you can stretch itbefore it snaps and breaks, or at which point the connectivity is no longer palpable.Is the connection between the EB-5 money and the new job easily perceptible tothe reasonable mind? Material Change ProhibitionThe root causes of the concept of the “impermissible material change” in Matter ofIzummi, 22 I&N Dec. 169 (AAO 1998), had to do with: (1.) misdirection and improper use of the money; and (2.) acting outside of the parameters or “beyond the scope” of the Regional Center approval; and (3.) grossly disregarding the overarching parameters of the Pilot Program itself, i.e. accepting TEA level investment outside of TEAs which were themselves outside the approved geographic area of the Regional Center.Any financial transaction documentation that is submitted up-front for examinationby USCIS for EB-5 compliance and is found acceptable may not be “materiallychanged” afterwards without resubmitting it for a new examination. Someunscrupulous Regional Center sponsors have been caught in the act of “bait andswitch” in regard to these complex financial transaction documents. Others havemade inadvertent errors. The results have been the same for the EB-5 investors:Bad News! Regional Centers are “Separate” ApplicantsThe EB-5 investors file I-526 petitions. They are separate and apart from theRegional Center Designation process. The Regional Center applicant files USCISForm I-924 in order to obtain recognition and designation or to “amend” its scope.The Form I-924 may also be used for the purpose of an advance vetting for aparticular project prior to the EB-5 investors filing their “actual” I-526 petitions.The Regional Center may not usurp an individual alien’s I-526 (or I-829) process Page 5 of 9

in order to push through an untimely amendment to the operational parameters or“scope” of the Regional Center. Mixed-Use Misconceptions 5One of the more popular concepts in Regional Center Proposals has been the“mixed-use” development. I am afraid that some Regional Center sponsors havelost sight of certain key underlying facts related to “mixed-use” developments inthe EB-5 Regional Center context. They are limited to the “kinds of commercialenterprises” supported by the Regional Center (RC) Proposal. “Mixed-use” doesnot grant anyone some free-for-all ability to throw together EB-5 Marketing Plansthat stray beyond those types of businesses, industries, or NAICS codes for whichapproval has been sought and obtained.For example, if the RC submitted an exemplar/hypothetical proposal for a “mixed-use” project that included: (1) retail space; (2) medical professional office space;(3) restaurant space; and (4) hotel suites, and supported that “mixed-use”development with an acceptable methodology for determining the number of jobscreated then that is the limit of the scope of its “mixed-use” concept approval.That particular sample mix contains four elements. When a “real” project comesalong and contains all four elements or any subset of them, then it is covered or“within the scope” of the Regional Center approved operational parameters.However, keep in mind this proviso; that the precise mix of businesses in theirexact proportions within the “actual” project will need a basic review foracceptability as to their job counts. That basic review could be accomplishedthrough submitting an I-526 exemplar as an I-924 amendment or by submitting onereal I-526 for an actual EB-5 investor acting as a “guinea pig” or “test subject”.The difference in cost between these two options is so trivial to a multi-milliondollar project that it should never even be a passing consideration. An “actual” I-526 is a real visa petition which MUST be “approvable when filed” for a petitionerwho is “eligible at time of filing”. The I-924 application is not a visa petition andMAY be perfected after filing. The real consideration speaks to the level ofconfidence the RC has in its project and especially the supporting evidence, i.e. theupdated economic analysis for the “actual” project.5 Prior version posted at: http://www.slideshare.net/BigJoe5/mixed-use-misconceptions-in-eb5 Page 6 of 9

Another major consideration that folks don’t realize is that if a “mixed-use” projectcomes along containing an element that was not already included in the OriginalProposal or a subsequent Amendment, then that is outside the scope of theapproval. This situation demands an amendment to the RC parameters. The“guinea pig” approach is not acceptable. The RC involved in Izummi 6 sought tousurp the investor’s petition as a means to amend its scope and that approach wasflatly rejected in the mid 1990s. Each form involves different statutes and hasspecific parameters for adjudication!Someone whose opinion I respect 7 observed in an e-mail to me on 6-21-2012, that: “[T]he term “mixed use” has taken on a definition of its own in the EB-5 context. Real estate professionals normally use the ...[term]... to refer to a mix of residential and commercial uses, not to a mix of commercial tenants in different industries as EB-5 people use the ...[term]...” Statutorily Prescribed Investment LevelsSome Regional Center applicants are genuinely confused while others aredeliberately misleading prospective EB-5 investors as to the minimum requiredamount for a qualifying investment. There are additional unrecognized, unofficialplayers in the Regional Center game. Recruiters and Agents working eitherindependently or in cooperation with U.S. based entities including some RegionalCenters may be either genuinely confused or deliberately misleading prospectiveEB-5 investors abroad with impunity. (China is trying to protect its citizens.)The basic minimum investment amount is one-million dollars. Only in thoseinstances when the project is located in a qualifying targeted employment area(TEA), may the minimum investment amount be cut in half. The mere associationwith a Regional Center does not qualify any project at the reduced investmentlevel. It is evident that even some would-be Regional Center applicants areconfused on this point.The parameters for TEA designation are statutory and NOT at the whim of USCIS.TEA designation is determined at a particular point in time for the individualinvestor, not the entire project. (USCIS is apparently looking at this issue.)6 Matter of Izummi, 22 I&N Dec. 169 (AAO 1998).7 Someone who wishes to remain anonymous. Page 7 of 9

