The Immigrant Investor Program was originally created in the Immigration Act of 1990 as an employment-based, fifth-preference visa category. The Act allocated 10,000 annual EB-5 visas to immigrant investors. At the time, the U.S. economy was in a decline, and the EB-5 Program was intended as a way to bring import investment and thereby stimulate economic growth and domestic job creation for Americans.
In 1992, in the midst of high unemployment following a deep recession, Congress expanded the EB-5 visa by creating the Immigrant Investor Pilot Program (also known as the EB-5 Regional Center Program). This Pilot Program authorized the creation of government-approved “regional centers,” which would pool investment capital to fund a broad range of projects within a specific geographic area and spur not only direct job creation in each project, but also indirect and induced job creation within the geographic area.
Despite its long history, the EB-5 Program did not become widely used until the late 2000s. In its early years, the Program was not administered efficiently by the then-Immigration and Naturalization Service and the other various agencies involved in adjudications. Only a small percentage of available EB-5 visas were being utilized, with the exception of a rise in 1997-1998. The application process was very confusing, the regulations were not applied uniformly, and much fraud went unnoticed. The government made several attempts to re-organize the EB-5 application, adjudication, and oversight process, while the courts issued several precedent decisions to interpret the EB-5 regulations.
By 2009, USCIS centralized EB-5 processing into one service center, issued policy guidance regarding the agency’s interpretation of the EB-5 regulations, and begun to increase fraud prevention. Around the same time, the U.S. economy had entered the Great Recession, causing funding for real estate investment to substantially tighten, and project developers turned to EB-5 to raise foreign funds at low cost. Applications began to substantially increase. Just as the EB-5 Program was created in the midst of one recession, a new one breathed new life to the program almost two decades later.
EB-5 investors are required to make a minimum capital investment of either $500,000 or $1,000,000 in a new commercial enterprise within the United States. But it is not sufficient to merely invest capital. As the premise behind the EB-5 Program is job creation, a foreign national’s investment must lead to the creation of jobs in the new commercial enterprise.
A commercial enterprise may be any type of entity, such as a sole proprietorship, partnership, holding company, joint venture, corporation, business trust, or other publicly or privately owned entity that operates any for-profit activity formed for the ongoing conduct of lawful business. The immigrant investor must be engaged in the management of the commercial enterprise through policy formation, daily managerial responsibilities, or direct management. A “new” commercial enterprise is defined as an enterprise established after November 29, 1990, and must be a for-profit business. Alternatively, an applicant may invest in a commercial enterprise formed on or before November 29, 1990, if the investment capital is used to expand or restructure or reorganize the enterprise. Non-profit business enterprises are not eligible for EB-5 classification.
In a typical investment into a new commercial enterprise, an investor must create at least 10 new, permanent, jobs. Jobs must be filled by authorized U.S. workers, and are deemed permanent if they last for at least two years. The jobs must be full-time (at least 35 hours per week), although multiple part-time jobs may be combined together to create one full-time job, based on aggregation of hours. In non-regional center investments, the newly created jobs must be direct employees (not independent contractors) of the commercial enterprise. Regional center investments, however, may count indirect and induced jobs as well, as determined by economic models and analyses. An investment in a pre-existing commercial enterprise that is expanded or restructured requires that the capital increases the business’ net worth or number of employees by 40% (which can mean more than 10 new jobs). And an investor may also invest in a troubled business that has incurred recent loss, in which case the business’ existing jobs need to merely be preserved for at least two years, and no new jobs need to be created.
The requisite minimum capital that must be invested is determined by the location of the job creating activity. The standard minimum investment is $1,000,000. However, if the investment project is located in a Targeted Employment Area (TEA) or a Rural Area, the minimum amount is decreased to only $500,000. A TEA is defined as an area where the local unemployment rate exceeds the national average unemployment rate by 150%. A rural area is one that is not located within any metropolitan statistical area (MSA) or within any city or town having a population of 20,000 or more. State governments are responsible for designating TEA status on an area and USCIS defers to such designation. Because of the substantially cheaper investment amount, the majority of investments made in the EB-5 program are being directed to TEAs.
