Given that the EB-5 Immigrant Investor Program constitutes one of the quickest and simplest ways to attain U.S. permanent resident status, its popularity has ballooned over the years since its 1990 inception. The program, originally created to attract foreign capital to the United States and drive job creation, has injected billions in foreign capital into the U.S. economy, in return issuing U.S. green cards to thousands of EB-5 investors and their immediate family members.
To be eligible for a U.S. green card, an EB-5 investment participant must fulfill certain criteria, including the funding of at least 10 full-time jobs for U.S. workers, the provision of comprehensive source-of-funds documentation for all EB-5 investment capital, and proof that the EB-5 funds have remained at risk throughout the entire investment period. Every EB-5 investment and EB-5 project is different, and as such, different investors may have an easier or harder time with some requirements, but all EB5 investments must meet the outlined requirements to garner a U.S. green card.
The Difficulties in Meeting the “At Risk” Requirement
The EB-5 program’s requirement to maintain capital “at risk” by no means indicates that EB5 investments should be risky. EB-5 investors are advised to make sensible investment decisions that they deem likely to generate a return, but no matter what, the investment must incur both the risk of loss and the possibility of gain. The “at risk” requirement is as simple as maintaining one’s EB-5 investment funds in such a state for the duration of the investment. However, the maintenance of EB5 investment funds in an at-risk state can become complicated through no fault of the investor.
Typically, an EB-5 investor participates in the residency-by-investment program through an EB-5 regional center—region-based entities that facilitate EB-5 investment projects by attracting investors and pooling together their funds for a larger investment. The investor transfers their EB5 investment capital to the respective new commercial enterprise (NCE), which, upon receipt of all participating investors’ funds, aggregates it into a single investment and injects it into the job-creating entity (JCE) for a five-year term. In the earlier years of the EB-5 program, this scenario functioned smoothly, with investors easily swimming through the EB-5 program’s processes and becoming eligible to exit by the end of the five-year investment term.
Problems sprouted up in 2014, when the popularity of the EB-5 program began to exceed yearly EB-5 visa numbers. Investors from China, India, and Vietnam in particular dove into the program at previously unseen rates, which triggered lengthy visa backlogs and therefore significant processing delays that still linger in 2020. As of December 2020, processing times can last several years, particularly for investors from China, and can easily exceed the typical five-year EB-5 investment term adopted by most NCEs. If an EB-5 investor is not eligible to exit at the end of the five-year term, redeployment of their capital is necessary.
What Is EB-5 Redeployment?
EB-5 redeployment is, simply, the reinvestment of EB-5 capital in an NCE. At the end of the five-year EB-5 investment term, assuming the JCE was successful and paid back the loan to the NCE, the NCE may then either pay back the funds to the investor(s) or redeploy the capital under similar investment terms and conditions. An EB-5 investor who fails to meet the EB-5 requirements to exit, even if simply through processing delays due to backlogs or United States Citizenship and Immigration Services (USCIS) inefficiency, may elect to have the amount paid back instead of redeploying it, but by doing so, they would be forfeiting their opportunity to obtain U.S. permanent resident status.
SEC Regulations on EB-5 Redeployments
The United States Securities and Exchange Commission (SEC) exists to protect investors in the United States, as well as foreign nationals making U.S.-based investments, and as such, its regulations apply to EB5 investments. The SEC therefore represents an additional hurdle for EB-5 investors and NCEs to circumvent in the case of redeployments, which initially were never supposed to materialize in the EB-5 program. The SEC holds that if an EB-5 investor has to make a decision between exiting and redeploying their EB-5 investment capital, the redeployment constitutes a new sale of securities that must be appropriately registered or exempted from registration.
If an NCE requests to reuse an investor’s capital, it is analogous to requesting voluntary assessments from the investor, as is common in real estate and oil and gas securities. An NCE may write into its offering documents the circumstances for such a request, as well as the maximum amount that may be requested and how the funds may be used. In this case, the SEC would not determine the redeployment to be a new investment decision, as the details surrounding the investment were discussed and agreed upon in the initial deployment of capital. However, the SEC deems any other EB-5 redeployment situation to constitute a new offering of securities.
Similar to the SEC’s ruling on voluntary assessments is its guidance on rescissions, or the request of a party to annul an investment agreement. If the NCE makes a rescission offer to an EB-5 investor, the investor must decide whether to accept the offer and sell their securities or to reject the offer and maintain their securities. The SEC deems this, too, to be a sale of securities that requires registration or appropriate exemption.
A further area of consideration for NCEs is statute of limitations determinations, given that courts have used “investment decision doctrine” when determining whether a given sale of securities constitutes a new investment decision. In these cases, the defendants usually employ a statute of limitations defense, asserting that the initial sale of securities took place before permitted by the statute. The plaintiffs, in turn, request that the court consider the date on which the funds were called and paid, not the date of the initial sale.
Based on the above SEC regulations, in most cases when an NCE receives repayment for EB-5 investment capital and asks the EB-5 investors whether they would prefer to receive their repayment or redeploy their capital in another JCE, the Securities Act must be analyzed to determine whether the investment decision constitutes a new offering of securities. If the decision is determined to be a new securities offering, analysts must further consider whether it falls under any of the exemptions laid out by the Securities Act. EB-5 professionals should bear in mind that previously applicable exemptions may no longer apply a second time, such as if an EB-5 investor’s accreditation or domicile have changed since the initial sale.
