What is an EB-5 Investment
“ at Risk?”
by Mona Shah, Esq and Yi Song, Esq.
Proof of an investment being“ at risk” is an important element of the EB-5 Immigrant Investor Program. A certain element of risk is what demonstrates the immigrant’ s commitment to the investment and job creation that are central to the EB-5 program. How to present an EB-5 project as one in which an investment is“ at risk,” and yet is not a“ risky” project is a challenge that EB-5 practitioners have been grappling with for years. Unfortunately, although the regulations address the“ at risk” element, neither the statute nor the existing body of EB-5 case precedents specifies precisely what the degree of risk must be. Because guidance on the matter is incomplete, developers have tested the limits of“ at risk”. This article looks at regulations, agency interpretations and two separate cases to analyze what“ at risk” means in practice.
Statutory provisions, regulatory requirements, and agency interpretations
The regulations clearly state that an EB-5 visa applicant must have invested or be in the process of investing the requisite amount of lawfully obtained capital at the time of filing their I-526 petition. 1 It is not enough, however, just to demonstrate that the investment is fully committed; additionally, the I-526 investor petition must be accompanied by evidence establishing that the capital has been placed at risk. 2 This regulatory requirement has been in place since the inception of the EB-5 program, however, nowhere in the regulations does it state the exact definition of“ at risk,” or what degree of risk is required.
1
See generally 8 U. S. C. 1153( b)( 5)( A).
2
8 CFR 204.6( j)( 2) states that,“ To show that the petitioner has invested or is actively in the process of investing... the petition must be accompanied by evidence that the petitioner has placed the required amount of capital at risk for the purpose of generating a return on the capital placed at risk.”( emphasis added).
There is no precise definition of“ at risk” in the statute; the term is mentioned but not defined in the regulations. In the absence of any express, affirmative definition of the term, there is no authoritative guidance as to what the degree of risk must be to satisfy the“ at risk” requirement. The general understanding of what is meant by“ at risk” is that the funds must be committed with no guarantee of a return or redemption. When the evidence demonstrates that the investor faces both a risk of loss and a chance of gain, the investment is considered to be at risk.
The Matter of Izummi is the source of the general definition of the“ at risk” element, but notably discusses what“ at risk” is not, rather than what it is. According to Matter of Izummi, if the immigrant investor is guaranteed the return of the capital investment or a portion thereof, or is guaranteed a rate of return on a portion of his or her investment, then that portion of the capital is not at risk. In Izummi, a partnership agreement permitted the investor to demand a return of capital or redeem some portion of the investment. Here, the EB-5 capital was not considered to be at risk because the investment was governed by a redemption agreement that protected against the risk of loss, and therefore, constituted an impermissible debt arrangement under 8 C. F. R. § 204.6( e). From this decision it is taken that the investor must face a risk of loss in order for their investment to qualify under the EB-5 program.
Using bonds to test the“ at risk” waters
All investors are in search of secure and safe projects, but how much security is too much to comply with the investment“ at risk” requirement? Some adventurous practitioners are not afraid to test the legal boundaries of the“ at risk” requirement.
Although it may at first appear that the use of bonds violates the“ at risk” rule because bonds are often associated with
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