Gifts as EB5 Investment Capital

 

Introduction

In order to qualify for EB5 classification as an immigrant investor, the petitioner must invest his or her own capital into a new commercial enterprise. Provided that the evidentiary requirements are met, an investor may use funds derived from a gift to meet the requisite minimum investment threshold for EB5 classification. In this article, we will examine various issues that arise when the source of an EB5 petitioner's invested capital is a gift.

Although this article focuses on gifts in the EB5 context, it is worth noting that many of the principles apply similarly to some cases where the source of investment funds derives from an inheritance.

To learn more about EB5 classification generally, please see our growing selection of articles on investment immigration [see category].

Pertinent Statutes and Regulations

Neither the statutes nor regulations specifically address the use of gifts as capital for EB5 investment purposes. However, bearing in mind that the current policies involving gifts as the source of capital derive from the statutes and regulations, we must still consider the statutory and regulatory background of the issue.

Section 203(b)(5)(A)(i) of the Immigration and Nationality Act (INA) provides that EB5 classification is available to aliens who have “invested … or, [are] actively in the process of investing, capital in an amount [to meet the applicable minimum investment threshold].”

The term “capital” is developed in the implementing regulations. 8 C.F.R. 204.6(e) defines “capital” as meaning “cash, equipment, inventory, other tangible property, cash equivalents, and indebtedness secured 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.” Here, it is important to understand that the capital must be owned, or in the case of indebtedness, secured by the alien entrepreneur.

8 C.F.R. 204.6(e) continues in excluding from the ambient of “capital” “[a]ssets acquired, directly or indirectly, by unlawful means (such as criminal activities) [which]shall not be considered capital for the purposes of section 203(b)(5) of the [INA].” This provision is crucial to understanding when gift proceeds constitute “capital” for EB5 purposes. That the regulation provides that funds obtained “indirectly” through unlawful means are not capital for EB5 purposes means that an investor relying on gift proceeds must establish that, before he or she was given the funds, they were obtained lawfully. As we will see, the lawful source of funds requirement is often one of the steepest hurdles for investors seeking to establish eligibility for EB5 classification while relying on gift proceeds.

8 C.F.R. 204.6(j)(3) elaborates on the lawful source of funds requirement. Again, the regulation does not specifically mention gift proceeds. However, it lists the types of evidence that the petitioner may submit to establish the lawful source of funds. The list reads as follows:

i. Foreign business registration records;
ii. Corporate, partnership (or any other entity in any form which has filed in any country or subdivision thereof any return described in this subpart), and personal tax returns including income, franchise, property (whether real, personal, or intangible), or any other tax returns of any kind filed within five years, with any taxing jurisdiction in or outside the United States by or on behalf of the petitioner;
iii. Evidence identifying any other source(s) of capital; or
iv. Certified copies of any judgments or evidence of all pending governmental civil or criminal actions, governmental administrative proceedings, and any private civil actions (pending or otherwise) involving monetary judgments against the petitioner from any court in or outside the United States within the past fifteen years.

It is important to distinguish gifts, with which we are concerned in this article, from loans. 8 C.F.R. 204.6(j)(2)(v) provides that a loan may be used as evidence that the petitioner has invested, or is in the process of investing, if it “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.”

We discuss permissible and impermissible debt arrangements for EB5 petitioners in a separate article [see article].

USCIS Policy Manual on Gifts

While neither the statutes nor regulations specifically address the issue of gifts as EB5 investment capital, the United States Citizenship and Immigration Services (USCIS) Policy Manual (PM) for USCIS adjudicators notes that gifts may be the source of EB5 investment capital.

At 6 USCIS-PM G.2(A)(4) [PDF version], the USCIS PM addresses the “lawful source of funds” requirement. It notes that the petitioner bears the burden of establishing by a preponderance of the evidence that the investment capital was obtained through lawful means. The USCIS-PM elaborates on 8 C.F.R. 204.6(j)(3)(iii), which requires the petitioner to provide “[e]vidence identifying any other source(s) of capital” than those mentioned in clauses (i) and (ii), where applicable. Among the potential other sources of capital, the PM specifies “[g]ift instrument(s) documenting gifts to the immigrant investor.” This provision makes clear that gifts are recognized as a potential source of EB5 investment capital. The USCIS also lists “[e]vidence of property ownership, including property purchase or sale documentation” and “[e]vidence identifying any other source of capital,” which may be relevant in certain cases involving gifts and/or inheritance.

