Investing Cash From Loan Proceeds:  A New Interpretation Of “Indebtedness”

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I. A New Standard, And An Old Problem

In the April 22 public engagement with the EB-5 stakeholder community, the Immigrant Investor Program Office (“IPO”) articulated a new adjudications standard that precludes the EB-5 investor’s use of loan proceeds as a source of investment capital unless the investor shows that the promise to repay the loan has been secured by assets the investor owns.  As stated by IPO:

[P]roceeds from a loan may qualify as capital used for EB-5 investments, provided that the requirements placed upon indebtedness by 8 C.F.R. § 204.6(e) are satisfied.  Under 8 C.F.R. § 204.6(e), “[c]apital means “cash, equipment, inventory, other tangible property, cash equivalents, and indebtedness secured by assets owned by the alien entrepreneur, provided that the alien entrepreneur is personally and primarily liable and that the assets of the new commercial enterprise upon which the petition is based are not used to secure any of the indebtedness.”

In order to establish an investment of capital, 8 C.F.R. § 204.6(j)(2) allows a petitioner to submit as evidence, among other items, the following:

Evidence of any loan or mortgage agreement, promissory note, security agreement, or other evidence of borrowing which is secured by assets of the petitioner, other than those of the new commercial enterprise, and for which the petitioner is personally and primarily liable.

USCIS classifies proceeds of a loan that are used for EB-5 investment as indebtedness governed by these regulatory requirements.  When using loan proceeds as EB-5 capital, a petitioner must demonstrate first that they are personally and primarily liable for the indebtedness.  That is, they must demonstrate that they bear primary responsibility under the loan documents for repaying the debt that is being used to satisfy the petitioner’s minimum required investment amount.

In addition, the petitioner must demonstrate that the indebtedness is secured by assets the petitioner owns and that the value of such collateral is sufficient to secure the amount of indebtedness that is being used to satisfy the petitioner’s minimum required investment amount.  Put another way, indebtedness secured by assets owned by the petitioner qualifies as “capital” only up to the value of such collateralized assets.[1]

The Q&A session that followed these remarks highlighted not only that this new adjudications standard has taken the EB-5 public by surprise but also that legal authority for the new position adopted by IPO is dubious.  Efforts to dialog with IPO representatives were met with the kind but nonetheless blunt statement that “this is no forum to debate our interpretation of the law” – a fly-swatting kind of rejoinder that IPO is in no mood to host “public engagements” that welcome input or different points of view about this particular issue.  It remains to be seen whether the media coverage suggesting uneven and corruption-fueled access to USCIS decision-makers, by some well-placed advocates for the interests of a few, will serve to poison what had been for a few years on the surface at least a collaborative and trusting EB-5 stakeholder process for the ostensible benefit of all.[2]

The immediate problem, which unfortunately is an old problem with the EB-5 program, is that this new adjudications standard is applied by IPO retroactively.  The “surprise” is in the form of I-526 petition denials presently received in the US mail for dozens (if not hundreds) of investor cases that have been pending with USCIS for well more than a year, with some dating back to 2013.[3]  IPO cites to no emergent circumstances such as law enforcement or national security rationale justifying retroactive application of the new adjudications standard.  The IPO suggests that there is no new adjudications standard at all, that it is simply clarifying their long-held standard now, since there have been inconsistent adjudications.  An informal polling of long-time, experienced EB-5 practitioners reveals this IPO statement to be inconsistent with the actual experience in EB-5 practice.  Lawyers can source their EB-5 cases over two decades to support their own testimonies on this point.  One relevant factor is the IPO itself is relatively new, in a new location across the country from the former location of EB-5 adjudicators; the institutional continuity of EB-5 adjudicators and policymakers is not clear.  We have only EB-5 precedent decisions and policy memoranda as history of what has been deliberated on over the years within the august halls of USCIS adjudications.  None of the EB-5 precedent decisions supports the new adjudications standard.  Not a single EB-5 policy memorandum speaks to the issue.  Perhaps no better evidence exists than the May 30, 2013 EB-5 Adjudications Policy Memo which sets forth the core aspects of EB-5 eligibility and is in some sense exhaustive of issues that have arisen in EB-5 practice, and yet this new adjudications standard appears nowhere in that Policy Memo.

