Introduction

On October 30, 2018, the United States Citizenship and Immigration Services (USCIS) revised its policy on debt arrangements in the Employment-Based Fifth Preference (EB5) immigrant investor context [PA-2018-11]. The modifications were made to the USCIS Policy Manual (PM) at 6 USCIS-PM G.2 [PDF version]. EB5 investors are not permitted to meet the EB5 minimum investment account through a debt arrangement. The new policy clarifies the distinction between permissible redemption agreements and impermissible debt arrangements. We will examine the new policy in this article.

Overview

In order to qualify for an EB5 visa, the investor must invest his or her own capital to meet the applicable minimum investment threshold. Regulations found at 8 C.F.R. 204.6(e) define “capital” as meaning “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.” The same regulatory provision defines the term “invest” as meaning “to contribute capital.” The regulations exclude from the term “contribute capital” in the EB5 context “[a] contribution of capital in exchange for a note, bond, convertible debt, obligation, or any other debt arrangement between the alien entrepreneur and the new commercial enterprise…” Thus, an EB5 petitioner may not meet the investment threshold through a debt arrangement between him or herself and the business in which he or she is investing. 6 USCIS-PM G.2(A)(2) adds that “[a] loan from the immigrant investor to the new commercial enterprise does not count as a contribution of capital.” Rather, 8 C.F.R. 204.6(j)(2) requires the EB5 petitioner to put his or her own capital “at risk.” We discuss the “at risk” requirement in detail in a separate article [see article].

Capital For Which Investor is Guaranteed a Return is Not At Risk

In the administrative precedent decision Matter of Izummi, 22 I&N Dec. 169, 180-88 (Assoc. Comm. 1998) [PDF version], it was held that any capital invested for which the investor is guaranteed a return or a rate of return is not considered to be at risk. 6 USCIS-PM G.2(A)(2) makes clear that “[f]or the capital to be at risk there must be a risk of loss and a chance for gain.”

The PM takes the position that “if the investor is guaranteed the right to eventual ownership or use of a particular asset in consideration of the investor’s contribution of capital into the new commercial enterprise, the expected present value of the guaranteed ownership or use of such asset will count against the investor’s capital contribution in determining how much money was placed at risk.” Matter of Izummi, 22 I&N Dec. at 183-84 provides an example of this situation. In Izummi, the investment agreement in question provided the investor with a sell option wherein he would have the right, after a certain period, to require the partnership to purchase his limited partnership interest. The adjudicator in Matter of Izummi determined that the amount of money the petitioner would stand to gain from the sell option could not be considered to be at risk “because it is guaranteed to be returned, regardless of the success or failure of the business.”

The PM clarified that “[n]othing prevents an immigrant investor from receiving a return on his or her capital in the form of a distribution of profits from the new commercial enterprise.” The PM later states that “[t]here must be a risk of loss and a chance for gain” for any capital placed at risk. Capital investments for which the investor is guaranteed a return or rate of return fail this standard because there is no “risk of loss” to the investor.

Redemption Agreements

As we noted, 8 C.F.R. 204.6(e) excludes from the definition of “invest” in the EB5 context any capital contributions that are made “in exchange for a note, bond, convertible debt, obligation, or any other debt arrangement.”

6 USCIS-PM G.2(A)(2) states that “[a]n agreement evidencing a preconceived intent to exit the investment as soon as possible after removing conditions on permanent residence may constitute an impermissible debt arrangement.” This point was discussed in Matter of Izummi, 22 I&N Dec. at 183-88. The PM also cites to Matter of Izummi, 22 I&N Dec. at 186-87 to make clear that in most cases, “the petitioner may not enter into the agreement knowing that he or she has a willing buyer at a certain time and for a certain price.”

The PM continues to elaborate on impermissible debt arrangements.

