With demand for EB-5 visas having recently outstripped supply, United States Citizenship and Immigration Services (USCIS) began 2020 with a backlog of approximately 14,000 EB-5 visa petitions awaiting adjudication. The resulting wait times, especially for Chinese applicants, among whom the EB-5 Program has become increasingly popular over the past several years, have prompted investors to explore new strategies to ensure they continue to meet the conditions of the program.
A main area of concern has centered on the requirement that EB-5 investment funds be maintained at risk throughout an investor’s conditional residence period, beginning from the time he or she enters the United States following approval of the I-526 petition and ending when the I-829 petition is adjudicated and unconditional permanent residence is granted. With retrogression causing wait times of six to ten years for some investors, fulfilling this requirement has become increasingly challenging.
This article examines the redeployment of investment funds within a new commercial enterprise, one adaptation strategy investors have used in response to this obstacle.
What is the at-risk requirement?
The purpose of the EB-5 Program is to create jobs within the United States. As such, those filing for visas under the program are required to make an initial investment of $900,000 or $1,800,000 in a new commercial enterprise depending on whether the project is located in a targeted investment area (TEA), which is a region experiencing unemployment levels significantly higher than the national average. This investment amount must be made available in its entirety to the new commercial enterprise for the explicit purpose of job creation.
That the investment must be maintained at risk means the investor cannot be repaid this initial amount until his or her conditional residence period has ended. While the investor is permitted to see a return on that investment, such as a distribution of profits from the operation of the new commercial enterprise, the original loan to the enterprise cannot itself be repaid. Guidelines from USCIS have additionally clarified that the amount cannot simply be held in escrow by the new commercial enterprise during this time but must be continuously deployed in a project.
This requirement creates a problem for investors dealing with increased wait times as a result of retrogression: If the wait time for adjudication extends beyond the term of the loan and the loan is repaid during or even prior to the conditional residence period, the funds are no longer at risk. In this scenario, the investor would fail to meet the EB-5 Program requirements and would risk losing his or her visa. For investors who have relocated their families and created new lives in the United States in an effort to obtain permanent residence under the program, this possibility poses a significant risk.
Redeployment of Investment Funds
The majority of EB-5 investors apply through the regional center model, in which the regional center as the new commercial enterprise loans the investment funds to a second enterprise responsible for job creation. In the case of a real estate development, for example, the regional center loans the funds to a development firm, which uses those funds to create construction jobs. At the end of the loan term, the firm repays the loan, and the regional center returns the funds to the investor.
Traditionally, loan terms of five years satisfied the at-risk requirement well, providing enough time for the investor to file and receive approval for an I-526 petition, live in the United States for a conditional residence period of two years, and then file and receive approval for an I-829 petition. However, increased wait times mean these loan terms are no longer sufficient and indeed create an additional risk for the investor: Aside from the possibility of the new commercial enterprise failing during the wait, the investor also risks losing his or her visa by failing to meet the at-risk requirement.
While resolving the issue of early repayment, longer loan terms are not desirable in all cases. As such, redeployment creates a potential solution for this issue by allowing the new commercial enterprise, the regional center, to ensure the investment funds are maintained at risk by continually deploying repaid funds into new job-creating projects. While the initial deployment of the investment must fill the job creation quota, redeployment simply allows investors to meet EB-5 Program requirements in cases where the loan is repaid prior to the end of conditional residence.
Investors should keep the following key points in mind when considering redeployment as a potential fund management strategy:
- The potential for redeployment must be outlined in the private placement memorandum for the initial offering. Although it is not necessarily possible to plan for redeployments years in advance, as the business climate may change in the intervening years, the plan should be as detailed as possible so as to allow investors to make informed decisions and minimize risk.
- The EB-5 Program does not allow for material changesto projects, meaning substantive changes not outlined in the business plan approved with the I-526 petition. As such, as mentioned above, job creation must occur during the first deployment of funds, which is the focus of the original business plan.
USCIS has not yet published definitive guidelines as to what constitutes an acceptable redeployment of funds, though redeployment to a project similar to the one outlined in the original I-526 business plan should theoretically meet the criteria. As wait times continue to pose an issue for EB-5 investors over the coming years, adjudication decisions will likely provide clarification on this matter and allow investors and project developers alike to adapt with appropriate redeployment strategies.