The COVID-19 viral outbreak that began in early 2020 has been a major catalyst in the continued fluctuations in the U.S. financial markets. All the careful planning and projecting EB-5 investment teams performed for the year has likely gone out the window, and we won’t understand the extent of the pandemic-related disruptions for quite some time. EB-5 investment participants would do well to expect ongoing changes as government and regulation bodies’ responses are rolled out in the coming months, as well.
This kind of uncertainty can be especially unsettling for foreign nationals already deeply entrenched in the EB-5 Immigrant Investor Program process. While the challenges faced in 2020 have been difficult on everyone in the industry, the impact on investors who elected to participate in EB-5 distressed business projects may be compounded.
The State of the Market for EB-5 Distressed Projects
A great number of projects within the recreational and entertainment market sectors that were already struggling to meet the financial projections laid out in their original offering materials are now experiencing even greater difficulties doing so. Additionally, the overall number of distressed or “troubled” businesses – especially in hospitality and real estate – has surely increased in the midst of the COVID-19 pandemic.
Financial Market Strain Can Have Devastating Outcomes
All of these businesses are particularly subject to greater distress following significant reductions in workforce, temporary operation restrictions, and disruptions in various supply chains. The financial markets’ reluctance to issue new bonds and other government-backed financing options is also disrupting the funding landscape for these types of projects. Interest rates are trending historically low as well. Unfortunately, even the most diligent EB-5 investors couldn’t have anticipated a sudden viral outbreak, and the culmination of all of these factors can lead to devastating outcomes.
Unexpected financial market fluctuations such as these have made it even more challenging to sell an EB-5 distressed project seeking EB-5 financing. When EB-5 project construction and operation activities cease, jobs can no longer be created, investors are unable to service their financing obligations, and EB-5 investment participants’ visa eligibility is placed at risk.
EB-5 Distressed Business Investors Need to Remain Well Informed
The savvy NCE operator will likely continue re-evaluating the impact of distress factors and determine whether continuing an EB-5 offering is prudent. Note that every NCE has a fiduciary duty to preserve its EB-5 investment participants’ capital as well as their visa eligibility, and they must do their best to identify the best potential remedies through their analysis. This isn’t, however, a failsafe. Every investor has a responsibility to stay abreast of the goings-on with their project, and a primary source of information is the security disclosure updates they should be receiving.
EB-5 Distressed Business Investors Must Continually Reassess 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. While the 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 be absolutely unnerving to an investor in an EB-5 distressed business, it isn’t necessarily the end of their EB-5 journey.
NCEs and other EB-5 operators involved with program-approved troubled businesses should all be providing essential updates for securities disclosures. These documents are the backbone of EB-5 investment participants’ resources for the continuous reassessment of the risks for their projects. Staying well informed allows them to be nimble in their actions and to react according to their own best interests.
Every investor should expect disclosures that specifically pertain to COVID-19 and how it may affect both EB-5 projects and the EB5 investment capital they have contributed to them. All distressed EB-5 projects predating the coronavirus outbreak should be preparing or have already prepared updated securities disclosures. Learn more below about what these disclosures could mean for EB5 investments in distressed projects, when investors should receive them, and what rights and options an investor has.
Troubled Business Investment Offerings Prepared Before the Outbreak
All EB-5 investment offerings are legally required by the U.S. Securities and Exchange Commission (SEC) to provide certain risk disclosures during the signing of an EB-5 investment agreement. This body oversees the execution of the laws and regulations put into place to protect investors in the United States. These disclosures usually cover general risks and cautionary language about the particular uncertainties associated with the industry for that specific project. Look for:
- References to safe-harbors availed to NCEs under the Private Securities Litigation Reform Act of 1995 (PSLRA)
- Disclosures on risks related to public health crises and pandemics
What you won’t see is COVID-19 named exactly. You also won’t see the current severity – or even the nature of – the impacts of this pandemic on the U.S. economy. Now is the time, though, for proper fiduciary handling. The SEC requires full and fair disclosure. Find out what that means below.
