SEC Guidance on EB-5 Capital Redeployment

The EB-5 Immigrant Investor Program is a residency-by-investment opportunity open to any foreign national with the means to meet the participation requirements. Its popularity stems from two completely different aspects that often equally drive each EB-5 investor’s actions. One, a matter of the heart, is the opportunity to gain U.S. green cards for themselves and eligible family members to live, work, and raise their families in the United States. The other pertains to the business mind of every investor and entrepreneur who is interested in participating: their capital investment in the U.S. economy in the form of capital infusion and job creation. Both are inextricably intertwined in their decision-making throughout the EB5 investment process.

To maintain eligibility status for their EB-5 visas and stay on track with their personal immigration plans, each investor must meet certain criteria throughout the process. Below are the four primary requirements:

While every EB-5 investment and project is different, it is the “at risk” requirement that often poses the most challenges, due to the tendency for forces out of an investor’s control to affect it. Learn more below about the difficulties EB-5 investment participants may deal with in meeting the “at risk” requirement, how redeployment can help, and what the SEC says about the redeployment process.

The Challenge with Meeting the EB-5 “At Risk” Requirement

Before addressing the challenges associated with the “at risk” requirement, understand that maintaining an “at risk” status does not mean investors must make risky EB5 investments. Quite the opposite—through due diligence and careful planning and consideration of an investor’s personal immigration and investment goals, they should always seek sensible investments. What the “at risk” requirement does stipulate is that every EB-5 investment must incur both the possibility of gain and a risk of loss throughout the investment period. Therein lies the challenge.

Maintaining an “at risk” status often becomes complicated through no fault of the investors or their EB-5 immigration counsel. There are a lot of moving parts throughout the investment process and a lot of hands the EB-5 investment and accompanying documentation must pass through before completion. As such, the greatest challenge to maintaining “at risk” status is usually related to timing. Take the EB-5 Regional Center Program, for instance.

The vast majority of investors choose to participate in this residency-by-investment program through its region-based entities. These regional centers facilitate EB5 investment projects by attracting foreign national investors and pooling their capital together to provide larger investments in local-area projects. Once all participating investors have transferred their capital, it is aggregated into a single investment in a selected new commercial enterprise (NCE). From there, the money is injected into the job-creating entity (JCE), typically for a five-year term. For more than two decades, this scenario was smooth-functioning. EB5 investment participants sailed through processing and easily met eligibility by the end of this common term. Unfortunately, that all changed in 2014.

That year, program popularity sprang to new heights, and application rates began exceeding annual EB-5 visa availability. Petition volume was particularly driven up by Asian investment interest. Visa backlogs emerged, triggering significant processing delays that have lingered all the way through 2020. Investors from China, India, and Vietnam have all felt the effects of relatively unchanged supply in the face of heightened demand. Even as late as December 2020, the processing time for a single petition commonly reached several years. Chinese investors have been especially hard hit by these wait times, as they can easily surpass the five-year mark, upending the typical EB-5 investment term adopted early on by the majority of regional center NCEs.

These issues gave rise to the EB-5 capital redeployment strategy to maintain an investment’s “at risk” status. So, what is redeployment, and how does it work?

EB-5 Redeployment Meets “At-Risk” Requirement Amidst Processing Delays

In the simplest terms, EB-5 redeployment is the process of reinvesting EB-5 capital in an NCE. When a project reaches the end of an EB5 investment term (with the JCE proving successful and the loan being paid back to the NCE), the NCE will either pay the funds back to its investors or reinvest the capital in a new project under similar investment terms and conditions. At that time, any EB-5 investor failing to meet EB-5 exit requirements, including those due to United States Citizenship and Immigration Services (USCIS) inefficiency and delays, can choose either option. However, if they do not choose to redeploy their capital, they are effectively forfeiting their opportunity for U.S. permanent resident status because they ultimately did not meet EB-5 investment requirements.

Thus, making the business decision to redeploy capital is virtually the only viable option when an investor’s personal objectives include obtaining EB-5 visas for themselves and their eligible family members. Up to this point, all aspects of redeployment have come from the perspective of meeting EB-5 program requirements. While redeployments were never anticipated to materialize within the EB-5 program, here we are, and thus these investments have become subject to the United States Securities and Exchange Commission (SEC)’s regulations as well.

EB-5 Redeployments According to SEC Regulations

The SEC is the governing body established to protect all investors in the United States, including foreign nationals who make U.S.-based investments. Therefore, EB5 investments are required by default to comply with SEC regulations as well, which can present an additional hurdle for program investors and NCEs at times, especially in cases of capital redeployment. SEC regulation dictates that when an EB-5 investor decides to redeploy their EB5 investment capital instead of exiting the program, the redeployment constitutes a new securities sale. The SEC says in these cases the new sale must be registered appropriately or officially exempted from registration.

When EB-5 Redeployment Constitutes a New Securities Offering

On one hand, if an NCE should request to reuse investor capital, then it aligns with the SEC’s rules for requesting voluntary assessments from an investor. This is common practice in real estate and oil and gas securities dealings. The NCE is simply required to write the circumstances of such a request into its offering documents to include the maximum amount that may be requested and how those funds can be used. The SEC does not consider this type of redeployment a new investment decision because the details were included in the initial investment documents. On the other hand, the SEC views any other scenario for EB-5 capital redeployment as constituting a new securities offering.

SEC Guidance on Annulments of EB-5 Investment Agreements

SEC guidance on rescissions (or requests by a party to annul investment agreements) are similar to those on voluntary assessments described above. When an NCE makes a rescission offer to its investors, EB-5 investment participants must decide to either a) accept the offer and sell the securities or b) reject the offer and maintain them. As such, the SEC deems the activity a sale of securities as requiring either registration or exemption.

What the SEC Says on EB-5 Investment Statutes of Limitations

An additional consideration regarding NCEs is a determination of the statute of limitations. U.S. courts have traditionally referenced “investment decision doctrine” to determine whether a sale of securities qualifies as a new investment decision. Defendants in these cases routinely use a statute of limitations defense. They assert that the original sale of securities actually occurred ahead of permission by the statute. In rebuttal, plaintiffs typically request that the court consider the date on which funding was paid, not the date of the original sale.

According to SEC regulations above, it is necessary to analyze the Securities Act in most cases where an NCE receives returned investment capital and then asks whether an EB5 investment participant prefers to be repaid or to redeploy the funding in an other JCE. In sum, this analysis informs court decisions on whether the secondary investment decision constitutes a new securities offering. When a decision is deemed a new offering of securities, analysts must then consider whether it is exempted under the Securities Act. An EB-5 investor’s team of immigration investment specialists will be able to help guide them on which exemptions apply at the time, as sometimes exemptions that previously applied are no longer applicable.