We have been counsel in various successful litigations where USCIS had challenged EB-5 petitions either based on an investment not being “at risk,” or based on the allegation that the investment was a “debt arrangement”, or based on a “guaranteed redemption”, or some combination of the three. Often USCIS uses the terms interchangeably as if they all relate to the same concept. They do not.
The purpose of this blog is to distinguish between the three concepts, distinguish between various scenarios in which these issues are raised and distinguish between USCIS policy and our view of the law, which we advocate both to USCIS and in federal court.
DISTINGUISHING BETWEEN THREE CONCEPTS
As mentioned, “at risk”, “debt arrangement” and “guaranteed redemption” are three separate issues. The first issue is whether the investment is a qualifying equity investment or instead a “contribution of capital in exchange for a debt arrangement” 8 CFR 204.6(e) defines whether the contribution of capital qualifies as an investment. If the investment is in return for a debt arrangement, there is no investment; and no other issue needs to be explored. Although USCIS has no standards for what constitutes a debt arrangement, such standards do exist both in tax law and in accounting principles (see below).
If the investment is an equity investment and not a debt arrangement, the next issue is whether the equity investment is “at risk”. This requirement does not exist in the statute but does exist in the I-526 regulations at 8 CFR 204.6(j)(2). Although not defined in any regulation, “at risk” has been defined in Matter of Izummi to require a chance of gain and a risk of loss.
The prohibition against a “guaranteed redemption” does not exist in either the statute or regulations, but rather is found in Matter of Izummi. The prohibition against a guaranteed redemption prohibits an unconditional promise to repay the investor at a fixed price and a fixed maturity date.
When responding to an RFE or an NOID, or when litigating a case in federal court, the first step is to determine which of these legal requirements are the source of USCIS’s concern.
DISTINGUISHING BETWEEN THE RELATIONSHIP BETWEEN THE INVESTOR AND THE NCE AND THE RELATIONSHIP BEWTEEN THE NCE AND THE JCE
The investor must make an equity investment in the new commercial enterprise (NCE), which is “at risk”. Since the investor is investing in the NCE, the issue of guaranteed redemption relates to the redemption by the NCE (the investment entity) of the investor’s interest. It does not relate to the relationship between the NCE and the job creating entity (JCE). A JCE is permitted to guarantee repayment of its loan from the NCE, and USCIS has stated that a third party can also guarantee the JCE’s payment of the loan to the NCE (without violation).
DISTINGUISHING WHETHER A GUARANTEED REPAYMENT IS AT THE OPTION OF THE INVESTOR OR THE INVESTMENT ENTITY
When the investment entity has an option to buy back an investor’s investment, it is called a “call” or “buy” option. Two recent federal court decisions, Chang and Doe, held that a call or buy option is not a provision that impacts the approvability of an EB-5 petition because it is solely an option exercisable by the NCE, may or may not be exercised and provides no rights to the investor. Our firm recently settled a case in federal court involving this issue, resulting in the approval of the plaintiff investors’ EB-5 petitions.
When the investor has an option to have his or investment money returned, that is called a “put” or a “sell” option. Whether such an option is violative of EB-5 law depends on whether it is a guaranteed or mandatory redemption option or whether there are contingencies that may prevent its exercise. Matter of Izummi prohibits a redemption that is effective “regardless of the success or failure of the business.” Arguably, if there is no guaranteed redemption, but rather a redemption that is in actuality contingent on the success or failure of the business, it should not be considered violative of the EB-5 requirements.
DISTINGUISHING BETWEEN SUSTAINMENT AND SUSTAINMENT AT RISK
As explained above, the “at risk” requirement is an I-526 requirement and is contained only in the I‑526 regulations. It is not an I-829 requirement, and there is no reference to “at risk” in the I-829 regulations.