Full and Fair Disclosure According to the SEC
In its “full and fair disclosure” guidelines, the Securities Exchange Act of 1934 plainly states that both disclosing untrue statements of material fact and the omission of material facts necessary to prevent previous statements from becoming misleading are expressly prohibited. There are no exact quantitative tests to determine that materiality exists under SEC laws. However, there is a precedent for determining violations – that is, whether there exists the substantial likelihood for a reasonable investor to believe an omission or misstatement was an important factor in the decision to hang on to or sell an investment.
The SEC’s scope on materiality is not narrow. As such, issuers are always advised to disclose supplemental offering documents in any situation where doubt may exist as to whether a material fact might influence investment decisions. NCEs that do not provide disclosures for significant changes (like the ones that are occurring within distressed EB-5 projects across the nation due to the pandemic) are potentially violating Exchange Act laws. Additionally, some COVID-19-related changes may be considered material in the eyes of USCIS adjudicators. Both need to be addressed promptly in order to maintain EB5 investment eligibility status.
Disclosures for Material Changes in an EB-5 Distressed Project
Securities disclosures can be very important in ensuring an investor remains eligible for their EB-5 investment visas throughout their project investment period. USCIS offers some level of flexibility on discrepancies between original project documents and final outcomes because there are always unanticipated events in business. Furthermore, some scenarios that require supplemental disclosures do not actually trigger material change findings by USCIS. That said, discrepancies that do materially affect a project can put EB5 investment eligibility at risk.
How USCIS Defines a Material Change
A material change is defined as one that pertains to the consequential aspects of an EB-5 project. These are the changes that may impact an adjudicator’s decisions. While material changes do not always result in a denial of a petition, they can significantly delay processing. So, what types of material changes can affect an EB5 investment? Here are some of the most common ones:
- Major offering document updates or any other project documentation
- Significant changes to regional center sponsorships
- Clear shifts in business plan elements like project scope and timing or employment structures that could change job creation
- Any investment structure or capital sourcing changes
When USCIS adjudication results in a material change during the EB-5 investment period, EB-5 investors are required to refile their I-526 petition with updated details of the project’s circumstances. There are certain signals within post-COVID-19 securities disclosures that may clue you in to those material changes.
Clues to Material Changes in Post-COVID-19 Disclosures
At first glance, an EB-5 investor should be able to pick up specific references to COVID-19. From there, there are a number of topics that should be addressed within the updated disclosures they receive, including:
- The accuracy of statements that depend on projections and assumptions that the pandemic may have rendered invalid
- Parts of the disclosure that provide explicit notice that COVID-19 may have or has caused expected results to differ materially
- More robust explanations of how the pandemic could present additional risks or exacerbate traditional risks associated with a distressed EB-5 project
- New projections on expected operational changes or the evolution of a project for the successful continuation of the project
- Impacts on job creation or allocation and other direct references to USCIS material changes
These are the clues to potential material changes that could impact an investor’s USCIS processing. Besides these signals to material changes within new disclosure documents, look for an explanation of EB-5 investors’ rights as well as an outline of when changes would require EB5 investment participants’ consent.
What to Do After Updated Disclosure Review
Especially when evaluating next steps for EB5 investment in a troubled business, an experienced EB-5 legal professional is a tremendous help in understanding updated securities disclosures and determining how an investor should proceed if significant material changes need to be addressed with USCIS. More importantly, EB-5 immigration attorneys can offer valuable advice on solutions to insulate an EB-5 investor from becoming ineligible for the program, which might include plans for new sources of funds, effective shifts in organization charts to maintain job requirements, or strategies for capital redeployment.
No matter the impact, EB5 investors should find some comfort in the understanding that the EB-5 Immigrant Investor Program was made for circumstances like this. It was designed and implemented specifically to aid the U.S. economy in less-than-ideal circumstances. It is meant to create jobs in areas where high unemployment exists and to stimulate the local economy, all the while ensuring the best interests of all parties involved. Because of this, everyone is rooting for the success of EB-5 projects. Facing any material changes due to pandemic-related challenges is nothing more than a hurdle for most. Timely securities disclosures and seasoned EB-5 professionals in your corner will mean the best possible outcome for every distressed business investor.