In individual cases, experience shows the making of the retroactivity grievance amounts to a mere whimper.  Experienced practitioners have been there, done that; the Realpolitik is IPO has all the tools and authority needed to bump an investor’s American dream off the rails by making up new adjudications standards, without meaningful and timely judicial remedy for the EB-5 investor.  The real damage stemming from retroactively-imposed adjudication standards is to the stakeholder process.  Any informed listener to the April 22 engagement must hear only a hollow ring to the professed commitment to predictability and fairness in EB-5 adjudications.  It is as if USCIS policy makers presume there is no downside to abandoning a principle of advance notice, as if there is a limitless worldwide supply of EB-5 investors who wear blinders to the ever-growing immigration risks that USCIS heaps atop an already-confused statutory/regulatory structure.  Not true, the supply is not limitless.  The blinders abound.

In the circumstances, what would makes sense would be for IPO to announce that (a) IPO would not apply their new adjudications standard until it has conducted substantive stakeholder engagement that invites stakeholder input, as it did prior to issuing the EB-5 Policy Memo; and failing that, then (b) IPO would not impose their new adjudications standard to any I-526 petition that has been pending; and if that’s not possible either, then (c) IPO would allow an investor to amend a long-pending I-526 petition to present a source of funds that would not be objectionable.  These options advance the interests of predictability and fairness.

The balance of this article is intended to provide an overview of the existing law and regulations that are applicable to the issue of investing cash sourced from loan proceeds.  As well we explain why, in the authors’ view (which is not unique as we know from conversations with colleagues), the new USCIS interpretation is erroneous and must be challenged.

II. The Plain Meaning of 8 CFR §204.6(e)

 

In applying its new interpretation to the adjudication of I-526 petitions where the qualifying investment is made, in whole or in part, with the cash proceeds of a loan, USCIS questions whether there has been the requisite investment of “capital” in the new commercial enterprise (“NCE”).  Citing to 8 CFR §204.6(e), the new RFE’s and NOID’s use language like the following: “It is not clear whether or not the petitioner is personally and primarily liable for those loans…and if those loans were secured by the petitioner’s own assets, and not by the NCE’s assets…The regulation allows the petitioner to use indebtedness (loan) as capital investment only if it is secured by the petitioner’s own assets.”

In referencing this regulation, the new USCIS adjudications assert without explanation or reasoning that the petitioner’s investment of cash is “indebtedness” as that term is used in the definition of “capital.”  This conclusion is not supported by the regulation and it lacks legal basis.  As a starting place, the complete regulatory definition of capital at 8 CFR §204.6(e) is:

Capital means cash, equipment, inventory, other tangible property, cash equivalents, and indebtedness secured by assets owned by the alien entrepreneur, provided that the alien entrepreneur is personally and primarily liable and that the assets of the new commercial enterprise upon which the petition is based are not used to secure any of the indebtedness. All capital shall be valued at fair market value in United States dollars.

It is impossible to miss the plain language of the regulation which could not be any clearer:  “Capital means cash …” If it is clear and undisputed that the petitioner has invested cash into the NCE, and if it is also just as clear that cash constitutes capital, it is plainly illogical to characterize her investment of cash as an investment of indebtedness.  Based on plain language and logic, there must be a heavy presumption, at minimum, that the petitioner’s investment of cash satisfies the requirement of making an investment of capital.

The statute, INA §203(b)(5)(A)(i), makes it clear that “capital” is what the EB-5 investor contributes to the NCE.  The immigrant visa is available to the immigrant who will be engaged in a NCE “in which such alien has invested (after November 29, 1990) or, is actively in the process of investing, capital…” (italics added)   Consequently, in questioning whether the petitioner has invested capital into the NCE, the applicable law requires USCIS to focus on the commercial transaction between the petitioner and the NCE.  The USCIS examiners’ focus, in answering this question, should not be on how the EB-5 investor came into possession of the funds.  That is a separate question.  The USCIS interpretation errs by confusing this analysis.

