Something New: 10/16 Quarterly Meeting

Something Old, Something New, Something Borrowed, Something Blue? (a/k/a How To Kill Deal Flow.)

Something New

Generally, quarterly EB-5 Stakeholder Meetings are a regurgitation of most things old. The real benefit often lies in the USCIS's response to the questions. Still, every once in a while, something new is thrown into the mix. In my opinion, the most shocking thing we learned from last week's quarterly engagement was the USCIS telling the EB-5 community that they have had a policy of suspending I-526 petitions of any Regional Center that has a pending I-924 amendment application.

  

When do Regional Centers apply for an amendment to their designation?

Some background: I-924 is the form on which new Regional Center designation applications are made. It is also the form on which amendments are made. I-924 amendment applications can be made for a number of reasons, including:

A. An amendment request may be filed to seek approval of changes to the Regional Center’s:

1. Geographic area;
2. Organizational structure or administration;
3. Affiliated commercial enterprise investment opportunities, to include changes in the economic analysis and underlying business plan used to estimate job creation for previously approved investment opportunities and industrial clusters;
4. Affiliated commercial enterprise’s organizational structure and/or capital investment instruments or offering memoranda.

B. An amendment may also be filed to seek a preliminary determination of EB-5 compliance for documentation provided as an exemplar Form I-526, Immigrant Petition by Alien Entrepreneur, prior to the filing of Form I-526 petitions by individual alien entrepreneurs.

However, in practice, the line between A and B is fuzzy. When a Regional Center seeks to change its geographic area or other items under A, it usually is put in as part of the exemplar I-526 application:

Example: Acme Regional Center currently has coverage in Northern California and wants to expand into Southern California. And/or it wants an industry category that Acme currently does not have a designation for. To achieve this, the Regional Center will either put in an actual or hypothetical project with all the required documentation showing why it's a good idea for the USCIS to let them do that OR the Regional Center will put in an exemplar I-526 petition with all the required documentation showing, again, why it's a good idea. In this latter case, reasons A and B related to amendments above are merged together. 

Or, a Regional Center will put in an exemplar I-526 for its next project even if there is no change in the regional or industry coverage.

What is an exemplar I-526?

An exemplar I-526 is an application that a Regional Center will make (through an I-924 amendment) to "pre-approve" a project before it goes out to market, or if the project has already been marketed, to qualify a project before any investor I-526s are filed. 

The I-526 petition is comprised of two parts. Part I pertaining to the business that is receiving investment (what is it, how are the jobs approved, what are the offering documents provided to the investor, how are the business entities involved structured, etc.) and Part II pertaining to the investor's source of funds. Therefore, if  a Regional Center's project has, for example, 90 investors, Part I of the I-526 petitions for all 90 investors will be identical. However, the USCIS did not have a formal procedure in place for streamlining its operations and as a result, all 90 investor petitions were reviewed 90 times. So it was not unusual for some investors to get an RFE (Request for Evidence) on Part I while other investors did not. Painfully inefficient, needless to say. 

So a few years ago, at the urging of the EB-5 community, the USCIS implemented a new process called an "exemplar I-526".  The Regional Center would submit to the USCIS a sample I-526 with only Part I. Then the USCIS could RFE (yes, loyal readers, RFE is used as a verb among my cohorts) Part I to death (or at least until they were satisfied it was a good project). Once the Regional Center received the exemplar I-526 approval, the idea was that any investor I-526 petitions that were filed based on the exemplar approval would only have Part II pertaining to the investor's fund sources reviewed. And this, the idea was, would dramatically speed up the I-526 review process.

(At this juncture I will not discuss how the USCIS took the opportunity to spend all the time they saved on not having to review Part I on scrutinizing Part II with a level of specificity never before encountered by any immigration lawyer; or how some adjudicators flatly ignored the exemplar approval and RFE-ed Part I anyway; and how many seasoned immigration lawyers took to advising clients to not even bother with the exemplar process, etc. But I think the exemplar I-526s are now coming into their own. To our credit, I think the tide turned when someone asked the USCIS Director in one of the quarterly engagements why the exemplar process was even introduced if the adjudicators were not going to honor it and the Director answered something to the effect of, this is the first time I'm hearing of this, is this true people? But I digress.)

