Promissory Notes and EB5 Investments
Introduction
In order to be eligible for an EB5 visa as an immigrant investor, an applicant must show that he or she is “in the process of investing” the requisite funds. Under regulations, the entirety of the minimum investment amount must be “at risk.” The same provisions apply when an immigrant investor subsequently applies for the removal of conditions from his or her permanent resident status. One way to show that immigrant investor is in the process of investing is through promissory notes. Promissory notes may also constitute capital in certain cases. A promissory note must conform to specific requirements to satisfy the evidentiary requirements for EB5 purposes. In this article, we will examine issues concerning the use of promissory notes to establish that the alien investor is in the process of investing and has placed the requisite investment funds at risk.
To learn more about the at risk requirement generally, please see our full article [see article]. We have a variety of articles on investment immigration in a distinct section on site [see category].
EB5 — Statutory and Regulatory Background
Under section 203(b)(5)(A) of the Immigration and Nationality Act (INA), an immigrant visa may be available for an alien who “has invested (after November 29, 1990), or, is actively in the process of investing,” the requisite amount of capital in a new commercial enterprise for EB5 purposes. (Emphasis added.) The minimum investment threshold is currently (as of March 15, 2019) $1,000,000 generally, but $500,000 for investment in targeted employment areas. Section 216A(d)(A)(i) requires an immigrant investor to establish that he or she “invested, or is actively in the process of investing, the requisite capital” in applying for the removal of conditions from permanent resident status after having been initially granted an EB5 visa for a conditional period.
The statute contemplates “in the process of investing” as an alternative to having actually invested the requisite funds both for eligibility for an EB5 visa in the first place and the subsequent removal of conditions. The scope of the “in the process of investing” avenue is limited by the narrow language of the implementing regulations. 8 C.F.R. 204.6(j)(2) requires that the investor “has placed the required amount of capital at risk for the purpose of generating a return on the capital placed at risk.” (Emphasis added.) Note that the regulation requires that “the required amount of capital” have been placed at risk, not merely a portion of the capital. Thus, while an EB5 petitioner need not have actually invested the full $1,000,000 in a non-regional center case in order to qualify for an EB5 visa, he or she must show that the entire amount of capital has been put “at risk for the purpose of generating a return on the capital placed at risk.”
Under 8 C.F.R. 204.6(e), the definition of “capital” includes “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.”
8 C.F.R. 204.6(j)(2)(v) specifically lists among the types of evidence that an EB5 petitioner may submit to show that he or she has actually committed the requisite capital a “promissory note … 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.” Regarding the removal of conditions, 8 C.F.R. 216.6(c)(1)(iii) requires the immigrant investor to show that he or she has “in good faith, substantially met the capital investment requirement of the statute and continuously maintained his or her capital investment over the two years of conditional residence.” (Emphasis added.)
Promissory notes represent one of multiple ways of satisfying the “at risk” requirement. In subsequent sections, we will examine the development of rules on the use of promissory notes in the EB5 context.
EB5 — Promissory Note Guidance
The USCIS Policy Manual (USCIS-PM) addresses promissory notes at 6 USCIS-PM G.2(A)(1). In order for a promissory note to be considered “capital” for EB5 investment purposes, it must conform to the following requirements:
The immigrant investor must be personally and primarily liable for the promissory note debt;
The promissory note must be secured by the immigrant investor's own assets; and
Any security interest must be perfected to the extent provided for by the jurisdiction in which the asset is located.
The PM includes the following requirements for the assets securing the promissory note:
They cannot include assets of the company in which the immigrant investor is investing;
They must be specifically identified as securing the promissory note; and
They must be fully amenable to seizure by a U.S. noteholder.
The same PM section makes clear that “[t]he fair market value of a promissory note depends on its present value, not the value at any different time.” (Emphasis added.) [In order to qualify as “capital” for EB-5 investment purposes, “nearly all the money due under a promissory note must be payable within 2 years, without provisions for extensions.”
The USCIS-PM's guidance draws heavily from two immigration precedent decisions: Matter of Izummi, 22 I&N Dec. 169 (Assoc. Comm. 1998) [PDF version], and Matter of Hsiung, 22 I&N Dec. 201 (Assoc. Comm. 1998) [PDF version]. These two decisions contain additional precedential guidance not included in the PM.
Legacy Immigration and Naturalization Service (INS) interpreted the regulations as providing “no requirement that the petitioner make all the required payment(s) on the promissory note within the two-year conditional permanent residence period…” (73 No. 2 Interpreter Releases 48 (Jan. 10, 1996).) Instead, “[a] promissory note remains a valid contribution of capital even if the payment date or dates are beyond the two-year conditional residence period.” (Id.) However, subsequent INS guidance expressed concerns about “promissory notes and balloon payments with sell or buy-out options.” (75 No. 1 Interpreter Releases 14 (Jan. 5, 1998).) Both of these issues were addressed in the precedential Matter of Izummi decision.