A. Investment of cash is not “indebtedness”

It is factually and legally incorrect to characterize a petitioner’s investment of cash as “indebtedness.”  The common dictionary definition of the word “indebtedness,” according to Merriam-Webster Dictionary, is “the condition of being indebted” (itself defined as “owing money”) or “something (as an amount of money) that is owed.”[4]  Black’s Law Dictionary defines “indebtedness” as:

The state of being in debt, without regard to the ability or inability of the party to pay the same. (citations omitted) The word implies an absolute or complete liability. A contingent liability, such as that of a surety before the principal has made default, does not constitute indebtedness. On the other hand, the money need not be immediately payable. Obligations yet to become due constitute indebtedness, as well as those already due. (citation omitted)[5]

In general, a petitioner who has invested cash derived from loan proceeds into an NCE is not in debt to the NCE.  Nor is the NCE in debt to the petitioner.  Rather, the petitioner’s investment of capital into the NCE is without the strings of indebtedness attached.  In making a qualifying EB-5 investment, such a petitioner would have invested the cash loan proceeds and, in return, acquired an ownership interest in the NCE.  Absent a promissory note from the petitioner to the NCE, or from the NCE to the petitioner, there is no debt arrangement between the petitioner and the NCE.  There is nothing about the petitioner’s investment of capital directly into the NCE that constitutes indebtedness or even suggests it.

On the other hand, an example of an investment of indebtedness would be where the investor contributed to the NCE a promissory note as a form of capital (illustrated in the diagram below), as did the petitioners in the EB-5 precedent decisions Matter of Hsiung and Matter of Izummi.

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Matter of Hsiung involved the petitioner’s claim that the contribution of a promissory note to the NCE satisfied the requirement to invest equity capital in the NCE.  Matter of Hsiung equates a petitioner’s contribution of a promissory note to the NCE as a form of investment of indebtedness.  It states in relevant part: “A promissory note can constitute ‘capital’ under 8 CFR §204.6(e) if the note is secured by the assets of the petitioner.”[6]  In other words, according to Matter of Hsiung, and consistent with the common definition of “indebtedness” as involving a current obligation to pay in the future, the “indebtedness” prong of the “capital” definition is not equated with current (or already completed) cash investment in the NCE but instead it contemplates future payments by the EB-5 investor to the NCE.  The case of an EB-5 investor contributing the full capital investment amount with cash loan proceeds is entirely different.  As of the date of filing the I-526 petition, the petitioner would have already contributed all of the required cash to the NCE, with no presentation of a promissory note to the NCE and no future obligation to pay the NCE.

In Matter of Izummi, the petitioner executed a promissory note in which he promised to pay $500,000 to the NCE in installments, and he identified various personal bank accounts as security for the promise to pay.  The petitioner in Izummi argued that the contribution of the promissory note itself, secured by his personal assets, constituted a qualifying investment of capital in the amount of $500,000.  On this issue, Matter of Izummi did not disagree with the proposition that a promissory note could comprise capital; however, the petitioner in Izummi failed to establish that the fair market value of the note itself was $500,000 or that the security for the note was adequate.  According to that decision, “the question to be asked is what a third party would pay for the petitioner’s note.”  The AAU found the present value of the promissory note to be significantly less than the face value of $500,000.  The AAU further found the security arrangements inadequate because the evidence failed to show that the NCE’s security interest in the bank accounts would be enforceable so as to ensure the availability of the full $500,000 to the NCE in the event the investor defaulted on his promise to pay.  In the case of an investment of cash loan proceeds, unlike in Izummi, the petitioner has not simply promised to pay the NCE the required amount of capital on a future date.  As of the date of filing the I-526 petition, such a petitioner would have actually contributed the required investment amount in cash to the NCE.  In this case, the value of the petitioner’s contribution is clear.  The absence of a security interest simply has no relevance where there is no future obligation to be enforced by the NCE.

