Since the COVID-19 viral outbreak, U.S. financial markets have fluctuated as governmental and regulatory bodies work to respond. Annual business planning and results have already all but gone out the window for many businesses across an exorbitant number of industries this year, and we still have some time before the true impact of these disruptions are known. Still, there’s one variable we can count on: the continuation of significant changes for as long as the COVID-19 crisis goes on. This can be especially concerning for foreign nationals already deeply invested—both in time and resources—in the EB-5 Immigrant Investor Program.
Updated Disclosures Aid EB-5 Investors’ Reassessment of Risk
EB-5 investment participants involved in financed projects are not sheltered from the adverse effects other similar businesses are experiencing in this relatively volatile time. Uncertainty stemming from temporary business closures, hiring freezes and layoffs, an uptick in medical leave across the nation, supply chain interruptions on a global scale, and even travel industry restrictions can all wreak havoc on an EB-5 project’s plans.
This isn’t necessarily the end of the EB-5 journey for those who have invested in an affected project. If they haven’t already, new commercial enterprises (NCEs) and other EB-5 operators should be providing essential updates on various securities disclosures that will help investors remain informed and able to reassess the risks for their projects so that they can react according to their own best interests. These disclosures will pertain to COVID-19 and the possible impacts on the project itself and on the capital that investors have contributed to it.
Any NCE that has EB-5 projects predating the coronavirus outbreak should be preparing or should have already prepared updated securities disclosures. Learn more about what these disclosures may mean for an EB5 investment and when they should be received, as well as what rights and options an investor may have after receiving them.
Offering Documents Prepared Before COVID-19
All EB-5 investment offerings are legally required by the U.S. Securities and Exchange Commission (SEC) to provide certain risk disclosures. This body oversees the execution of the laws and regulations put into place to protect investors in the United States. This legislation typically covers general risks and cautionary language regarding the uncertainties associated with the particular industry under which the project is classified.
An EB-5 investor is likely to see references to safe harbors availed to NCEs under the Private Securities Litigation Reform Act of 1995 (PSLRA), and the disclosures are even likely to include risks related to public health crises and pandemics. They are not, however, likely to address COVID-19 specifically, nor the current nature or severity of its impact on the economy. This doesn’t necessarily signal underhanded activity—how could a business have anticipated this? But now is the time for proper fiduciary handling, and the SEC requires accuracy in its full and fair disclosure statutes.
SEC’s Statements on Full and Fair Disclosure
A core requirement in the protection of investors is offering documents outlining “full and fair disclosure” of material information on an investment. Specifically, the Securities Exchange Act of 1934 not only outlines the prohibition of disclosing untrue statements of material fact but the omission of material facts necessary to prevent previous statements from becoming misleading as well. While no exact quantitative test for materiality exists under SEC laws, the precedent for determining violations is whether there is a substantial likelihood for a reasonable investor to consider a misstatement or omission an important factor in holding on to or selling their investment.
The SEC has cast a wide net when it comes to materiality, and issuers are advised to disclose supplemental offering documents any time there is any doubt as to whether a material fact has the potential to influence investment decisions. Any NCE that does not provide disclosures for significant project changes to its EB5 investment participants would potentially come into violation of Exchange Act laws.
Furthermore, some of the changes that can occur in the wake of a major event like the ongoing COVID-19 crisis may be considered material changes in the eyes of U.S. Citizenship and Immigration Services (USCIS) adjudicators too.
Disclosures on Material Changes from an NCE
Investors need these securities disclosures to ensure they remain eligible for their EB-5 investment visas throughout the allotted investment period. USCIS does offer some flexibility when it comes to discrepancies between original project documents and final outcomes—there are always unanticipated events in business. There are instances in which supplemental disclosures due to updated facts do not trigger findings of material change by USCIS. However, discrepancies that materially affect a project may put EB5 investment eligibility at risk.
Material Changes According to USCIS
Material changes are generally defined as those pertaining to significant aspects of an EB-5 project—ones that can impact adjudication decisions. These changes do not automatically result in petition denial, but they can drastically delay processing. There are several types of material changes that can affect an EB5 investment, including
- Changes to investment structure or that involve an investor’s capital in any way—source of funds is a common trigger for material change refiling
- Major shifts in any elements in the business plan, including project scope and timing or staffing structures that change job-creation goals
- Regional center sponsorship changes, especially when it involves the recent and widespread regional center shutdowns
- Significant updates to offering documents or any other project documentation
Typically, when a USCIS adjudicator determines that a material change has taken place during an investment period, the EB-5 investment applicant is required to file an updated I-526 petition providing the details of the project’s new circumstances.
Identifying Material Changes in Post-COVID Disclosures
Updates in statements regarding future risks and uncertainties will specifically address COVID-19. EB-5 investors are looking for accuracy of statements that were previously dependent upon future events and assumptions that may no longer be valid. Parts of the disclosure providing notice that COVID-19 may (or has) caused expected results to materially differ are of great interest. More thorough disclosures will outline a robust explanation of how the pandemic could present additional risks or exacerbate traditional risks.
Topics Proper Disclosures May Address
An NCE should clearly disclose how the virus may cause construction delays on a real estate project, for example, or that demand for a hotel project may dwindle following adverse effects on the travel and tourism industry due to an additional viral surge. They may then provide projections on expected operational changes or project evolution to successfully more through recovery.
The impacts upon job creation and allocation, direct references to material changes—these are the signals that an investor may find addressed in those disclosure documents. Additionally, there should be an explanation of EB-5 investors’ rights and when changes would require their consent. All these topics have the potential to affect material changes and impact an investor’s USCIS processing.
Steps Following Updated Securities Disclosures
An experienced EB-5 professional or immigration lawyer can review an investor’s disclosures to help them determine whether any updates signal a significant material change that needs to be addressed with USCIS. They can also advise on solutions to insulate an EB-5 investor from being negatively impacted by COVID-19. This may incorporate any updates from shifts in organization staffing, plans for new fund sources, or capital redeployment strategies as a few examples.
Ultimately, the EB-5 Immigrant Investor Program was designed to aid the U.S. economy in circumstances just like this. An EB5 investment is meant to help create jobs in areas where they are needed most, and to ensure compliance is in the best interest of all parties involved. Facing material changes due to economic and financial challenges is simply a hurdle, and everyone is rooting for success. With timely securities disclosures and a team of seasoned EB-5 professionals at the helm, the situation becomes nothing more than a matter of properly navigating choppy waters.