Recent wait times in I-526 and I-829 petition adjudication have created hurdles for regional centers, which must ensure investment funds remain at risk throughout the conditional permanent residence period. This is especially the case for investors from countries with severe visa backlogs, who typically face estimated wait times of several years. Loan transaction structures in which the investment amount is set to be repaid to the new commercial enterprise (NCE) by the job-creating entity (JCE) prior to adjudication of the investor’s I-829 petition thus pose a problem for all parties.
To comply with the at-risk requirement of the EB-5 program, regional centers have provided for the redeployment of any investment funds repaid during that time, meaning the funds are reinvested and remain at risk. Initially, United States Citizenship and Immigration Services (USCIS) provided limited clarification on the requirements to satisfy the at-risk rule. Fortunately, on July 24, 2020, USCIS clarified its guidelines on the redeployment of EB-5 investments.
Under these guidelines, the EB-5 capital must be redeployed within 12 months into a commercial activity through the original NCE rather than into a purely financial activity such as the purchase of financial instruments on the secondary market. Additionally, the NCE must redeploy the EB-5 capital within the approved geographic scope of the same regional center, and the new commercial activity must fall within the scope of the NCE. Therefore, NCE managers should plan to redeploy EB-5 capital into a new JCE within the geographic scope of the same regional center within 12 months of the repayment of EB-5 capital from the original JCE.
However, redeployment strategies give rise to several issues with U.S. securities laws that regional centers and investors must consider. This article addresses the most crucial points in this regard.
The Securities Act of 1933
The Securities and Exchange Commission (SEC) has provided guidance relevant to the redeployment of EB-5 investments regarding the distinction of whether a new securities offering is made through such a redeployment. According to the Securities Act of 1933, all new securities offerings must be registered with the SEC, and any unregistered securities must fall under an exemption. This carries implications for redeployment because under certain circumstances, the redeployment of investment funds is considered a new offering.
Areas of relevance for EB-5 practitioners are registered blind pool offerings and asset-backed financings, most often used for real estate projects. For such loan structures, where the usage parameters for an investment are not identified until after the investment has been made, redeployment is not considered a new offering of securities provided the redeployed investment is made within the parameters of the offering documents for the original investment. However, such arrangements exclude investors from control over where their investment funds are deployed and are thus not typically a beneficial arrangement from the investor’s point of view.
Similarly, investors who pay mandatory assessments arising because of the original investment decision are determined not to have been offered new securities under the 1933 Act. Mandatory assessment may arise when more funds are needed to complete a project. However, the SEC considers voluntary assessments to be a new investment decision and therefore a new securities offering.
Certain redeployments do raise 1993 Act concerns, such as situations in which the loan structure provides for a decision by investors to either dissolve the NCE and receive the repayment proceeds or approve their redeployment into a new JCE so the investment funds will remain at risk. Consequently, regional centers and investors must consider structuring any loans of the investment to account for redeployment in light of these new securities offering requirements.
In cases where a new securities offering would be determined to have been made, regional centers may be able to claim an exemption under Regulation D, Regulation S, or Regulation A+. But these exemptions depend on the circumstances of the redeployment. Regulation D allows certain smaller companies to avoid registering their securities by filing Form D after first selling those securities, and this option should be considered early in structuring the loan.
Regulation S allows for a safe harbor in which securities offered overseas do not need to be registered. However, this would likely not apply given that investors would be in the United States as part of the conditional residence at the time the new securities were offered. Regulation A+ similarly applies to smaller companies and can be investigated as a possibility.
The Investment Company Act of 1940
The Investment Company Act provides several securities registration exemptions. As such, NCEs that originally relied upon any such exemptions must ensure continued compliance during the time of the new securities offering. Three such exemptions under this act are detailed in §3(c)(1), §3(c)(5), and §3(c)(7), of which the first two are most relevant for EB-5 projects. The first concerns private funds owned by no more than 100 shareholders, and the second concerns funds engaged in the purchase of real estate.
To apply for redeployments determined to be new offerings, these exemptions must be structured into the initial investment.
The Investment Advisers Act of 1940
Redeployment may potentially create issues regarding the Investment Advisers Act, as well, depending on the number of clients being advised, as the act exempts an adviser from registration if he or she has fewer than 15 clients in the year preceding the redeployment. Certain state adviser laws may also come into play depending on the circumstances under which the redeployment takes place and the value of the assets involved. As these differ depending on the project location, each regional center must be aware of its state adviser requirements.
For EB-5 projects, the number of clients counted under this act is up for debate. If the threshold of 15 clients is reached, the adviser must register. However, the SEC has provided little guidance on whether the NCE represents one or multiple clients. In the former case, the NCE itself would be considered one client, whereas in the latter each partner or member of the NCE would be considered an individual client.
The act holds that an NCE is considered one client if the adviser provides investment advice based on the needs of the NCE rather than the individual needs of the partners. For redeployments, the SEC has previously granted no-action relief in cases where advisers did not make any recommendations regarding redeployment options. Yet the SEC has taken action in cases where advisers provided advice to individual members of an LP or LLC regarding investments and tax issues. As this could conceivably be the case for advisers of an EB-5 project involving multiple partners and members, regional centers must consider Investment Advisers Act compliance when structuring a redeployment situation.
To avoid unforeseen securities law concerns if an investment must be redeployed to maintain its at-risk status, NCE should consider this possibility while structuring the original securities offering. One strategy is to grant the general partner or managing member leeway through the original offering document by including only general parameters for the use of the investment and providing that actor the right to determine how repaid funds will be redeployed without the need for an investor vote, which would allow the SEC to consider the redeployment a new investment decision.
Regional centers may also be able to take advantage of exemptions under the three acts outlined above, but continued exemption is conditional upon the same requirements being met at the time of the redeployment. In some cases, as with a Regulation S exemption, this would be unlikely. Regional centers and investors alike must therefore carefully consider the structure of a loan to ensure the possibility of redeployment is accounted for in any cases where an exemption is sought for the original investment.
Currently, USCIS rules allow an EB-5 investor to receive repayment of their invested EB-5 capital upon completion of the two-year conditional residency period, regardless of the adjudication status of their I-829 petition. Prior to an investor completing the two year conditional residency period, the NCE must maintain the at-risk status of the EB-5 investor’s funds, which may include redeployment of the funds, depending on the timeline of the specific project.
As EB-5 practitioners become aware of increased wait times and adapt to these challenges, the need for redeployment can be avoided altogether by providing for a longer loan term or otherwise preventing funds from being repaid to the NCE until the I-829 petition has been adjudicated.
Redeployment additionally presents challenges of its own concerning the timing of investments and the availability of a job-creating project at that crucial juncture. Investors and regional centers must carefully consider how they will address the liquidation of a loan prior to I-829 adjudication, which marks the end of the conditional residence period.
As with all decisions concerning an EB-5 investment, practitioners benefit from consulting with a qualified securities attorney to identify potential areas of concern and ensure the loan is structured in such a manner to protect investors while complying with U.S. securities laws.