The PM's articulation of the preponderance of the evidence standard is noteworthy. While the burden is on the petitioner to establish the lawful source of funds, the PM makes clear that the petitioner is only required to show that it is more likely than not that the funds derive from a lawful source.

Foreign Affairs Manual Guidance in E2 Nonimmigrant Context

The Department of State's Foreign Affairs Manual (FAM) provides guidance for consular officers. The FAM contains extensive guidance on the E2 nonimmigrant classification for treaty investors. Although the FAM is not binding on the USCIS and the E2 category has significant differences from the EB5 category, it is worth examining how the FAM addresses gifts, given the similarities between the source of funds provisions for E2 and EB5.

At 9 FAM 402.9-6(B), the FAM states that “[t]he alien must demonstrate possession and control of the capital assets, including funds invested.” The section goes on to list “gift[s]” and “inheritance” as potential sources of capital which the investor can have received through “legitimate means.” The FAM makes clear that in the case of a gift or inheritance, the investor must demonstrate possession and control of the funds and must establish that the funds were obtained through legitimate means.

2016 Statement from USCIS Investor Program Office

On February 3, 2016, the USCIS Investor Program Office (IPO) held a stakeholder engagement meeting [PDF version]. Julia Harrison of the IPO observed that there were several questions “about … gifts being used as the source of funds.” Regarding gifts, she stated as follows:

Generally, a gift of capital must be must be freely given and includes no expectation by the donor of receiving repayment or anything else of value from the recipient in exchange for the gift. A familial relationship is not required for a gift to be considered as a lawful source of investment capital. Rather, the focus is on whether the petitioner has sufficiently demonstrated that the capital was obtained through a gift, including the lack of any terms for repayment.

From this passage, we glean several considerations in establishing whether gift proceeds constitute investment capital for EB5 purposes. First, the gift must be freely given by the donor to the investor. Second, the gift cannot have had attached any expectation of repayment, whether in terms of money or “anything else of value.” There is no guidance on what, besides money, may constitute “anything else of value” such as to call into question whether gift proceeds may qualify as investment capital. It is safe to say that the USCIS will likely be skeptical if it appears that a “gift” was given with some expectation of receiving something of value in return.

In light of our survey of AAO decisions [see section], Henderson's statement that “[a] familial relationship is not required for a gift to be considered as a lawful source of investment capital” is significant. The vast majority of unpublished AAO decisions on the subject involve gifts or purported gifts from spouses, parents, and siblings. However, there is no rule that the gift must be from a family member. Provided that the gift meets all of the regulatory requirements to qualify as capital, it may satisfy the EB5 requirements, regardless of source. However, a petitioner relying upon a gift from a non-family member may have to take particular care to establish that the gift came with no expectation of repayment or anything else of value in return.

Henderson then commented on the lawful source of funds requirement in the gift context. She emphasized the regulatory provision at 8 C.F.R. 204.6(e), which states that funds acquired “indirectly” through unlawful means does not qualify as EB5 investment capital. In short, merely showing that the investor him or herself received the gift through lawful means is insufficient. Rather, the investor must show that the original source of the gift funds was lawful.

Administrative Precedent Decisions

There are four administrative precedent decisions regarding the EB5 program. None of the precedents deal specifically with the issue of gifts as a source of EB5 investment capital. However, several of the decisions address issues tangentially related to gifts in the EB5 context.

In Matter of Soffici, 22 I&N Dec. 158, 164-65 (Assoc. Comm. 1998) [PDF version], the former Immigration and Naturalization Service (INS) held that funds lent to the petitioner must be adequately documented. Although loans, in and of themselves, implicate different issues than gifts, the USCIS typically applies this same standard to gift proceeds. The burden is on the petitioner to adequately document the source of gift proceeds.

In Matter of Izummi, 22 I&N Dec. 169, 195 (Assoc. Comm. 1998) [PDF version], the INS held that bank records, in and of themselves, do not establish the lawful source of funds. As the regulations indicate, more extensive evidence may be needed to establish the lawful source of funds held by the bank.

