EB-5 Investor Considerations Following the Policy Alert in July 2020

One key program requirement for EB-5 investment participants is that all capital remain at risk for the duration of the investment period. Sometimes this means redeploying capital to maintain eligibility for the U.S. green cards tied to the EB5 investment. Those who fail to meet this prerequisite are in violation of EB-5 program requirements.

The longstanding popularity of this residency-by-investment opportunity has only increased since its inception in 1990, but with the notable surge in demand among Chinese, Vietnamese, and Indian investors in the last few years, it is the EB-5 Immigrant Investor Program’s popularity itself that presents serious complications in processing.

Surges in Demand Result in Massive Backlogs for Asian Investors

The program, facilitated by United States Citizenship and Immigration Services (USCIS), promises U.S. green cards to qualifying investors and their immediate family members following the successful completion of an EB-5 investment. Essentially, a foreign national injects the minimum required capital into a program-approved new commercial enterprise (NCE). The NCE consolidates all EB5 investment funds from participating investors to funnel the total capital into a job-creating entity (JCE). The EB-5 program requires the creation of a minimum of 10 new jobs for U.S. workers that are sustainable for at least two years.

There are approximately 10,000 U.S. green cards earmarked for the EB-5 program each year, and until 2014, the program ran relatively smoothly, with EB-5 investment participants fulfilling their program requirements and exiting the investment successfully within about five years. Demand for the EB-5 program has skyrocketed since then, however, and the annual supply of EB-5 visas simply isn’t meeting it. The result? Massive backlogs even in January 2021, particularly among Asian investors.

Backlogs Aren’t the Only Issue Gumming Up the Works

These backlogs are extending processing times, and the general five-year investment term that has been used throughout the program’s history is often insufficient for EB-5 investors to remain compliant with EB-5 program requirements. Nevertheless, the backlogs aren’t the only issue gumming up the works.

The U.S. Securities and Exchange Commission (SEC) is a governing body designed to protect both domestic and foreign investors in U.S.-based securities offerings. Recent updates in legal requirements for private fund advisors have further complicated EB-5 capital redeployment. Add long-standing requirements outlined in the Investment Companies Act of 1940 and USCIS’s Policy Alert in July 2020, and suddenly EB-5 investment participants have a whole lot of hurdles to jump through to properly execute an EB5 investment capital redeployment. Let’s take a closer look…

When Private Fund Advising Gets Sticky with the SEC

The SEC’s Advisors Act allows an NCE’s general partner or a managing member to act as a “private fund advisor.” However, their reporting obligations are different from more traditional fund advisors. An acting private fund advisor from an NCE is permitted to participate in EB-5 investment capital redeployments. That said, the level of regulation by the SEC will depend upon whether that advisor offers guidance to an entire body of limited partners based on overall NCE objectives or consults individual EB-5 investment participants based on their individual investment goals.

The SEC has stipulated that it will refrain from action when a private fund advisor provides consultation to an NCE’s limited partnership, as the advisor will be viewed as furthering the objectives of the NCE, not its investors. Furthermore, an NCE private fund advisor is also permitted to inquire about whether individual limited partners prefer distributions to be paid out in cash or in kind. They are prohibited, however, from offering advice or in any way swaying or attempting to sway a limited partner’s decision. If found to take such action, the private fund advisor would be subject to further SEC regulation and action.

Maintaining Exemptions Under the Investment Companies Act of 1940

Most assets in an NCE are comprised of promissory notes representing the deployment of EB5 investment capital to its JCE. For this reason, most NCEs are classified as investment companies and fall under the governance of the Investment Companies Act of 1940. As such, participating in the EB-5 Immigrant Investor Program usually lands them squarely under one of two key exemptions under the act: Section 3(c)(1) or Section 3(c)(5)(C).

  • Section 3(c)(1) provides that a securities issuer is not considered an investment company unless it a) has more than 101 investors and b) publicly offers its securities.
  • Section 3(c)(5)(C) is an exemption for securities issuers whose promissory note has been secured by qualified real estate assets.

The most important aspect of these exemptions for EB-5 investors is that their selected NCE’s exemption status still stands at the time of redeployment. If you are an EB5 investment participant who needs to redeploy their investment capital at any point in time, it is advisable to determine whether your selected NCE still satisfies all the requirements for its exemption status. If it does not, the next step is to determine whether another exemption under the Investment Companies Act may apply.

If neither of these determinations can be made, an EB-5 investment participant may expect further complications in the redeployment of their capital.

USCIS’s Policy Alert Says Redeployment Must Be Through the Same NCE

First and foremost, every investment in the United States is subject to either SEC regulation or the Investment Companies Act of 1940. USCIS cannot legally override the regulations of either, so all NCEs and participating EB-5 investors are required to adhere to these rules. USCIS regulations follow these two pieces of legislation, and July 2020 marks the date USCIS released a new Policy Alert on EB-5 capital redeployment.

According to the Policy Alert, every redeployment of capital must be through the same NCE for the purposes of furthering the NCE’s objectives. When an EB-5 investor works with an EB-5 regional center, the capital redeployment must also occur through the same regional center. That said, the JCE is not required to be the same. Additionally, the commercial activity and location of the project may differ from the original. Furthermore, EB-5 investment funds that were initially deployed in a targeted employment area (TEA) are also eligible for redeployment in a new area that does not necessarily qualify for TEA status.

Working with EB5 Affiliate Network on Capital Redeployment

One way to ensure the smoothest redeployment process an investor can get is by partnering with an experienced group of EB-5 professionals. EB5 Affiliate Network (EB5AN), for instance, is comprised of more than a dozen regional centers across 20 states. Choosing EB5AN means maximizing your redeployment flexibility. Our team of experienced EB-5 specialists makes sure every EB-5 investment remains compliant with EB-5 program requirements throughout the investment process – even if it means redeploying capital when the need arises.

If you are an EB-5 investor impacted by USCIS processing delays and need help maintaining the “at risk” status required of every EB5 investment, reach out to EB5AN and learn more about how we may be able to assist.

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