Furthermore, EB-5 law requires that the investment be placed “at-risk” for the purpose of generating a return. The mere intent to invest is insufficient to meeting this condition, though the law does not specify the exact degree of risk required. Thus, it is important that the project be structured in a way that cannot be construed as offering the investor any guarantee of return or redemption.
The EB-5 regulations provide for three types of investments: direct investments, pooled direct investments, and regional center investments into a commercial enterprise. A direct investment typically involves an investor investing in his own business, which requires creating 10 direct jobs for U.S. workers. In a pooled investment, two or more investors aggregate their funds to invest in the same enterprise. This can be as small as several friends pooling funds into a joint startup, or as large as a third party enterprise recruiting dozens or hundreds of investors for a major capital project. Pooled direct investments require the same job creation as standalone investments by a single investor, meaning that 10 new direct jobs must be created for each investor in the enterprise.
An investment in a regional center project also pools funds from multiple investors into an enterprise. However, the main difference is that the job creation requirement. A regional center project may count direct, indirect, as well as induced jobs toward the 10 jobs that each investor must create. These extra jobs are calculated by economists using available data to project economic impact on the area generated by the investment activity.
The counting of indirect and induced jobs is the major advantage of regional center projects. Another benefit is that the foreign national investor can choose to live anywhere in the United States. An investor in a direct investment project is typically involved in the daily operations of the business, and their place of residence is limited to the near vicinity of the project. However, investors in regional center projects typically only participate in the management of the enterprise through voting on policy formation, which can be performed from anywhere, thus expanding the choices for place of residence. Investors who prefer to have greater control over their investment or maximize their profits would be find a direct investment more suitable.
An EB-5 project must comply with several areas of law and must be thoroughly documented to be approved by USCIS. A typical project submission to USCIS includes the following documents:
Ø Corporate documentation – entity formation, tax identification, and articles of incorporation or organization for each commercial enterprises involved in the project
Ø Business Plan – USCIS requires that every EB-5 project be supported by a business plan. The business plan must be comprehensive and at a minimum include the following details:
o Overview of the project
o Background of the owners and/or development team
o Breakdown of sources and uses of funding
o Development timeline
o Descriptions and timeframe of job creation
o Market and feasibility study
o Revenue projections and pro forma
Ø Funding documents – loan agreements, funding contracts, bank statements, and other documents demonstrating availability of all necessary funding for the project, including EB-5 funding, equity investment, bank loans, and other funding, as may be applicable.
Ø Land or commercial space entitlement – a project must demonstrate that it owns or leases, or has a plan or means to acquire, the land or commercial space where the project will be developed and operate.
Ø Permits and Licenses – USCIS requires that projects have obtained or have applied for all requisite development and/or operating permits or licenses that are necessary under state law and local ordinances
Ø Services Agreements - contracts for construction, architectural, management, or other services necessary to develop and operate the enterprise.
Ø Targeted Employment Area Certification – letter from the relevant state agency designating the project location as a TEA, if the investment is only $500,000
For projects that pool together investments of numerous EB-5 investors, additional documentation is necessary, such as:
Ø Private Placement Memorandum (PPM) – a comprehensive summary of the offering made to each investor by the project developer, including the disclosures of all applicable risks and other disclosures as required for compliance with state and federal securities laws;
Ø Operating Agreement – an agreement between all the investors and manager of the project, detailing the rights and responsibilities of each party with respect to the investment and operation of the business;
Ø Subscription Agreement – a legally binding contract per which the investor purchases a membership unit in the project offering for the amount of the investment; and
Ø Escrow Agreement – an agreement per which investment funds are placed in an escrow account and are released to the project enterprise upon the satisfaction of one or more preconditions.