What does this all mean?

ANYWAY, back to the topic at hand. Therefore what does it mean, if the USCIS is really going to stick to their policy (which we had never heard of before) that any I-924 amendments will automatically halt existing I-526 adjudications? It means that a Regional Center that has just closed an offering and has a dozens of I-526 applications pending cannot move ahead and prepare for its next offering (i.e. It will kill deal flow).

Example: A Regional Center has just successfully closed an assisted-living facility offering to foreign investors. There are currently 30 I-526 petitions pending approval. Currently I-526 approvals are taking something like 9 months on a good day (with the rare exception of a couple of older centers). The Regional Center would now like to launch its next offering which involves, say, a hotel. They would also like to put in an exemplar I-526 application for the said hotel project to save time and aggravation. But, if what the USCIS said at last week's conference is true, they cannot do this for fear of holding up I-526 adjudications on the assisted-living facility project.

Unfortunately, a number of Regional Centers whose I-526 petitions have been pending for a while realized after last week's call that it was their new project documents that were holding up the adjudications. But then again, this year was an unusual year in many respects for EB-5, especially with the extension of the Regional Center program that was hanging over everyone's head and the controversy surrounding the tenant-occupancy model. So it is hard to say what exactly has been holding up all these petitions. 

But as an EB-5 attorney representing individual clients, I am wondering if I need to add to my checklist of questions to ask Regional Centers that my clients are considering investing in, "Do you have any I-924 amendments pending that can potentially delay the approval of my client's I-526?"

UPDATE: December 4, 2012

There was a Conversation with the Director engagement call yesterday and someone managed to squeeze in the question whether there was an USCIS policy of holding I-526s adjudications when an I-924 amendment was made because he was experiencing a sudden halt to his projects I-526 approvals since he put in an I-924 amendment; to which Mayorkas answered he wasn't aware of such a policy. (Apparently, nobody told Mr. Mayorkas that the new operations person from the USCIS said that was happening during the October call.) I have heard from a handful of RCs that this was happening. Also, a friend who was in the audience at the DC meeting said that after the meeting he spoke to some RC reps that were noticing the same thing.)

Direct vs. Regional Center EB-5s Part 2.

This is Part 2 of a two-part blog post addressing the intense debate which was waged on many LinkedIn groups recently. If you are relatively new to EB-5s and need to understand the exact difference between Direct EB-5s and Regional Center EB-5s, please read Part I first.

The following are my thoughts on the arguments for Direct EB-5s and against Regional Center EB-5s that were posted on the LinkedIn EB-5 groups. (Italics are from the post.)

1. Argument re: Loss of Capital: "It is almost unheard of that an investor in a Direct Investment has seen a loss of capital. In cases of Regional Centers, it is quite common for investors to experience capital erosion of between 5 to 100%."

As a starting point, I would like to point out that there is no way anyone can get accurate data to make the above claims. Because the USCIS only started systematically collecting Regional Center data at the end of FY2011, the public has no access to the I-526/I-829 approval or deny records of any Regional Center. As to investment return track record, it is anybody's guess. So when Regional Centers boast a 100% track record, you have to kind of take them at their word.

In addition, the bulk of Regional Centers were formed beginning 2008/2009. Currently there are over 200 Regional Centers, while as of June 2010 (which is the oldest USCIS statistic I can find right now), there were 94. Considering that Regional Center investments are not returned for five to six years, even if the first round of new Regional Centers established in 2008 flooded the market with projects as soon as they were approved (which they didn't), that was only 4 years ago, so it is pretty early to be making sweeping ("quite common") and weirdly specific ("5 to 100%") statements about the return of capital.

As for Direct Investments never losing capital, that again, is a statistic nobody keeps. But that statement doesn't sound too accurate as it implies new businesses never fail or lose money. I wouldn't be surprised, however, that EB-5 Direct investments as a group have better success rates than generally established new businesses, as the owners probably manage them very conservatively, so as not to lose the opportunity to get the conditions removed on their greencards. (Assuming it is the investor owner that is managing the company. There seems to be a slow but steady emergence of "institutionalized Direct EB5s" (I made up that term) where entities are acting as intermediaries, similar to regional centers, and connecting investors with Direct EB-5 opportunities. Or, the investor may simply be taking a minority stake in a company managed by someone else.)