Revealingly, current USCIS policy guidance, which is binding on adjudicators, expressly substitutes in place of the word “indebtedness” the reference to a promissory note in its explanations of what can constitute “capital” under the regulation:

First, the definition of “capital” is sufficiently broad that it includes not only such things of value as cash, equipment, and other tangible property, but it can also include the immigrant investor’s promise to pay (a promissory note), as long as the promise is secured by assets the immigrant investor owns, the immigrant investor is liable for the debt, and the assets of the immigrant investor do not for this purpose include assets of the company in which the immigrant is investing.[7]

The EB-5 Policy Memorandum then goes on to elaborate what are the additional requirements of a promissory note, as enunciated in Matter of Hsiung, in order for USCIS to accept it as a contribution of capital for EB-5 eligibility purposes.  Thus, Matter of Hsiung, Matter of Izummi, and the Policy Memorandum all strongly support a view that the singular form of “indebtedness” that USCIS has contemplated in EB-5 adjudications is in the form of the petitioner’s promissory note made payable to the order of the NCE.  Again, a petitioner fully funding his EB-5 investment with cash loan proceeds has not contributed a promissory note as capital to the NCE.  Had he done so, like the petitioners in Matter of Hsiung and Matter of Izummi, he would have been contributing a promise to pay something of value to the NCE at a future date.  Instead, such a petitioner has fully funded his investment with a contribution of cash.  The requirements for additional security and personal liability referenced in the regulatory definition of “capital” simply do not apply, because the petitioner did not contribute a promissory note to the NCE as his contribution of capital.

B. An equity investor of cash loan proceeds is not a lender

 Matter of Soffici and Matter of Izummi generally stand for the proposition that the EB-5 investor must contribute to the NCE equity capital, not debt capital.  The foundation of these decisions is the regulatory definition of what it means to “invest” as referenced in 8 CFR §204.6(e), which specifically excludes “debt arrangements” between the petitioner and the NCE.  An example of an impermissible “debt arrangement” would be where the Petitioner loans funds to the NCE in return for a promise of repayment (illustrated in the diagram below), as in the EB-5 precedent decisions of Matter of Soffici and Matter of Izummi.

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In Matter of Soffici, the petitioner capitalized his business with funds booked as loans to the NCE; some of these funds were loaned by the petitioner/shareholder to the NCE, and other funds were loaned by a bank to the NCE (and secured by the assets of the NCE).  Matter of Soffici held that neither of these contributions satisfied the regulatory requirement that the petitioner invest capital.  The petitioner’s loan of personal funds to the NCE was not an “investment” because it was a “debt arrangement between the alien entrepreneur and the new commercial enterprise,” expressly precluded from the definition of “invest” in 8 CFR §204.6(e).  The bank loan to the NCE was not an investment of qualifying capital for two reasons:  (1) proceeds of a loan obtained by the NCE cannot be said to be the petitioner’s personal capital; and (2) the bank’s loan to the NCE was “indebtedness that is secured by the assets of the enterprise,” expressly precluded from the definition of “capital” in 8 CFR §204.6(e).

Like Matter of Soffici, Matter of Izummi also involved an impermissible “debt arrangement.”  In Matter of Izummi, the petitioner’s investment agreement provided for a guaranteed minimum annual return of 12% on the amount of his cash contributions to the NCE, as well as a sell option guaranteeing a fixed price.  To the extent of the guaranteed returns, these arrangements effectively transformed the petitioner’s contributions from investments into loans, because the contributions were made in return for the NCE’s contractual obligation to return value to the petitioner.  These are impermissible “debt arrangements,” according to Izummi, that are not “investments” within the meaning of 8 CFR §204.6(e).  When the petitioner may require the NCE to redeem the invested capital, as in Matter of Izummi, the petitioner is merely making a loan to the NCE and consequently has not “invested” equity capital.

In the case of an equity EB-5 investment made with cash loan proceeds, in clear contrast to the situations presented in Matter of Soffici and Matter of Izummi, the petitioner has made an equity investment into the NCE.  The petitioner has not loaned funds to the NCE in return for a promise of repayment.   She has contributed cash from her personal bank account which is indisputably personal capital.  The petitioner’s cash contribution would have been in return for an ownership interest in the NCE that is not accompanied by any promise of a return.  Such a petitioner holds no security interest in the assets of the NCE.  His investment of capital is simply not an investment of “indebtedness” or a “debt arrangement” as those terms are used in the regulation.  Such a petitioner’s contribution of cash to the NCE would not have been conditioned on any redemption agreement, guaranteed return, or promise of future value.  Nothing about the petitioner’s transaction with the NCE would place him in the position of a lender as opposed to an equity investor.