Finally, regional center projects must also include the following:
Ø The regional center’s corporate documents;
Ø The regional center’s USCIS approval letter;
Ø An affiliation agreement between the regional center and the investment project enterprise; and
Ø An economic impact report detailing methodological economic projections of the job creation impact that the project will have within the regional center’s designated geographic area.
USCIS performs a thorough due diligence of the project, including independent research and verification of relevant. Depending on the nature of the investment, the project may require compliance with not only immigration law, but may involve aspects of securities law, tax law, and state or local real estate or other commercial regulations. Thus, when putting together an EB-5 project, it is critical to retain the services of a full team of experts in each relevant field.
EB-5 investors must thoroughly prove to USCIS that their investment capital originated from a lawful source. Thus, it is necessary to demonstrate, with ample documentation, the lawfulness of the investment source, as well as to trace the path from the source to the investment in the commercial enterprise. The most common sources of investment capital, and the relevant documentation typically required for each, are as follows:
Ø Earned Income
o Certification of income letters from employers
o Corroborating payroll documents and tax returns
o Corporate information and business licenses of the employer company
o Employment contracts
o Professional qualification licenses or certifications
Ø Sale of Real Estate
o Seller’s and buyer’s deeds
o Purchase and sales contracts
o Mortgage contracts (if applicable)
o Real estate transfer tax payments
o Bank statements corroborating the transaction
Ø Real Estate Mortgage Loan
o Deed to mortgaged real estate
o Original real estate purchase documents
o Mortgage contracts
o Loan certifications
o Bank statements corroborating receipt and use of loan proceeds
Ø Business Shareholder Loan
o Business registration, incorporation, and license documents
o Shareholder agreement and resolutions
o Financial statements and audits
o Income tax returns
o Business contracts
o Loan resolutions and agreements
o Bank statements corroborating receipt and use of loan proceeds
Ø Inheritances and Gifts
o Birth and death certificates
o Gift agreements
o Probate judgments of distribution
o Bank statements corroborating receipt and use of the proceeds
These are just the most common types of sources of funds frequently used for EB-5 investments, but any lawful source can be potentially viable if ample supporting documentation can be provided. It is important to note, however, that most investments typically include more than one source. For example, investment funds obtained from the proceeds of the sale of inherited real estate would likely include four sources: (1) the earning of income sufficient by the testator, (2) the testator’s initial acquisition of the real estate, (3) the passing of the testator and inheritance by the beneficiary, and (4) the sale of the property by the beneficiary. It is not enough to simply prove the beneficiary’s inheritance and sale of the real estate. All four parts in the choice of such hypothetical chain of source of funds would need to be corroborated. Thus, it is important to work with a knowledgeable attorney who has the experience of what USCIS looks for when providing the legitimacy of the investor’s source of capital.
Navigating through the entire EB-5 immigration process involves several phases over several years.
The first step involves the filing of Form I-526, Petition for Alien Entrepreneur, with USCIS. The petitioner must submit evidence pertaining to the project and to the investor’s lawful source of funds. If the investor successfully establishes that an investment of the requisite minimum amount has been made in a compliant new commercial enterprise that has or will create at least 10 jobs for U.S. workers, and that the investor’s source of capital is lawful, the investor’s petition will be approved.
A filed Form I-526 does not grant a petitioner lawful status to stay in the United States. The petitioner must rely on some other temporary visa if he or she chooses to be in the U.S. while the petition is adjudicated. Nor does approved Form I-526 alone does not grant the petitioner any visa or lawful status. After approval, the petitioner in the U.S. must file a Form I-485, Application to Adjust Status, in order to apply for a Green Card based on the approved Form I-526. Alternatively, a petitioner overseas must apply for an immigrant visa through the National Visa Center and his or her local U.S. consulate. A petitioner’s spouse and children under the age of 21 are eligible to receive Green Cards together with the investor.