Finally, the INS held in Matter of Ho, 22 I&N Dec. 206, 210-11 (Assoc. Comm. 1998) [PDF version], that bank statements which do not clearly establish that the petitioner is the owner of the funds are insufficient. In that case, the petitioner submitted bank statements which listed a woman who was purportedly his wife. However, the petitioner failed to submit evidence to substantiate his claims that (1) the woman was his wife, and (2) that they were the joint owners of the funds even if she was his spouse. Furthermore, and importantly for the issue of gift proceeds, the INS held that even if the petitioner had satisfied the foregoing two points, he still failed to establish the source of the funds that had been transferred into her account.

Unpublished AAO Decisions

The USCIS Administrative Appeals Office (AAO) has entered numerous unpublished decisions on EB5 petitions where at least some of the proposed investment capital was derived from gifts. In this section, we will examine several of these decisions. Although they are non-precedential and thus non-binding on future cases, they provide general guidance for practitioners and petitioners in similar cases.

Matter of M-H-L-, ID# 1779698 (AAO Dec. 10, 2018) [PDF version]: The petitioner claimed that her investment capital was sourced from a gift from her spouse, “made from his accumulated employment earnings.” In order to establish that the gift derived her spouse's accumulated employment earnings, she submitted “an income certification and tax certificates for her spouse.” However, the AAO agreed with the adjudicator that the petitioner failed to “establish [that] he retained a sufficient amount of income to make such a gift.” The AAO added: “For example, it lacks documentation, such as bank records or other evidence, of the accumulation of funds over time.” The petitioner also did not submit sufficient documentation to show “the path by which funds moved from her spouse through her to the [new commercial enterprise's] escrow account.” See also: Matter of Y-Z-, ID# 1779738 (AAO Dec. 10, 2018) [PDF version] (similar).

Matter of E-Q-, ID# 1519989 (AAO Nov. 13, 2018) [PDF version]: The petitioner's mother had remitted $500,000 to the new commercial enterprise before rescinding the investment. She then executed a gift agreement whereby she granted her one unit interest in the new commercial enterprise, worth $500,000, to the petitioner. The petitioner then executed his subscription agreement and the new commercial enterprise remitted $500,000 to the job creating entity on her behalf. The AAO concluded upon considering the gift agreement that the petitioner was never the owner of the $500,000 that the petitioner had invested in the new commercial enterprise. It noted that a unit of interest in a company is not “cash, equipment, inventory, other tangible property [or] indebtedness…”

Matter of W-C-, ID# 810173 (AAO Apr. 5, 2018) [PDF version]: The petitioner claimed that her parents have her approximately $502,283 in U.S. dollars to invest in the new commercial enterprise. However, the AAO concluded that the record did not document the complete path of the capital from the petitioner's parents to the petitioner. It noted that the petitioner failed to establish that her parents had saved enough money to give that amount to her in light of her parents' income. Furthermore, documents showing the funds she received from her mother did not specify the sources of portions of the funds in question.

Matter of Y-L-, ID# 604766 (AAO Feb. 7, 2018) [PDF version]: The petitioner stated that her $500,000 investment in the new commercial enterprise derived from a gift from her spouse. Specifically, she said her spouse gifted her the proceeds of a loan that he had obtained from his wholly-owned business. The petition was initially denied because the adjudicator “determined that the Petitioner had failed to establish that the funds invested had been obtained by lawful means because [the husband] secured the loan with his undistributed profits from the company.” However, on appeal, the petitioner submitted “a letter from a legal scholar, demonstrating the lawfulness of shareholder loans in China” and “a letter from an accountant, explaining the concept of undistributed profits.” Based on this information and the information of record, the AAO concluded that it was error to determine that the petitioner's funds derived from an unlawful source “solely because they originated from a shareholder loan secured by an interest in undistributed profits…” The AAO remanded for further consideration of this point and other issues.

