If a foreign national wishes to make an EB-5 investment in a more prosperous future for themselves and their immediate family members in the United States, they must fulfill a number of strict EB-5 program requirements. Perhaps the most stringent is the source-of-funds requirement, which forces EB-5 investment participants to compile a comprehensive paper trail of how they obtained their EB-5 investment capital and how it was moved to the new commercial enterprise (NCE) that is accepting the EB5 investment. Effectively, EB-5 investment capital can come from any source, as long as the investor can demonstrate it fell into their possession lawfully.
One such possible source for EB-5 funds is loans—but there are conditions. Source-of-funds best practices advise a secured loan, with a property or another asset of the principal investor’s used as collateral. Loans should use market rates, even if between friends. There are no strict guidelines for structuring a loan for EB-5 source-of-fund purposes—the best practices have simply arisen from adjudication tendencies at United States Citizenship and Immigration Services (USCIS). In this vein, some investors have attempted to make unsecured loans, taking cash from a third-party loan to make their EB5 investment.
This source-of-funds solution worked for EB-5 investment participants for much of the residency-by-investment program’s history—until 2015, when USCIS decided that cash derived from unsecured loans constituted “indebtedness,” not cash. Under this rationale, USCIS began denying the I-526 petitions of good-faith investors making EB5 investments in line with previously successful investors.
Investors Strike Back: Zhang and Hagiwara v. USCIS
EB-5 investment participants have not been known to let inappropriate USCIS actions go unaddressed, boasting a history of lawsuits against USCIS when warranted. When EB-5 investors Zhang and Hagiwara had their I-526 petitions denied on the grounds that the cash secured from their unsecured loans constituted “indebtedness” and thus not an appropriate source of funds, they decided to fight back.
In 2013, both plaintiffs borrowed $500,000 in cash for their respective EB-5 investments—by all means a normal EB-5 practice. In 2015, their I-526 petitions were denied on the basis that unsecured loans were not a viable source of funds. The two then teamed up to file a suit against USCIS, arguing that the denials constituted an “impermissible interpretation of the governing regulation.”
Progress was slow, as it always is in law. However, in late 2018, the disgruntled EB5 investment participants finally won their case in district court. USCIS appealed the ruling to the U.S. Court of Appeals in 2019, and in October 2020, the verdict finally came, again in favor of the investors. The court declared that cash derived from unsecured loans counted as viable EB-5 investment capital, as per USCIS’s own guidelines that unambiguously identify cash as the proceeds of third-party loans.
USCIS Policy Changes in Store?
Following the October 2020 ruling, USCIS could have further appealed the case to the U.S. Supreme Court, but they chose not to, and in April 2021, after considerable effort and turmoil, Zhang’s I-526 was finally approved. This may indicate that USCIS has given up on their stance, which has been deemed unreasonable, and policy changes surrounding unsecured loans may be in store for future EB-5 investment participants. As of May 2021, USCIS has yet to update their online policy manual, but changes may nonetheless be coming in the future.
The Outlook for Investors
Having the courts on the side of investors is powerful, and it helped get Zhang’s petition approved, even if years later than originally anticipated. Zhang’s case, which has attracted significant attention in the EB5 investment world, may set a new precedent, but new EB-5 investors should nonetheless exercise caution when using unsecured loans as EB-5 investment source of funds. Any prospective EB-5 investor should consult with an experienced immigration attorney before making any decisions, and when possible, using a secured loan is safer—but going forward, USCIS may accept unsecured loans as viable EB-5 investment capital, allowing investors to more easily secure the myriad benefits of an EB-5 visa.