EB-5 investors initially temporary Green Card that grants conditional permanent residency for a period of two years. Within three months of the expiration of the conditional residency, the EB-5 investor and his or her dependent family members must submit a Form I-829, Petition by Entrepreneur to Remove Conditions on Permanent Resident Status, which will grant lawful permanent residency if successfully approved. The Form I-829 petition serves to demonstrate to USCIS that the petitioner’s investment was sustained at risk throughout the period of conditional residency and that the requisite jobs have been created.
The entire process will take several years to complete, and will take longer for investors from countries that have more applicants than available visas. In the early years of the EB-5 Program, only a small percentage of available EB-5 visas were being used on an annual basis. This begun to change as EB-5 has grown in popularity, and in 2014, China became the first country to reach its annual cap in EB-5 visas, as there became more applicants than annually available visas. Unless Congress takes action to allocate more EB-5 visas, investors from oversubscribed countries will have to endure much longer waiting times for a visa.
USCIS defines a regional center as “any economic unit, public or private, engaged in the promotion of economic growth, improved regional productivity, job creation, and increased domestic capital investment” set up specifically for EB-5 investments. Generally anybody may apply for a regional center license, or designation, from USCIS. Some regional centers are formed by project developers as a means to sponsor investments into their own projects. Others regional centers are formed without any specific projects in mind, and affiliate themselves with independent project developers for a fee.
The Form I-924, Application for Regional Center Designation Under the Immigrant Investor Program is used request USCIS approval to sponsor EB-5 investments. An application requires the following supporting documentation:
Ø Formation, tax identification, and articles of incorporation or organization of the regional center;
Ø A comprehensive operating plan that describes in detail the background of the regional center’s owners and management staff, the geographic area and economic industries that the regional center’s projects will target, the regional center’s marketing plan, how the regional center will supervise projects, how it ensure compliance with applicable securities and immigration law, how it will screen investors’ source of funds, and how it will track job creation;
Ø Bank statement evidencing availability of sufficient funding for the regional center’s initial marketing and startup activities;
Ø A map indicating the contiguous geographic area that the regional center intends to serve; and
Ø Project documentation for an actual project that the regional center intends to sponsor, or a business plan and economic impact analysis of a hypothetical project that demonstrates the regional center ability to satisfy the job creation requirements of the EB-5 Program.
After the Form I-924A is approved, the regional center is required to annually file Form I-924A, Annual Certification of Regional Center. This form constitutes a report of the regional center’s investment activities and job creation during the previous fiscal year, and must be filed by December 29th of each year. Failure to timely file the form or to show ongoing economic activity may result in termination of the regional center’s designation by USCIS.
In 2017, USCIS announced an audit program by which it will conduct EB-5 compliance checks on randomly and specifically targeted regional centers and projects, in an effort to prevent fraud and misuse of investment funds. It is thus critical for regional centers to regularly supervise their projects for compliance with their respective business plans and expenditures.
The EB-5 Program was initially authorized by statute in the Immigration and Naturalization Act (INA) §§ 203(b)(5) and 216A, and is codified at 8 U.S.C. 1153(b)(5) and 8 U.S.C. 1186b. The EB-5 Regional Center Program, created two years later, is set forth in Public Law 102-395, and is authorized as a temporary pilot program that has been renewed by Congress every several years since 1992. The corresponding agency regulations, as implemented by USCIS, are set forth in the Code of Federal Regulations at 8 C.F.R. §§ 204.6 and 216.6, and serve as the basis for adjudication of all EB-5 applications.
The EB-5 statutory provisions and corresponding regulations are broadly written, and do not provide guidelines for the many types of scenarios that frequently arise in the ever-evolving financial and business world. For this reason, EB-5 adjudications have not been consistent over the years, as officers are left to rely on USCIS policy memoranda and internal practices to apply the existing regulations to new types of financial trends.
The following list includes the major authorities used by USCIS over recent years to adjudicate EB-5 petitions:
Ø Adjudicator’s Field Manual (AFM) - The AFM comprehensively details USCIS policies and procedures for adjudicating all USCIS applications and petitions. USCIS updated the AFM regularly to incorporate new policies and procedures established through statutes, regulations, policy memoranda, or any other pertinent publications. A public redacted version has been made available by USCIS on its website.
