U.S. financial market conditions have fluctuated wildly in the wake of the COVID-19 pandemic as well as the governmental and regulatory responses that have followed. Existing operations and prospective businesses across a myriad of industries have seen disruptions in both planning and results. While the true extent of pandemic effects has yet to come to light, one thing is certain—significant changes will generally continue at least as long as the COVID-19 crisis does. This can be especially concerning for foreign nationals who are counting on the EB-5 Immigrant Investor Program as a pathway to U.S. permanent residency.
COVID-Related Disclosures Help Potential EB-5 Investors Evaluate Risk
Projects that use EB-5 investment financing are subject to the same adverse effects any other business would be in this comparatively volatile time. Industry and operational uncertainty, permanent and temporary closures, interruptions in supply chains and travel, hiring freezes and extended medical leave among employees—these are only a few of the most important considerations.
As EB-5 investors continue vetting program-approved projects, it is important to understand there are essential disclosures potential partners should be providing to them so that they may properly evaluate investment risks ahead of submission. Prospective EB5 investment participants should expect certain disclosures regarding COVID-19 and its possible impact on both EB-5 investments and on the project as a whole.
Learn more about what these disclosures mean for an EB5 investment, when they should be received, and under what circumstances consent for change is required. First, we provide an overview of new EB-5 investment offerings in the recent economic climate.
EB-5 Operators Adopt a Wait-and-See Approach
Although the COVID-19 pandemic has clearly impacted EB-5 project business and operations, which seems to have led to a further stifling of new EB-5 offerings by NCEs, this wasn’t the only contributing factor. Rather, an addition to recent years of turbulence from changes such as
- A lack of definitive policy determinations from U.S. Citizenship and Immigration Services (USCIS)
- Changes to methodologies and allocation of targeted employment areas (TEAs)
- Substantial increases in minimum investment requirements
- Massive visa backlogs in certain countries
- Political uncertainty in the United States
That said, the uncertainties caused by the global pandemic have essentially become the final straw for may EB-5 operators that hadn’t already slowed, and even a good number of those overseeing the continued success of operating exceptional projects and/or maintaining meaningful relationships with migration agents have come to adopt a wait-and-see approach to new EB-5 investment offerings. This strategy isn’t necessarily a red flag, but instead more likely signals proper fiduciary handling. Additionally, a downturn in the economy doesn’t mean EB-5 investments should discontinue. There are actually a number of benefits from the global pandemic already surfacing. In fact, depending on the project, it may make the most financial sense to invest now. Those operators in an investor’s consideration set who do go ahead with new EB-5 offerings simply have a responsibility to provide the proper disclosures with their offering materials. It is the duty of the investor (and their attorney) to perform due diligence prior to investment.
Legal Obligations of Full and Fair Disclosure According to the SEC
The U.S. Securities and Exchange Commission (SEC) governs by laws, rules and regulations that are designed to protect every investor in the country. One of the core requirements to ensure investor protection is offering documents that contain “full and fair disclosure” of material information as outlined in several federal statutes.
Specifically, the guideline that can be directly applied to prospective EB-5 investors is that the Securities Exchange Act of 1934 prohibits disclosure of untrue statements of material fact and the omission of material facts necessary to prevent previous statements from becoming misleading. There is no hardline quantitative test for materiality under SEC laws, but precedent for evaluating a violation is to determine whether there exists a substantial likelihood for a reasonable investor to consider a misstatement or omission an important factor in the decision to buy or sell a security. So how does that apply to disclosure documents for an EB5 investment offering?
Full and Fair Disclosure within New EB-5 Offering Documents
Within the context of a new EB-5 investment offering documents, there are three hallmarks of full and fair disclosure investors should seek out: cautionary language, investment risk factors, and in the current climate, statements regarding COVID-19.
Cautionary Language and Risk Factors
Offering documents need to include statements of general caution and the various traditional risks and uncertainties associated with the particular type of EB-5 project under consideration. It should also reference in forward-facing statements the safe harbors availed to new commercial enterprises (NCEs) under the Private Securities Litigation Reform Act of 1995 (PSLRA) as well as the Securities Exchange Act itself. NCEs will tailor language to the specific industry under which the project is housed.
Statements Regarding COVID-19
Specifically, in the statements looking forward, the risks and uncertainties a project may be subject to in relation to COVID-19 should exist. Emphasis should also be placed on the accuracy of certain statements that depend upon future events and assumptions. Investors should be able to find notice that COVID-19 may cause expected results to differ materially. The proper documents will also include robust disclosures on exactly how the pandemic might present additional risks and/or exacerbate traditional risks associated with this type of project.
Topics Proper Disclosures May Address
For instance, in addition to disclosure statements traditionally provided, an NCE would clearly disclose how the virus may have caused construction delays on a real estate project or that demand for a hotel project may dwindle following potentially ill effects on the travel and tourism industry due to an additional viral surge. A well-prepared NCE may even provide projections on how they expect operations to change or a project to evolve in various scenarios as the hospitality industry moves through recovery.
What are the impacts upon job creation and allocation? At what points could material changes come into play? Could operational changes lead to material changes? These are all questions that may be addressed within those disclosure documents. Along with potential changes, there should be an outline for an EB-5 investor’s rights and when changes would require their consent. The reason these topics are so important is the potential for material changes to impact USCIS processing of investor petitions.
Material Changes for EB-5 Projects
While some degree of flexibility between original project documents and final outcomes exists with USCIS adjudication of EB-5 petitions, discrepancies that materially affect a project can put an EB5 investment participant’s visa eligibility at risk. Material changes are ones pertaining to significant aspects of an EB-5 project—ones that can affect adjudication decisions. These changes do not in and of themselves equate to petition denial, but the two types of changes that can lead to the biggest processing snags are fund sourcing and business plan elements.
Having an experienced EB-5 professional or immigration attorney review new offering documents and disclosures can help to ensure that solutions are in place that insulate an EB-5 investor for projects that could be negatively impacted by COVID-19 in the future. Additionally, this type of review can confirm the availability of an exit strategy that would allow an EB-5 investor to remain compliant with program eligibility requirements.
From the perspective of an operator’s liability, it is always best practice to disclose to EB-5 investors the greatest amount of meaningful information possible (including updates made necessary by the ongoing pandemic). It is important to realize they are held to a higher standard by the SEC than what USCIS may require.
For this reason, an EB-5 investor is best advised to seek the counsel of an attorney to clarify what information USCIS might deem “material,” exactly how much information should be provided and when, as well as what rights the investor has following the receipt of these disclosures. Ultimately, the proper evaluation of these disclosures will help potential investors more aptly navigate the decision to participate in an EB-5 project.