Any agreement between the investor and the commercial enterprise which provides the investor with a contractual right to repayment constitutes an impermissible debt arrangement. Those funds in particular would not count toward the investor’s meeting the applicable minimum investment threshold. In a footnote, the PM adds that “USCIS generally disfavors redemption provisions that indicate a preconceived intent to exit the investment as soon as possible…” It adds that in Chang v. USCIS, 289 F.Supp. 3d 177 (D.D.C. Feb. 7, 2018) [PDF version], the United States District Court for the District of Columbia held that the controlling question was whether the contractual agreement actually gave the investor the “right to repayment.”

The PM states that “mandatory redemptions and options exercisable by the investor are two examples of agreements where the investor has a right to repayment.” Agreements where the investor has the right to repayment are deemed by USCIS to be impermissible under the controlling regulations. The PM adds that this “cannot be remedied with the addition of other requirements or contingencies, such as conditioning the repurchase of the securities on the availability of funds; the delay or repurchases until a date in the future (including after the adjudication of the [Form I-829, Petition by Entrepreneur to Remove Conditions on Permanent Resident Status]; or the possibility that the investor might not exercise the right.” The export of these examples is that “repayment does not need to be guaranteed in order to be impermissible.” Rather, the emphasis is on whether the investor has the right to repayment, not whether he or she actually exercises that right at a future date.

The PM includes a chart of examples of permissible and impermissible redemption provisions. We have reproduced the chart below for your convenience:

Characteristics of Redemption Provisions

Type of Provision Description Impermissible Agreement?
Mandatory redemptions Arrangements that require the new commercial enterprise to redeem all or a portion of the petitioner’s equity at a specified time or upon the occurrence of a specified event (for example, once the conditions are removed on the petitioner’s permanent resident status) and for a specified price (whether fixed or subject to a specified formula). USCIS considers this an impermissible debt arrangement. Such impermissible obligations are not subject to the discretion of the new commercial enterprise (although it may have some discretion regarding the timing and manner in which the redemption is performed).
Options exercisable by the investor Arrangements that grant the petitioner the option to require the new commercial enterprise to redeem all or a portion of his or her equity at a specified time or upon the occurrence of a specified event (for example, once the conditions are removed on the petitioner’s permanent resident status) and for a specified price (whether fixed or subject to a specified formula). USCIS considers this an impermissible debt arrangement.
Option exercisable by the new commercial enterprise

A redemption agreement between the immigrant investor and the new commercial enterprise that does not provide the investor with a right to repayment.

One example of such an agreement is a discretionary option held by the new commercial enterprise to repurchase investor shares. These options are typically structured similarly to options exercisable by the investor, except that the option is held and may be exercised by the new commercial enterprise. When executed, these options require an investor to sell all or a portion of his or her ownership interest back to that entity.

USCIS generally does not consider these arrangements to be impermissible debt arrangements.

However, such an option may be impermissible if there is evidence the parties construct it in a manner that effectively converts it to a mandatory redemption or an option exercisable by the investor (considered a debt arrangement). For example, an arrangement would be impermissible if ancillary provisions or agreements obligate the new commercial enterprise to either (a) exercise the option (at a specified time, upon the occurrence of a specified event, or at the request of the investor) or (b) if it chooses not to exercise the option, liquidate the assets and refund the investor a specific amount.

The only types of redemption agreements in general that are considered permissible by USCIS are options that are exercisable by the new commercial enterprise. Such agreements may be permissible so long as they do not give the investor the right to repayment. Agreements where the enterprise itself has the right to repurchase investor shares are generally permissible. However, the USCIS qualifies this by stating that “such an option may be impermissible if there is evidence that the parties construct it in a manner that effectively converts it to a mandatory redemption or an option exercisable by the investor…”

Conclusion

The USCIS’s PM update clarifies the distinction between permissible redemption agreements and impermissible debt arrangements. The guidance stems from the requirement that an EB5 investors’ invested capital must be placed at risk of loss. To the extent that the investor is guaranteed a return, rate of return or the right to sell equity to the commercial enterprise, that capital is not deemed to have been placed at risk.

Filing an EB5 petition is a complicated and evidence-intensive process. A prospective immigrant investor should consult with an experienced immigration attorney in the area of investment immigration for guidance on developing an investment plan that would comport with the EB5 requirements.

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