Ø USCIS Memorandum, dated December 11, 2009, by Acting Associate Director Donald Neufeld (frequently referred to as the Neufeld Memo) – this was the first major USCIS policy memorandum consolidating the agency’s interpretation as the EB-5 regulations as applying to frequently arising issues in petitions at that time. The stated purpose of the memorandum was to "provide instruction to . . . personnel involved in the adjudication of EB-5 Regional Center Proposals, and affiliated Forms I-526, Immigrant Petition by Alien Entrepreneur and Forms I-829, Petition by Entrepreneur to Remove Conditions."
Ø USCIS Memorandum, dated May 30, 2013 – this was a fresh update of USCIS’ interpretation of the regulations, intended to update adjudicators and practitioners about newly arising issues in the EB-5 context. The stated purpose of the policy memorandum was “to build upon prior policy guidance for adjudicating EB-5 applications and petitions.” Though the memorandum provided an insight on USCIS’ view of most major EB-5 issues of the time, the memorandum did not formally rescind the Neufeld Memo, but was designed to build upon it.
Ø USCIS EB-5 Training Materials – in April 2015, IPO designed a set of EB-5 presentations to train its expanding personnel in EB-5 adjudications. These presentations have been released to the public via the Freedom of Information Act.
Ø USCIS Practice Manual – in 2016, USCIS decided to phase out its AFM and policy memoranda in favor of one centralized Policy Manual. The introduction to the manual states:
USCIS has undertaken a comprehensive review of our adjudication and customer service policies to improve quality, transparency, and efficiency. As a result of this extensive and ongoing review, USCIS has created the USCIS Policy Manual, which is the agency’s centralized online repository for USCIS’ immigration policies. The USCIS Policy Manual will ultimately replace the Adjudicator’s Field Manual (AFM), the USCIS Immigration Policy Memoranda site, and other policy repositories.
Despite its attempt to improve efficiency, the new Practice Manual is still a work in progress. It does not yet address many issues pertaining not just to EB-5, but to all immigration categories, and it has been criticized for lacking a fair method of updating practitioners of new policies.
Ø USCIS Public Engagement – from time to time, USCIS holds public engagements to discuss policies and trends, announce changes, answer questions, and accept feedback from the public. Though information set forth through such forums is not legally binding, participation in it serves as a valuable tool for learning.
The Administrative Appeals Office (AAO) holds jurisdiction over appeals of denied EB-5 petitions. Though AAO decisions are publicly released in redacted form, they usually have no precedential material. Prior to USCIS replacing the defunct Immigration & Naturalization Service (INS) in 2003, such appeals were handled by the INS Administrative Appeals Unit. In 1998, four appeals were decided by the Administrative Appeals Unit which became major precedential decisions on the interpretation of EB-5 law. Almost two decades later, these four cases still govern EB-5 adjudications and are frequently cited by USCIS and the AAO. They are summarized below:
Ø Matter of Soffici, 22 I&N. Dec.158 (1998) – This case focused on whether an EB-5 investor could claim investment of the requisite capital by demonstrating that the new commercial enterprise obtained a loan and used such loan proceeds to start-up its business. The case held that: (1) a petitioner cannot establish the requisite investment of capital if he lends the money to his new commercial enterprise; (2) loans obtained by a corporation, secured by assets of the corporation, do not constitute capital invested by a petitioner; (3) not only is such a loan prohibited, but the petitioner and the corporation are not the same legal entity; (4) a petitioner’s personal guarantee on a business’s debt does not transform the business’s debt into the petitioner’s personal debt; and (5) a petitioner must lawful source of funds must establish that the funds are his or her own and that they were obtained through lawful means. This case was recently cited by USCIS as support for its 2015 policy change pertaining to debt taken out by a petitioner and invested in a commercial enterprise.