2. Argument re: Dividends: "Most regional centers do not pay out dividends. and those that do pay dividends are usually in the low single digits in RC's, while investors usually get double digit returns for Direct Investments. This means that at the very least, investors in direct investments get between 2 to 8 times higher profits when compared to Regional Centers."

It is true that Regional Centers pay little, if any, distributions to its members. (I assume that the writer meant distribution as regional centers are not corporations.) And in the case of loan products, the interest rates are very low as well. (To understand the difference between equity based and loan based EB-5 projects, see here.) Whether investors who invest in direct projects "usually" get double digit returns, is up for debate.

3. Argument re: Exit Strategies: "It is quite easy to sell a business on the open market or even take it public. It is quite hard to sell shares in a regional center, and most regional centers require the investors to use their affiliates to sell their shares, which means an added cost of 3-10% when exiting."

Off the bat, let me just say taking a business public is a very rare and expensive endeavor. (You don't have to be a former securities lawyer like me to know that.) Whether an investor can sell their EB-5 business quite easily depends on how well the business is doing and what the market conditions are at that point in time.

I agree it is quite hard to sell a regional center interest (not shares, again, because regional centers are not corporations and what the investor is obtaining through the investment is interest in a fund (either a limited partnership or limited liability company). Regional center interests are restricted securities, meaning that there are heavy transfer restrictions. In addition, there is no market for these securities because, in a way, the main "return" on the investments come in the form of a greencard. Regional Centers EB-5s have evolved from the equity model to the loan model to address this issue. (Again, see link in #2 above for a discussion on the difference between the two.)


4. Argument re: Loss of Certification: "It is quite common for regional centers to lose certification, and quite unusual for direct investments to lose certification." 

As of today, there is only one regional center that has lost its certification. (Which is not to say, more will not in the future if managed badly.) Direct investments are not certified in any form by the USCIS. You either create the jobs or you don't. Mismanagement of the business will result in the investor not obtaining the permanent greencard.

5. Argument re: Fraud: "Many cases have surfaced where regional centers were found to have defrauded investors. As a matter of fact, the NYTimes.com article below clearly says EB-5 programs are rife with fraud and corruption. http://www.nytimes.com/2012/04/16/opinion/reform-the-eb-5-program.html"

There is no doubt that the EB-5 program needs better supervision. At the very least, it needs some sort of an EDGAR-like system where potential foreign investors can gain access to relevant data points. And I am sure there are misstatements galore and even instances of fraud involved. But to say that because there is fraud in regional center projects, all people working in regional center projects must be frauds (which is the gist of the accusations hurled around on LinkedIn) is like saying there are securities fraud on the stock market so anyone involved in public companies are guilty of fraud.

(I must admit that I'm a bit disappointed in my beloved New York Times publishing such a lazy opinion piece. The opinion piece that makes claims that the EB-5 program is "rife with fraud and corruption" without any supporting evidence (although I am the first to admit that there is no place to obtain such evidence; but the writer could at least have made the effort to have one egregious case study of an individual investor or bad-behaving regional center!) with a poorly crafted conclusion to just "fix it".)

For the interest of full disclosure, I would like to state that I have a regional center application pending (in the USCIS's RFE blackhole) while I earn a living filing petitions for immigrant investors  that want to obtain a greencard through Regional Center EB-5 investments. I also work with businesses that are interested in establishing regional centers or working with existing regional centers. That said, I also assist investors with their Direct EB-5 petitions who want to run their own business (or invest in a Direct EB-5 by taking an equity stake in somebody else's business). In fact, I am going to a construction site next week to take pictures of a restaurant that is being built that my client is investing in. (I could have asked for the pictures to be send via email, but I wanted to see it for myself and also talk to the owners who are receiving the investment.) I'm also going to Korea at the end of this month on behalf of a client who is receiving Direct EB-5 investments so that I can meet his investors and explain the EB-5 process.

So which is better? I will have to give the quintessential lawyer's answer, which is: IT DEPENDS. Then what does it depend on? That will be the topic of my next few posts.