Neither Matter of Soffici nor Matter of Izummi supports the rationale of the new USCIS interpretation, which purports to transform such petitioners’ equity investments of cash into indebtedness.  In sum, there is no support in the EB-5 statute, regulations, precedent decisions, or Policy Memorandum, or in plain English usage for the complete transformation of such a petitioner’s investment, from a clear contribution of cash for an equity share of the NCE to an investment of indebtedness.  The reasoning of the USCIS interpretation lacks any legal foundation.

 

C. If cash loan proceeds are at risk of loss, additional security is not required

As applied to investments of the cash proceeds of unsecured loans, or loan agreements that are silent on the matter of security, the new USCIS decisions cite to the definition of “capital” as well as the above-quoted language of the Policy Memorandum and suggests in a far-reaching conclusion that the absence of security indicates that the investor is not personally and primarily liable for the loan.

For the reasons already explained above in the discussion of the regulatory definition of “capital,” this conclusion is not supported by any rational reading of the EB-5 statute, regulations, precedent decisions, or any other binding authorities.  The regulatory requirement that the petitioner establish he is personally and primarily liable for “indebtedness” is applicable only where the Petitioner is contributing indebtedness as capital (as with Petitioner A, above); with a contribution of cash loan proceeds, it simply does not apply.

Moreover, the new USCIS position misses the thrust of those authorities that touch upon borrowed funds and the form of security for repayment of the borrowed funds.  The upshot of those cases is that where an investment is derived from borrowed funds and the repayment of the borrowed funds is secured by the assets of the NCE, the investment does not satisfy the requirements of the EB-5 law because it is not “at risk.”  Securing the repayment of a loan with assets of the business rather than assets of the petitioner impermissibly transfers the risk of loss from the petitioner to the business.  Thus, loan proceeds secured by the assets of the business into which they are invested cannot seed an “at risk” investment by the petitioner, as required by 8 CFR §204.6(j)(2), because the petitioner has transferred the risk of loss to the business.

By contrast, an unsecured loan does not present the same concerns as to whether her investment is at risk of loss.  The petitioner who has invested cash proceeds from an unsecured loan personally bears 100% of the risk of loss of his investment capital if the NCE fails to manage it well.  Moreover, if he fails to repay his lenders, neither the NCE nor the assets of the NCE have been pledged to his lenders to satisfy his repayment obligations.  In both of these “bad-case” scenarios the full amount of EB-5 capital will have been exposed to complete loss in the business activities of the NCE, and neither the NCE nor the assets of the NCE must answer to the petitioner’s lenders.

The regulatory requirement that a petitioner’s investment funds be “at risk” was intended by Congress to reflect that concept as it had been developed in the context of E-2 treaty investor visa law.  See 56 Fed. Reg. 60897, 60904 (Nov. 29, 1991).   The U.S. State Department’s interpretive guidance in its Foreign Affairs Manual (“FAM”) sets forth the well-settled legal standards of “at risk” for E-2 visa practice.  9 FAM 41.81 n.8.1-2, entitled “Investment Connotes Risk,” provided the basis for the concept that “investment” requires placing funds at risk in the hope of generating a financial return.  If the funds are not subject to at least partial loss if business fortunes reverse, then the activity is not the kind of investment that would merit a visa.

According to the FAM, if the funds that the investor uses for the business actually come from borrowing – that is, the source of the funds is loan proceeds from a loan taken by the investor, as in the case under discussion here – Note 8.1-2 makes a clear distinction that is instructive.  If the business in which the investment is made is used as collateral for the borrowing, then the loan proceeds that are invested in the business are not at risk.  The reason is that in the case of non-payment of the loan, the lender will foreclose on the business assets instead of the investor’s individual assets.  However, Note 8.1-2 goes on to state:

On the other hand, loans secured by the alien’s own personal assets, such as a second mortgage on a home, or unsecured loans, such as a loan on the alien’s personal signature, may be included, since the alien risks the funds in the event of a business failure. (Emphasis added)

As seen in the FAM treatment of the issue, due to the potential creditor status of a lender who takes security for repayment of the funds that have been lent, where the repayment of loan proceeds is secured, the “at risk” analysis requires scrutinizing the security agreement and the collateral to determine if the risk of loss has been impermissibly transferred to the business or NCE.  But in clear contrast, the investment of cash proceeds from an unsecured loan does not present the same analytical requirement.

