The 2020 COVID-19 pandemic has brought major changes to the worldwide economy, impacting nearly every market sector. Hiring freezes, layoffs, workforce reductions, global supply chain disruptions, travel and operational restrictions, temporary business and consulate closures, and even a rise in employee medical leave have all taken a toll on businesses, including those supported by EB-5 capital. For EB-5 investment participants who have chosen to invest in EB-5 distressed business projects, the effects of the pandemic may be even more severe.
In hospitality, real estate, and other industries, the number of distressed EB-5 businesses has increased. Projects in the entertainment and recreational sectors that were already fighting uphill to meet the financial goals of their original offering documents are having even more trouble. Historically low interest rates and a hesitancy toward new bond issuance have also created problems for EB-5 project funding.
Some EB5 investment participants may even see their visa eligibility put at risk. If their project’s construction and operations cease, they may not reach their job creation requirements. However, all these changes do not necessarily mean investors in EB-5 distressed business projects have reached the end of their EB-5 journey. It simply means that those investors need to stay informed.
Securities and Risk Disclosures
The U.S. Securities and Exchange Commission (SEC) requires every EB-5 investment agreement to provide risk disclosures during the signing process. New commercial enterprises (NCEs) in EB-5 distressed businesses should provide investors with updates regarding COVID-19 in their securities disclosures. EB5 investment participants should take care to understand these disclosures and what they mean for their visa eligibility, as well as their financial investment.
The Securities Exchange Act of 1934 requires “full and fair disclosure,” prohibiting both false statements of material fact and the omission of any material facts necessary to prevent previous statements from becoming misleading. Risk disclosures typically cover general risks and uncertainties involved with the specific industry in which the EB-5 project will operate.
Regarding COVID-19, the NCEs may not explicitly name the pandemic in their updated disclosures, so investors should look for disclosures regarding public health crises and pandemics as well as references to safe harbors availed to NCEs under the Private Securities Litigation Reform Act of 1995 (PSLRA). Any NCE that does not provide such disclosures or disclosures about the significant changes brought upon distressed EB-5 projects by the pandemic may be in violation of U.S. exchange laws.
Material Changes
Securities disclosures that materially affect an EB5 investment project can put an investor’s visa eligibility at risk when adjudicated by United States Citizenship and Immigration Services (USCIS). A material change is defined as a change that affects the consequential aspects of a given EB-5 project, including not limited to changes to regional center sponsorships, changes in capital sourcing or investment structure, clear shifts in project scope and time, shifts in employment structures that affect job creation, and even major updates to offering documents or other project documentation.
If USCIS determines that a material change has taken place during the period of EB-5 investment, then the investor must refile their entire I-526 petition, updating the documentation and details for the project.
COVID-Related Disclosures
Certain securities disclosures related to COVID-19 may be considered material changes to USCIS. Even if they do not explicitly address the virus, there may be signals within updated securities disclosures that keen investors should look out for. These signals may be disclosures related to impacts on job creation or allocation, new expected operational changes, the realignment of projections rendered invalid by the pandemic, new risks brought by the pandemic, or the pandemic’s compounding impact on traditional risks.
In addition to securities disclosures, EB-5 investment participants should look for language detailing when such changes would require their consent, as well as an enumeration of EB-5 investors’ rights.
2021 and Beyond
As governmental responses and regulations continue to arise, EB-5 investors should expect to see further changes in 2021. Seeking the advice of an immigration lawyer experienced in the EB-5 program can help investors find means by which to keep themselves and their families eligible for permanent residency in the United States. Possible solutions may include new strategies for capital redeployment, new funding sources, or shifts in organization to maintain job creation requirements.
While material changes brought about by COVID-19 must be taken seriously, they may ultimately prove little more than a bump in the road for most EB-5 investors, even those working on distressed EB5 investment projects. The EB-5 Immigrant Investor Program was created to help stimulate ailing sectors of the U.S. economy, the very circumstances in which many sectors find themselves due to the pandemic. With the help and advice of experienced EB-5 professionals, distressed investors should be able to navigate any material changes with ease.