The most recent version of the USCIS Policy Manual agreed with our position, as advocated in numerous blogs, that the “sustainment” requirement only applies through the 2 years of conditional residence and not during the time that it takes USCIS to adjudicate the I-829 petition. However, the Policy Manual does not yet agree with the position we have advocated that the sustainment requirement during the 2 years of conditional residence does not also require that the investment remain at risk – – only that it be sustained and not returned to the investor. The language of the relevant regulations – – 8 C.F.R. 216.6(a)(4)(iii) and also 8 C.F.R. 216.6(c)(1)(iii) – – clearly requires sustainment for the 2 years of conditional residence but makes no mention whatsoever of a requirement that the investment remain at risk.
DISTINGUISHING BETWEEN “AT RISK” FOR INVESTMENT AND “AT RISK” FOR REDEPLOYMENT
Although one searches in vain for a definition of “at risk” in the regulations, the term is only defined in Matter of Izummi, which defines at risk as requiring a chance of gain or a risk of loss.
In many cases, especially given long quota waits, the sustainment requirement necessitates redeploying the investment money into a different project once it has been used for its original job-creating purpose as set forth in the I-526 business plan. Once the money is redeployed, it must remain at risk (at least through conditional residence). One might presume that the definition of “at risk” for redeployment purpose would mirror the definition applied for purposes of the “investment” requirement, but, according to the USCIS Policy Manual, one might be wrong. The Policy Manual creates many new requirements for an investment to be considered “at risk” in the event of redeployment, which are contained in neither the statute nor the regulations nor any precedent decision and, as such, have no basis in law. For a complete analysis of the “at risk” requirements set out in the USCIS Policy Manual for the redeployed investment, please see [http://www.klaskolaw.com/uncategorized/updated-standards-guidelines-redeployment-eb-5-investment-funds/].
The major requirement in the USCIS Policy Manual is the requirement that the money be “engaged in commerce”, which apparently means more than merely redeploying the money into an investment in which there may gain or loss. In an appropriate case, this may be the subject of litigation unless the USCIS policy is changed before that occurs.
DISTINGUISHING DEBT VERSUS EQUITY
USCIS has provided no definition of the type of “debt arrangement” that is prohibited by 8 C.F.R. 204.6(e). In litigation challenging any finding by USCIS that an apparent equity investment constitutes a “debt arrangement”, we reference three sources that do provide such definitions and distinctions. First, Black’s Law Dictionary states that debt requires an “obligation of a debtor to pay” and the “right of a creditor to receive and enforce payment.” Also, there is a complete body of statutory and case law under the Internal Revenue Code that distinguishes debt from equity. In addition, under generally accepted accounting principles, there are clear lines of demarcation between debt and equity. As a result, when this is an issue, we include an expert opinion from a CPA regarding the treatment of the investment as an equity investment under tax law and accounting principles. Generally, a federal district court will give little to no deference to a USCIS determination that an investment constitutes debt when it is able to cite to no standards and when the record contains expert opinions and citations to court decisions under the tax laws and generally accepted accounting principles.
DISTINGUISHING MATTER OF IZUMMI RELATING TO GUARANTEED REDEMPTIONS
Matter of Izummi provides three separate requirements for an impermissible guaranteed redemption: “an unconditional promise” to repay an investor at a “fixed price” and at a “fixed maturity date.” In parsing any USCIS decision, we focus on proving that any language in the offering documents regarding redemption does not include any of these elements. However, there is an argument that we have raised in litigation that the language of Izummi only triggers a guaranteed redemption if all three elements are present. For example, an unconditional promise to repay that does not involve a fixed price or a fixed maturity date arguably should not be violative of Izummi. A promise subject to conditions to repay at a fixed price and/or at a fixed maturity date arguably should not be considered to be violative of Izummi. USCIS does not always agree with or understand this, which may necessitate litigation.
DISTINGUISHING MATTER OF IZUMMI FROM REALITY
Matter of Izummi analogizes an investment to a marriage. According to Matter of Izummi, just like a marriage cannot be entered into with the intention of dissolving the marriage, so too an investment cannot be entered into with the intention of liquidating the investment and seeking a redemption. The disconnect of that statement in Izummi from reality is very helpful in educating a federal district court judge regarding USCIS’ expertise to adjudicate investment cases.
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