Whether an EB-5 investment has been placed at risk of loss, according to Matter of Ho, turns on whether the petitioner has relinquished control over the capital to the NCE, and whether the NCE has engaged in meaningful concrete business activity to show that EB-5 capital is at risk.  Where an I-526 petitioner has made an equity investment of cash into an NCE that will use the cash to fund its job-generating business activities, the petitioner bears the risk of loss should the NCE be unsuccessful in its business endeavors.   The petitioner who has borrowed funds has entered into loan agreements with one or more lenders.  If he defaults on these loans, his personal assets are at risk.   In the event of default, the lender(s) could seek to enforce a judgment against him personally in court.  The lenders would have no recourse against the NCE or its assets; thus the petitioner is indeed personally and primarily liable on the debt(s) he owes to his lender(s).  Whether or not the lenders would be able to be made whole in the event of default has no bearing on whether the petitioner has personally made an at-risk investment in the NCE.

 

D. An investor of cash loan proceeds is the legal owner of the invested funds and thus is the legal owner of the ownership interest of the NCE

The new USCIS decisions further assert that because an investment of cash loan proceeds is made with borrowed funds, the petitioner has not established that he is the “legal owner” of the capital invested.  In the typical case of an EB-5 investment of cash loan proceeds, in which the investment is funded from cash held in the petitioner’s personal bank account, there is no evidence that the petitioner is not the legal owner of the funds he used to invest in the NCE.  Except perhaps in the case of fraud perpetrated by a borrower on its lender, it is basic property law that title to borrowed funds is vested in the borrower when a lender disburses a loan to the borrower and the borrower deposits the proceeds into her personal bank account.  Typically, the petitioner is the named holder of the account he uses to transfer funds to the NCE.  In the absence of any evidence in the record suggesting that another person has a legal or equitable interest in the petitioner’s bank account, the law presumes that he is the owner of the funds in the account.  The fact that the borrowing of funds was accomplished without the petitioner providing security for repayment to his lenders has no relevance to whether he has a legal ownership interest in the loan proceeds.  A security interest is simply a mechanism for reducing the risk of loss assumed by the lender, by providing an alternative source of repayment in the event of the borrower’s default.  Moreover, a security interest only encumbers the borrower’s title to the specified collateral; it does not encumber title to the funds in the borrower’s bank account unless the cash in the account is identified as the collateral.  The presence or absence of a security agreement has no relevance whatsoever to the question of whether the petitioner is the legal owner of the cash in his personal bank account.

An example of a case where a petitioner is not the legal owner of the invested capital would be where the funds are legally owned by another person (illustrated in the diagram below), as in the EB-5 precedent decisions of Matter of Soffici and Matter of Ho.

 

In Matter of Soffici, the petitioner’s “investment” was in large part a commercial loan extended by a bank directly to the NCE (secured by the assets of the NCE).  Although the petitioner was the sole owner of the NCE, the borrower of the funds was the NCE – a separate legal person – not the petitioner.  Even if the transaction had been an equity investment as opposed to debt, the petitioner in Soffici could not demonstrate personal ownership of the invested funds.  The funds originated from the bank and were transferred directly to the NCE as the result of a transaction to which the petitioner in his personal capacity was not a party.   In Matter of Ho, the petitioner’s connection to the invested capital was even more tenuous:  The petitioner there presented no evidence whatsoever to show who owned the bank account from which the investment funds were transferred.   In the absence of documentation to show that he owned the funds that were transferred to the NCE, the Matter of Ho petitioner could not establish that he, as opposed to a third party, had made an investment.

