assets (exclusive of Government securities and cash items) on an
unconsolidated basis.”
Section 2(a)(36) of the 1940 Act defines a “security” in pertinent part as “any note, stock, treasury stock, …, or, in general, any
interest or instrument commonly known as a ‘security’.”
EB-5 funds, investment funds which raise money solely or
primarily from investors seeking to qualify for “green cards”
under the EB-5 program, most commonly use all of the funds
they raise from investors to make loans to job-creating entities
(“JCEs”) for which the funds receive promissory notes. The funds
may also make equity investments in JCEs for which the funds
receive stock or limited liability company (“LLC”) or partnership
interests if the JCE is an LLC or partnership. These notes or stock
may be considered “securities” under the 1940 Act by virtue
of being expressly included in the definition of “security” cited
above3 and, accordingly, once the funds are invested, virtually
all of the assets of an EB-5 fund will consist of notes or stock,
an EB-5 fund would potentially fall within the definition of an
“investment company.”4
That said, in the main, EB-5 funds are typically very specialized
structures which usually hold only one note or stock investment,
the terms of which underlying investment are generally fixed for
five or more years and often require little to no management.
Since the JCE has actually been selected at the time the investor
invests in the fund, the investor is not so much relying on the
management of the fund as it is the quality of the JCE, in contrast
to a mutual fund which would generally have a portfolio consisting of multiple securities and the investor would rely more on the
management of the fund to adjust the portfolio as appropriate. In
the case of an EB-5 fund making a loan, investment in the fund
arguably resembles more a purchase of a loan participation than
an investment in an investment company. For this reason, among
others, it is not clear that an EB-5 fund is necessarily “engaged
or proposes to engage in the business of investing, reinvesting,
owning, holding, or trading in securities.”5
There may be circumstances, however, particularly if the NCE
makes a loan to the JCE, where the JCE may repay the debt prior
to the final adjudication by U.S. Citizenship and Immigration
Services (“USCIS”) of all of the investors’ I-829 petitions seeking
removal of conditions on permanent residence.
If the JCE repays the loan before all investors’ I-829 petitions
have been approved, the NCE must take steps to redeploy the
returned funds into another at-risk investment. Fortunately,
USCIS has indicated in a draft policy memorandum 5, that
redeployment of funds into a new “at risk” investment after the
NCE’s initial investment has created the requisite EB-5 jobs would
not constitute a material change. This is “because the facts related
to the petitioner’s eligibility, based upon which the petition was
filed, did not change or deviate from the business plan.” Assuming,
as anticipated, that USCIS confirms its draft guidance in a final
memorandum, more redeployments by EB-5 funds are foreseeable.
It is unclear how the ability to redeploy funds would affect the
analysis of whether an EB-5 fund was engaged in the business of
“investing, reinvesting, owning, holding, or trading in securities.”
As discussed further below in this article, being a investment
company requires an expensive registration and reporting process.
Hence it is best if an EB-5 fund can qualify for an exemption
from the definition of “investment company” that would render
the fund outside the scope of the ICA.
100 Is the Magic Number6
The most common exemption from the definition of “investment company” is under ICA § 3(c)(1), which provides an
exemption if the number of investors in a fund is not more than
100, and the fund does not engage in a public offering. This
exemption would currently allow an EB-5 fund to raise between
$50 million and $100 million, depending on whether the project
is in a targeted employment area, based on the current minimum
investment for EB-5 investors, which is either $500,000 or $1
million. Another way to increase the size of the fund offering
while staying within the 100 investor limit is to increase the minimum size of investment in the fund above the amount required to
make the investor eligible for the EB-5 program. However as most
funds set the minimum investment in the fund at the required
$500,000 or $1 million amount for EB-5 purposes, a fund
which attempts to increase the smallest investment it will accept
to a figure far beyond the EB-5 requirements may find itself at a
competitive disadvantage from a marketing standpoint in trying
to attract investments from investors who may be looking to
invest the smallest amount necessary for EB-5 purposes.
Two Funds Are Not Necessarily Better Than One
The 1940 Act provides specific rules for counting investors.
These generally involve situations where an investment in a fund
is made by an entity. Since investments in EB-5 funds are made by
individuals looking to obtain green cards, entity-related rules are
not particularly relevant.
Another potentially greater concern would arise if an EB-5 fund
either has affiliated funds that either cater to non-EB-5 investors
and invest in the same JCE, or that have similar investment objectives. The SEC has, in certain instances, required that the holders
of substantially similar funds be integrated for the purposes of
determining whether the 100-investor test is met. For example,
if Fund A had 60 investors and Fund B had 70 investors, and
the SEC took the view that the funds should be integrated,
both funds would be deemed to have 130 investors and thus be
disqualified from using the 3(c)(1) exemption. The SEC’s main
criterion for determining if funds should be integrated is “whether
a reasonable investor in two or more entities relying on ICA § 3(c)
(1) would consider the interests to be materially different”. The
factors the SEC considers in reaching this determination include
whether the funds share the same investment objectives, portfolio
securities and portfolio risk/return characteristics.7
Avoid a Public Offering
The other requirement of ICA § 3(c)(1) is that the EB-5
fund not engage in a public offering of its securities. Generally,
EB-5 fund offerings are conducted as private placements under
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