Matter of J-Z-, ID# 725896 (AAO Jan. 26, 2018) [PDF version]: Petitioner funded her investment through loan proceeds and sought to show that the loan was secured by her personal assets. The petition was initially denied because it was determined that the assets came from a third party loan that was secured by the petitioner's mother's apartment. On appeal and in response to a notice of intent to deny (NOID), the petitioner submitted a Gift Agreement and Personal Statement stating that her mother gave the apartment to her and her sibling. The statement stated that the petitioner's mother would have “no right to deal with the property in any form…” However, the AAO found that this evidence contradicted other evidence in the record. “For example, a February 2014 Notarial Certificate certifies the authenticity of a House Ownership Certificate confirming that the Petitioner's mother owns the apartment.” The record did not contain evidence that the petitioner's mother had undergone all the steps to formally transfer the property to the petitioner and her sister. Other documents indicated that the petitioner's mother still owned the apartment. The petitioner subsequently submitted a letter from her mother which stated that she was giving half of her estate to the petitioner in order for the petitioner to apply for an EB5 visa. The AAO found that this also contradicted the evidence in the record indicating the mother's ownership of the apartment.

Matter of Y-W-, ID# 36914 (AAO Nov. 9, 2016) [PDF version]: The petitioner stated that the $500,000 he invested was a gift from his sister. He submitted a gift letter which was drafted after the date on which he filed his EB5 petition and transactional documents to establish that the money more likely than not qualified as investment capital. Although the AAO agreed with the petitioner that a post-filing letter classifying a transaction that took place before the filing could constitute evidence, it noted that the purported gift transaction occurred after he had filed the EB5 petition. Furthermore, the petitioner failed to submit evidence establishing that his sister had actually transferred the requisite funds to his account rather than to an account she controlled. The petitioner also did not document the source of the transferred funds or how he and his sister accumulated the funds.

Matter of M-N-, ID# 12077 (AAO Nov. 9, 2016) [PDF version]: Petitioner invested the proceeds of a $1,001,000 loan from her parents. The petitioner confirmed that the transfer was a loan, not a gift. The AAO went on to assess whether the petitioner had placed her own assets at risk in consideration of EB5 policies on indebtedness.

Matter of Y-Z-, ID# 18021 (AAO Aug. 25, 2016) [PDF version]: The petitioner's $500,000 investment derived from a gift from her parents. The gift itself “constituted the proceeds of a mortgage on the property that [the petitioner] and her mother jointly own.” The petitioner documented the purchase of the property and her mother's having taken out a mortgage on the property. The guaranty listed the jointly owned property as the security for the mortgage. The petitioner consented to the mortgage. The petitioner's mother subsequently executed a statement recounting her ownership of the property and mortgage details and agreeing to “relinquish all control of the funds proportion under my name to my daughter … for her exclusive control and disposition, free from all restrictions.” The record traced the path of the funds from the petitioner's mother, to the petitioner, “to several individuals agreeing to serve as conduits for the funds back to the Petitioner's [] account, and finally back to the [new commercial enterprise]. The AAO stated that the only issue in question was whether the petitioner invested her own funds and placed her own assets at risk. The AAO concluded that the petitioner's “mother obtained the mortgage and relinquished all interest in her proportion of those funds to the Petitioner. Those gifted funds are the Petitioner's personal assets.” Accordingly, the petitioner's appeal was sustained.

Conclusion

It is clear from USCIS policy and several unpublished decisions that gift proceeds may constitute capital for EB5 investment purposes. However, there are special considerations that practitioners and petitioners must take into account. First, the petitioner must establish that he or she actually owns the funds. Second, the funds must actually be a gift that was given without any expectation of repayment or anything else of value in return. Third, assuming the funds are the petitioner's, the petitioner must establish that the funds that were given to her were obtained lawfully by the giver. This may entail submitting extensive evidence about the individual who provided the funds to the petitioner, how he or she obtained the funds, how he or she had enough money to give the gift to the petitioner, and how the funds were transferred to the petitioner and subsequently to the new commercial enterprise.

EB5 petitions are complex matters that necessarily involve substantial amounts of money and careful planning. Individuals considering applying for an EB5 visa should first consult with an experienced immigration attorney in the area of investment immigration before proceeding. An experienced attorney will be able to assess and help develop an investment proposal and ensure that there is a sound basis for seeking EB5 classification. If the petitioner is relying on gift proceeds or is considering obtaining a gift for the purpose of seeking EB5 classification, an experienced attorney will be able to assess the case and, if the petitioner goes forward, help ensure that the gift will ultimately meet the requirements for qualifying as “capital” under the EB5 statutes and regulations.