In Matter of Izummi, the Associate Commissioner held that “[u]nder certain circumstances, a promissory note that does not itself constitute capital could instead constitute evidence that the petitioner is 'in the process of investing' other capital, such as cash.'” 22 I&N Dec. at 193. However, the regulations require that the payments must be substantially completed by the end of the two-year conditional residence period. Id. In the specific case, the Associate Commissioner looked unfavorably on a promissory note which provided for five $18,000 annual payments and a $290,000 balloon payment due six years in the future. Id. The Associate Commissioner held with regard to guaranteed returns that “prior to completing all … cash payments under a promissory note …, an alien investor may not enter into any agreement granting him the right to sell interest back to the partnership.” 22 I&N Dec. at 186.
The Associate Commissioner in Matter of Izummi held that the schedule of payment in the promissory note “is relevant to the issue of whether a petitioner has, in good faith, committed the requisite amount of personal funds.” 22 I&N Dec. at 193-94. There is no exception to the rule that “nearly all of the money due” must be payable within two years. 22 I&N Dec. at 194. This requirement exists in order to ensure that an immigrant investor who obtains an EB5 visa is likely to be eligible for the removal of conditions in two years. Id.
In Matter of Izummi, the petitioner included a “Summary of Bank Account Balances” to show that his promissory note was properly secured by his assets. 22 I&N Dec. at 191. The Associate Commissioner was skeptical of the idea that bank accounts constituted security for a promissory note. However, assuming that they did, the Associate Commissioner noted that the petitioner had failed to establish how the bank account funds were amenable to seizure in the United States. 22 I&N Dec. at 192. It specifically noted that the petitioner had not included any details regarding the laws of the country in which he had the bank accounts and their enforceability by U.S. interests or security interests taken in the accounts in that country. Id. The petitioner was also faulted for providing “no guarantee … that the money contained in the accounts would remain there for the entire six years over which the petitioner would be obligated to make payments on the promissory note.” Id. The Board recognized that “[u]nder certain circumstances, a promissory note that does not itself constitute capital could instead constitute evidence that the petitioner 'is in the process of investing' other capital, such as cash.” Id. at 193. Regardless, the petitioner “must substantially complete his payments on the note prior to the end of the two-year conditional period.” Id. The Associate Commissioner derived this rule from 8 C.F.R. 216.6(c)(1)(iii), noting that to hold otherwise would be to allow for the approval of an EB5 petitioner who had not established that he or she would likely be eligible for the removal of conditions within two years. Id.
In Matter of Hsiung, the Associate Commissioner made clear that the petitioner must clearly identify which assets are securing it. Matter of Hsuing, 22 I&N Dec. at 202. The promissory note may not have a greater obligation than the assets securing it. 22 I&N Dec. at 203. The decision recognized that promissory notes may constitute evidence that the petitioner is “actively in the process of investing.” 22 I&N Dec. at 204 n.5.
In order to establish that the assets underlying a promissory note are amenable to seizure where the petitioner is relying on his or her foreign assets to secure the note, he or she must establish “that the laws of the foreign country in which assets are located would recognize, and permit execution of, a judgment of a court of the United States or of any State with respect to the foreign assets.” Id. “In the alternative, the petitioner must establish that the courts of that foreign country would themselves recognize and enforce the promissory note absent the judgment of an American court.” Id. Notwithstanding establishing the amenability of the assets for seizure, if “considerable expense and effort would be involved in pursuing them,” the fair market value of the promissory note secured by foreign assets would be reduced. Id. Thus, when the petitioner is relying on his or her own foreign assets to secure the promissory note, he or she must take into account the cost that would be required to seize those assets in assessing the fair market value of the note.
Both Matter of Izummi and Matter of Hsiung contemplate two uses for promissory notes in the EB5 context. In one case, which has subsequently been developed in the PM, a promissory note itself may constitute capital. In order for a promissory note to be considered capital, it must conform with all of the requirements set forth in the PM. In the alternative, a promissory note that is not in and of itself capital may suffice as evidence that the alien is “actively in the process of investing.” Nevertheless, the requirements for promissory notes are similar in both cases and generally conform with the rules governing when indebtedness qualifies as capital. The note must be secured by assets of the petitioner and the petitioner must be personally and primarily liable for the note in both cases.
Conclusion
An EB5 petitioner is not required to submit promissory notes to show that he or she is “in the process of investing.” For certain petitioners, depending on personal circumstances and the nature of the investment, a promissory note (or notes) may be an effective way of putting together an approvable EB5 petition. Where a petitioner relies upon a promissory note, it is crucial to carefully follow the applicable guidance from the USCIS-PM and the precedential decisions in Matter of Izummi and Matter of Hsuing.
An immigrant investor considering applying for an EB5 visa should consult with an experienced immigration attorney in the area of investment immigration. EB5 petitions have extensive evidentiary and technical requirements and necessarily involve the petitioner putting significant funds at risk. An experienced attorney will be able to assist the prospective investor in determining whether the EB5 category is right for him or her or whether an alternative investment option — such as the E2 nonimmigrant category — may be more appropriate. In the event that the immigrant investor decides to pursue an EB5 visa, an experienced attorney will be able to assist the investor in putting together a comprehensive petition to satisfy the myriad EB5 requirements.