Acting within the scope of its authority, USCIS has determined that the reducedinvestment amount may be secured by the individual investor at either one of twodistinct and discrete points in the EB-5 process as follows. • The lower amount may be invested by the alien investor before filing their Form I-526 if the place where the qualifying investment occurred was a TEA at the time of actual investment. • In the alternative, the TEA designation must be valid at time of filing the USCIS Form I-526.One of the statutory requirements for I-526 approval is showing that the alien hasinvested or is actively in the process of investing the required amount. Generally,this can be proven by the production of contracts, various written agreements, bankstatements, cancelled checks, etc.., which show that the money has been handedover to the project developer or put to use. Another popular alternative is showingthat the full amount has been placed in escrow and is to be released upon I-526approval (or some other acceptable trigger). Escrow 8 is not legally required andcan be detrimental to the success of a project. Need for release of fund fromescrow will not support expedited processing requests.The FULL minimum investment amount must be a placed “at risk” in the approvedproject. The costs of obtaining Regional Center designation and continuingoperation of the Regional Center cannot be “skimmed” off the top of the minimuminvestment amount. Separate “administrative fees”, “subscription fees”, or“whatever fees” have become the industry standard. In due course of administeringthe EB-5 Program, USCIS has an interest in examining and evaluating the feescharged versus the services provided in exchange for them. USCIS is the licensingauthority and is empowered by statute to oversee the entire program in all respects. Timing Issues and the Back-End Burden of ProofThe Regional Center is also obligated to do all it can to assist its EB-5 investorstowards the end of their immigration process. At a set point in the process, theEB-5 investor must petition for removal of conditions from status. The USCISForm I-829 must be filed within the 90-day period before the expiration of the EB-5 investor’s conditional permanent resident status. Therefore, the Regional Centerneeds to work with its EB-5 investors so that they file their individual petitions and8 See: http://www.slideshare.net/BigJoe5/escrow-agreements-in-eb-article-june-30-2001-jw Page 8 of 9

obtain their conditional status at the best estimated time such that the required jobswill be created at the necessary future time to ensure approval of their Form I-829.Lastly, the Regional Center is in the best position to gather information on behalfof all its EB-5 investors for use as evidence to support their Forms I-829. The I-829 submitted by a Regional Center affiliated investor will need evidence tosupport findings-of-fact by USCIS that the conditions precedent as predicted in theeconomic analysis submitted up-front have been fulfilled or are on the cusp ofbeing achieved within a reasonable period of time. This evidence is highly variableand specific to the assumptions presented in the economic analysis. If theeconomic analysis stated that the project would develop a specific amount, of acertain type of space, which would support a certain level of employment in thespecified “kind of commercial enterprise”, then those assumptions transform intothe conditions precedent required to prove the predicted “indirect job” creation.For example, suppose that the anchor tenant in a brand new “mixed-use”development will be an upscale supper club. The developers are bending overbackwards to “build to suit” a particular celebrity chef who is sure to draw plentyof traffic to the entire complex. Suppose that the industry standard for an upscalefull-service restaurant with a live floor show tells us that X square feet in such anestablishment will support one full-time position. The economic analysissupported this figure through verifiable detail from a reputable and reliable source(perhaps BLS or the U.S. Chamber of Commerce or an industry organization). Theeconomic analysis also drew from the business plan that this particular projectwould create Y square feet, which would therefore result in Z full-time positionsfor qualifying employees.At the I-829 stage, the Regional Center needs to supply some type of documentaryevidence to its EB-5 investors to submit with their I-829s in order to prove thesepoints. What documents will it need to submit? Will contracts and leases suffice asto the type of space created for commercial use? Will written reports from the localbuilding inspectors confirm the construction of the space as predicted? Would thedemand for production of I-9s from the restaurateur be overkill and ultra vires?Neither the Regional Center applicant nor USCIS should fail to consider theanswers up-front to the questions pertinent to the back-end burden of proof!ConclusionFailing to plan equals planning to fail! The EB-5 “Pilot Immigration Program”remains to be clearly defined. USCIS and EB-5 stakeholders need to work togetherto come to a clearer understanding of the program. That’s my two-cents, for now. Page 9 of 9

Some EB-5 facts that have been forgotten

by Joseph Whalen on Jun 23, 2012

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