Ø Matter of Izummi, 22 I&N. Dec.169 (1998) – This case is primarily known for its comprehensive interpretation of the “at-risk” requirement. The case held that an investor may not receive any guarantees of payments from or enter into any redemption agreement with the new commercial enterprise, and that capital placed into a reserve instead of used toward job creation is not at-risk. Furthermore, it was also held that petitions must be approvable when filed, preventing post-filing material changes to defective petitions in order to meet USCIS requirements.
Ø Matter of Hsiung, 22 I&N. Dec. 201 (1998) – This case decided that a promissory note secured by assets owned by a petitioner can constitute investment capital if the assets are specifically identified as securing the note, and the security interests in the note are perfected in the jurisdiction in which the assets are located, and the assets are fully amenable to seizure by a U.S. note holder. Furthermore, such assets must belong to the petitioner and must be valued at a fair market price rather than face value.
Ø In re Ho, 22 I&N. Dec. 206 (1998) – This case is known for defining what constitutes a valid business plan for an investment project. The holding stated that projected job creation must be supported by a comprehensive, detailed, and credible business plan that demonstrates the need for the positions and the schedule for hiring the employees.
Though Congress created the EB-5 Program permanently as part of the Immigration Act of 1990, the EB-5 Regional Center was created in 1992 as a temporary pilot program with an expiration date. Every several years since then, the Regional Center Program has been routinely reauthorized, with each respective expiration date typically falling on September 30th – the end of the federal fiscal year and the same date that many other government programs are often set to expire.
By the time the program was coming up for renewal in 2015, however, EB-5 had become a very popular immigration visa, and along with a growth in popularity it had also grown in abuse, fraud, and various inefficiencies. Legislators determined that the time had come to amend and reform the Regional Center Program to make it stronger, fairer, and less susceptible to fraud.
The major proposals for EB-5 reform have included the following:
Ø Increase of minimum investment capital – The minimum investment amount for non-TEA and TEA investments has been set at $1,000,000 at $500,000, respectively, since 1990. Both Congress and the EB-5 industry agree that after more than 25 years it’s time to raise that amount. Proposals have been made to raise the minimum from 20% to 80%, or to adjust it based on the changes in the consumer price index.
Ø Changes to Targeted Employment Areas – The existing EB-5 Program has been criticized for permitting “gerrymandering” of TEAs by state governments, by combining census tracts to achieve an average unemployment rate that qualifies the combined area for TEA status. This allows states to bring investment capital to areas that were not the types of high unemployment areas intended to be stimulated by a lower threshold of EB-5 investment capital. Legislators have proposed prohibiting or limiting combination of census tracts; creating additional criteria to TEAs besides the unemployment rate, such as poverty rate and median income; and designating new types of TEAs, such as Priority Urban Investment Areas, Special Investment Zones, Military Base Areas, based on different criteria.
Ø Visa Allocation Reform – In order to alleviate the visa backlog created by the popularity of the EB-5 Program, proposals have been made to increase the amount of EB-5 visas available on an annual basis, or to authorize the usage of unused visas in other employment-based immigration categories toward the EB-5 category, or to distribute existing EB-5 visas as a unit per investor rather than per each individual family member.
Since 2015, many reforms have been proposed and debated by Congress, by the Department of Homeland Security, and by practitioners, and many reform bills have been drafted by the judiciary committee in the Senate and House of Representatives. But despite bipartisan agreements in Congress and a general consensus of the necessary reforms, no EB-5 bill has been passed due to more pressing political priorities. Instead, Congress has merely prolonged the Regional Center Pilot Program with short-term extensions.
It is important to note that expiration of the Regional Center Pilot Program without reauthorization would not affect the original EB-5 Program. However, with 90% of EB-5 capital invested in regional center projects, it is crucial for the success of EB-5 that the Pilot Program be reauthorized. Given the success of job creation through EB-5 capital, the immigration community is hopeful that Congress will pass some reforms sooner rather than later.