EB-5 Capital Redeployment Guidance – Episode 117
On July 24, 2020, U.S. Citizenship and Immigration Services (USCIS) issued a policy alert, attempting to provide clarification on the USCIS Policy Manual regarding the redeployment of investment capital. Unfortunately, rather than clarify, they have caused confusion and frustration in the EB-5 community over the past week. Are these changes to the regulations limiting, or have they in fact broadened the scope of redeployment options available to project developers? Are the changes retroactive? Listen in to understand the changes USCIS has made to the Policy Manual and how these changes might affect both investors and developers alike.
On this episode of EB-5 Investment Voice, Mona, Rebecca, Christina and Mark sit down to discuss the new changes to the USCIS Policy Memo regarding redeployment of capital. They provide insights into what has changed, what remains unclear and how these changes may have both helpful and damaging results. Listen in for insights from EB-5 industry experts on the changes to the redeployment guidelines and how these changes may impact your project or pending Form I-526 or I-829.
What is Redeployment?
- Redeployment involves the reinvestment of capital following the repayment or disposition of the original EB-5 investment made through a qualifying new commercial enterprise (“NCE”). The requirement that immigrant investors maintain their capital investment “at-risk” over the two years of conditional lawful permanent residence (LPR) has always been an essential requirement of the EB-5 Program.
- The redeployment of capital can only occur (i) after the original purpose for the capital has been achieved as outlined in the business plan, (ii) the jobs have been created and (iii) the capital has been repaid. In the absence of these three steps, the capital is not considered to be eligible for redeployment.
- On June 14, 2017, USCIS provided guidance on redeployment of EB-5 invested capital, but many in the industry did not feel the information was sufficiently clear and comprehensive. The new policy guidance, released on July 24, 2020, has not been received much better.
By What Methods can EB-5 Capital be Redeployed?
- The July 24, 2020 guidelines state that a new commercial enterprise (“NCE”) may deploy capital “directly or through any financial instrument” as long as certain requirements are met. These include that the (1) capital is put at risk for the purpose of generating a return; (2) there is a risk of loss and chance of gain; (3) a business activity is undertaken; (4) the capital is made available to entity most closely responsible for creating employment, and; (5) there is a sufficient relationship to a commercial activity (exchange of good/services) such that the enterprise remains commercial.
- Further to this point, the guidelines state that secondary markets do not generally satisfy these requirements because they are not related to the actual undertaking of business activity, do not make capital available to job-creating business and represent activity primarily financial (not commercial) in nature.
- Secondary Markets is most commonly known as the New York Stock Exchange (NYCE) and the Nasdaq, and describes the purchase of securities from investor to investor, or with the involvement of a third-party entity, rather than from the original source—the issuer.
- Unlike Secondary Markets, Primary Markets refer to the purchase of securities (by investors) from the issuer. This encompasses initial public offerings (IPOs), private placements, rights offerings and new issue municipal bonds.
- A reading of the original guidelines shows that USCIS previously referred to new issue municipal bonds (“NIMB”) as an example of proper redeployment, and some EB-5 stakeholders have expressed concern online that the removal of this language is problematic. However, NIMBs are a prime example of a Primary Market financial instrument and thus, USCIS has widened its scope of what constitutes a proper financial instrument for the purposes of redeployment by altering the language in this way.
- Unfortunately, blatantly excluding redeployment in Secondary Markets does mean investors will be taking on more risk in the redeployment of their capital, as Primary Markets are often more risky investments, though bonds issued by municipalities are known to be the securest option.
How Long and Where Can the Capital be Redeployed?
- Once the job creation requirement has been satisfied, the NCE “may further deploy capital within a reasonable time” to satisfy the EB-5 requirements.
- The new policy guidance states that the Service will consider 12 months as a reasonable amount of time but may consider longer periods of time for a specific commercial enterprise or activity, after reviewing the totality of the circumstances. The latter discretion may have been included to allow USCIS to consider COVID-related delays.
- The capital must be redeployed in the same regional center as the original project and through the same NCE, though not the same job creating entity (“JCE”). This means that the redeployment of capital must be within the limited geographic scope that the Regional Center has been approved for through USCIS (Form I-924) and cannot be sent to other parts of the country, though it needn’t be in the same targeted employment area (“TEA”).
- This “geographic scope” requirement is perhaps the most limiting on issuers and investors. Concerns have arisen regarding what is allowed if a regional center is terminated, or the regional center is not able to alter and expand its geographic scope for a number of years (due to slowed USCIS processing times).
Are These Policy Changes Retroactive?
- USCIS provided an answer to this question on its website just a few days after the announcement of the new guidelines—July 27, 2020. The Service has stated that as of July 24, 2020, the Policy Manual updated guidelines will apply to all pending Forms I-526 and I-829, as well as future petitions. This is certainly a concern for investors whose funds have been redeployed based upon the old guidelines, which did not provide the concrete changes made on July 27th.
- USICS has released a statement that “any potential impacts to investors would be minimal because the updated guidance merely clarifies continuing eligibility requirements. This clarification does not change any substantive requirements.” This has provided little comfort to investors and developers, who have relied upon their interpretation of prior guidelines. We anticipate more litigation in the future to determine what will happen to investors whose capital has already been deployed contrary to the new guidelines.
What Can Developers Do?
- It is important for project developers to alter their offering documents to conform with these updated policy guidelines, and USCIS has all but encouraged these alterations. SEC regulations require that if any changes are made to the investment that alter the original disclosures, these changes must be communicated in writing to the investors.
- At this time, the Form I-924 and I-924A do not require information about further deployment activity. However, USCIS has stated in the Q&A posted online on July 27, 2020 that it does “routinely revise forms and a future version of Form I-924A may require such information.”