In the typical unsecured loan scenario, the petitioner’s investment stands in stark contrast: The documentation in the record generally establishes that the petitioner transferred funds to the NCE directly from a bank account held in his name.  The petitioner’s lenders are generally not joint owners of the petitioner’s bank account.  To the extent the petitioner may have liabilities, to a lender or any other creditor, the liabilities do not divest him of his personal assets.   In the absence of documentation indicating that a third party has title or an ownership interest in the cash in the petitioner’s bank account, the petitioner’s bank statements alone should be viewed as clear and convincing evidence that he is the legal owner of the cash invested into the NCE, that he invested into the NCE on his own behalf, and that he is consequently the legal owner of a membership interest in the NCE.

None of the four EB-5 precedent decisions of 1998 supports the convoluted analysis found in the new USCIS decisions.  Although each of the four precedent decisions is occupied with the qualifying criteria for investment of capital, and therefore, the decisions in varying degrees address the definitions and commercial concepts of equity and debt capital, none of the decisions supports the reasoning of the new denials.  Not surprisingly, the new RFEs, NOIDs and Denials do not actually analyze the regulations or precedent decisions as applicable in the circumstances of the individual cases.

Illustration of the typical petitioner’s investment of cash loan proceeds in the following chart shows graphically how this investment is fundamentally distinct from the noncompliant investments of Petitioners A, B, and C in the illustrations offered to the right:4

 

In this example, the lending transaction is strictly between Petitioner D and a third party, and it has no bearing on the investment transaction between the petitioner and the NCE, except insofar as it relates to the lawful origins of the funds.

In another recent forum,[8] USCIS has suggested that the scenario above would constitute qualifying capital if there were yet another party standing between the loan proceeds and the petitioner, as in the following illustration for purposes of comparison:

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Under the reasoning of the new adjudication standard, if the third party’s loan transaction means that he does not actually own the cash loan proceeds, it is difficult to see how the cash loan proceeds could be lawfully gifted to the petitioner.  Moreover, as between Petitioner E and the NCE, the investment transaction is identical to that of Petitioner D.  There is no rational basis in fact, law, or policy, to declare that one has invested cash while the other has invested not cash but “indebtedness.”

In sum, the fact that an I-526 petitioner obtained his funds as the result of an unsecured loan from a third party does not transform his investment from an equity investment into a debt arrangement with the new commercial enterprise, it does not transform the petitioner from an investor into a lender, it does not shift to the NCE or another party the business risk of the investment, and it does not indicate that he is investing money that he does not own.  Neither the plain meaning of the statutory and regulatory language, nor the reasoning of the cited precedent decisions or binding USCIS policy, supports the conclusions asserted in the new USCIS adjudications.

III. Beware the Snowball Effect

 

The implications of the newly announced USCIS adjudications standard extend far beyond the question of whether cash loan proceeds are indeed cash or whether they are indebtedness, as those terms are used in the regulation.   Under the new standard, sometimes a $500,000 equity investment in cash is not a $500,000 equity investment.  In concluding her April 22 remarks, the Deputy Chief stated:

 

In addition, the petitioner must demonstrate that the indebtedness is secured by assets the petitioner owns and that the value of such collateral is sufficient to secure the amount of indebtedness that is being used to satisfy the petitioner’s minimum required investment amount.  Put another way, indebtedness secured by assets owned by the petitioner qualifies as “capital” only up to the value of such collateralized assets.

 

As noted in the discussion above, the EB-5 precedent decisions Matter of Hsiung and Matter of Izummi analyze in detail the rationale for requiring adequately valued collateral, comprised of personal assets, in the situation where an investor is contributing indebtedness (i.e. a promissory note) instead of cash.  Where a promise to pay is used as capital, there can be no assurance that the petitioner is actually in the process of completing an investment of the required minimum amount of personal assets unless those assets are identified and valued and the NCE has the legal right to turn to the assets to satisfy the petitioner’s obligation.  In the case of a cash equity investment already made, the same concerns are simply not present, as the petitioner’s investment has been completed and there is no future obligation to the NCE to be satisfied.

 

As also noted above, established EB-5 law provides that the regulatory requirement that the petitioner place his own funds “at risk” in the new commercial enterprise means that under no circumstances may the assets of the NCE be used as collateral for a lending arrangement that shifts the risk of loss from the petitioner to the NCE.

