Finally, it is important to recognize that new regional centers,
early stage EB-5 enterprises, and new investors must be cognizant of this new policy as they take steps to bring their EB-5
financing plans to fruition. Regional centers and project developers should consider developing or modifying their offering
documents to reduce the likelihood that extended adjudication
delays and (in the short term) increased denial rates will impair
the timely and successful execution of the business plan.
Broader Changes on the Horizon in S.1501?
The Leahy/Grassley bill
currently pending in the
Senate, S.1501, widely expected to provide the framework
for EB-5 reform
in 2015, proposes
further
statutory
restrictions on the use
of loan proceeds as capital. Section 2(b) of S.1501
would amend Section 203(b)(5) of the INA
to provide that “[c]apital derived from indebtedness” is qualifying
capital only where the capital is both (a) secured by assets owned
by the petitioner, and (b) “issued by a reputable banking or lending
institution that is properly chartered or licensed under the laws of
any State, territory, country, or applicable jurisdiction.”4 The bill
would require DHS/USCIS to verify the lender’s licensure and
reputation using relevant commercial and government databases.
Section 2(c) of S.1501 would make the statutory changes effective
upon enactment.5
The primary intent of this provision appears to be to prohibit
the use of private or non-institutional loans as a source of investment capital. It would entirely eliminate the use of shareholder
loans and loans from family and friends, and in this respect it
represents an even more dramatic shift than is represented in
the new USCIS indebtedness policy. The requirements for loan
security/collateral, including a prohibition on unsecured loans,
appear to be in accord with the USCIS indebtedness policy.
Because the changes would be statutory, however, they would be
controlling over any contrary or less restrictive interpretation of
a regulation, precedent decision, or policy. Importantly, because
they would take effect upon enactment, they would render
statutorily ineligible even pending petitions that were filed in
reliance upon prior EB-5 law and practice, including petitions
that are approvable under the new USCIS indebtedness policy.
In addition to restricting the use of loan proceeds as capital, S.1501 also proposes restrictions on the use of gifts that
could affect the ability of investors to fashion a “cure” for
a now-defective loan by converting the loan to a gift. Under
S.1501, the EB-5 statute would permit gifted funds to be used
as investment capital only where (a) the donor is the petitioner’s
spouse, parent, child, sibling, or grandparent, and (b) where
the funds “were gifted in good faith and not to circumvent any
limitations imposed on permissible sources of capital under this
subparagraph.”6 The referenced subparagraph includes not only
the provisions relating to gifted funds, but the provisions relating to loaned funds and other evidentiary requirements relating
to source of funds. The proposed statutory language relating
to circumvention certainly raises questions about the future
efficacy of fashioning a “cure” by means of loan forgiveness or
gift agreement for a completed investment in an affected case.
As we assess the impact of the new indebtedness policy
and make strategic decisions about how to respond, EB-5
stakeholders will want to consider the effect that proposed
statutory restrictions, as drafted, would have on their available
legal options. Note that the use of the words “derived from indebtedness” in the proposed statutory amendment could render
moot the argument that USCIS has misconstrued the use of
the term “indebtedness” in the regulatory definition of “capital.”
Additionally, the application of new statutory restrictions on
even long-pending cases could render ineffective any efforts to
obtain administrative or judicial relief against the harsh effects of
retroactive application of new agency policies. Stakeholders may
wish to consider whether legislative efforts should be directed
toward amelioration of these impacts on pending petitions that
were filed in good faith. For now, S.1501 should be recognized
as indicative of changes that are on the horizon, but it is not yet
law a