 

Beyond those two contexts, where there is a clear rationale grounded in the EB-5 statute and articulated in the precedent decisions, there is simply no logical or reasonable basis for extending limitations on security agreements into the petitioner’s independent commercial transactions with third-party lenders.  Implementing new standards that extend existing principles out of context creates a snowball effect of absurd results:  Under the new standard, a business owner who invested $500,000 in cash obtained from a shareholder loan from his company, secured by his interest in future dividends, would be deemed to have contributed no qualifying capital, since future dividends have no present value.  A parent who invests $500,000 in cash obtained by mortgaging (with his daughter’s consent) a vacation home that is 10% owned in his daughter’s name, may be deemed to have invested only $450,000 in qualifying capital if the vacation home is appraised at $500,000), or (if not wholly owning the vacation home disqualifies it altogether) perhaps no qualifying capital.  An entrepreneur who invests $500,000 in cash obtained as an unsecured loan from a friend is deemed to have not made a capital contribution.  And yet, a student who invests $500,000 in cash that was gifted by his parents from mortgage loan proceeds is deemed to have made a $500,000 capital contribution.  Looking at the transactions between the NCE and the petitioners, each of these investment transactions involves the equity investment of $500,000 in cash, and their capital accounts with the NCE will be equal.  In each case, the present value of the cash they invested was $500,000.  As respects their “capital,” there is simply no rational basis to distinguish among these investors.

 

Equally important, the new adjudication standard delivers results that are at odds with traditional, uniformly understood and expected standards for conducting business transactions.  Loans are matters of contract, and the commercial conventions that have developed around security agreements are to facilitate the extension of credit.  The nature and value of collateral demanded by any given lender is a function solely of that lender’s bargain with the borrower; one lender may be satisfied with nothing, whereas another may require full value.   The lender does not own the collateral; the lender owns a lien or other encumbrance against the collateral, which can be asserted in a legal proceeding.  For the purposes here, a borrower of $500,000 secured by a $200,000 motor home and a borrower of $500,000 secured by a $500,000 parcel of land have each actually borrowed $500,000.  And it is self-evident that $500,000 in cash has a present value of $500,000.

In sum, no reasonable person reading the regulations at 8 C.F.R. § 204.6(e) could intuit, even after careful study of the EB-5 precedent decisions and the EB-5 Adjudications Policy Memo, the interpretation USCIS has announced as part of its new adjudication standard.   For USCIS to be announcing this irrational “twist” on settled law and applying it retroactively to long-pending cases injects a distasteful degree of unfairness into a process that, due to unwieldy procedures and extremely extended USCIS adjudication times, is already complex and burdensome on good-faith investors.

 

 


* Stone Grzegorek & Gonzalez LLP, Los Angeles, California.

[1]  IPO Deputy Chief’s Remarks, Immigrant Investor Program Office (IPO), EB-5 Telephonic Stakeholder Engagement (April 22, 2015), available at www.uscis.gov/sites/default/files/USCIS/Outreach/PED_IPO_Deputy_Chief_Julia_Harrisons_Remarks.pdf, AILA Doc. No. 15031770.

[2] The EB-5 Adjudications Policy Memo (May 30, 2013) was released after an iterative process involving substantial stakeholder engagement.  Not everybody liked certain new adjudication standards it announced, but all could applaud the genuine effort to make it a transparent process that serves to minimize hardships resulting from lack of advanced notice.

[3] The new adjudications standard was recently cited even in adjudication of an I-829 petition for removal of conditions, essentially a many-years-later determination that an investment of cash that was sourced to loan proceeds did not qualify as a qualifying investment of capital for purposes of the I-829 petition even though it must have been approved in the I-526 petition adjudication several years earlier.

[4] http://www.merriam-webster.com/dictionary/indebtedness; http://www.merriam-webster.com/dictionary/indebted

[5] http://thelawdictionary.org/indebtedness/

[6] 22 I & N Dec. 201, 202 (Assoc. Comm’r, Examinations 1998).

[7] USCIS Policy Memorandum, EB-5 Adjudications Policy, PM-602-0083 (May 30, 2013), at page 3 (“EB-5 Policy Memorandum”).

[8]  USCIS Interactive Teleconference regarding Lawful Source of Funds Requirements (February 26, 2015).

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