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A secured loan, where ownership of the collateral
is not yet vested. This disqualifies petitioners who
obtained loans secured by their interest in a future
asset, such as an interest in an inheritance, a trust
distribution, or shareholder dividends (including
an owner’s proportional share of retained earnings
of a company). This very commonly affects the
shareholder loan scenario (please note, although
shareholder loans have historically been a common
and successful vehicle for sourcing investment funds,
the shareholder loan may no longer be a viable option
if S.1501 becomes law, as discussed further below).
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A secured loan, where the collateral has a present
fair market value of less than the required EB-5
investment amount. Under the new policy, USCIS
apparently expects to see a third party valuation of the
present, fair market value of the collateral. Where the
loan in question is a bank loan, it is typical for this
documentation to be available and adequate. Where
there is a company loan or a private loan, however,
the parties to a loan transaction are often willing to
view a security interest as adequate notwithstanding
a shortfall in present value or uncertainty as to
when the expected value will be realized. For
example, shareholder loans are often secured by
the shareholder’s interest in future dividends or the
retained earnings of the company. Private loans may
be extended based on a combination of partial security
and trust. Assets such as intellectual property, which
may be tremendously attractive to lenders as collateral,
may be extremely difficult to value. In any of these
cases, USCIS will deem the investment qualifying
“capital” only up to the present value of the collateral.
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Loans specifying a purpose that is inconsistent
with EB-5 investment are now suspect. This policy
change was part of the IPO’s new policy statement,
although it is not, strictly speaking, related to the
interpretation of “indebtedness.” It is mentioned
here because it does affect many investor petitions,
particularly where the source of funds is an armslength commercial loan. The implication is that
where the loan documents include an agreement or
representation that the loan is made for a purpose
other than for investment, USCIS concludes the
loan transaction may have been “unlawful.”
Can Affected Pending Petitions Be Salvaged?
First, experienced EB-5 practitioners recognize that not every
petition reaches the expected outcome. Waiting for adjudication
with the hope of approval is a reasonable choice, particularly
given the current clamor of legal objection to the new policy.
USCIS noted in a previous “interactive” stakeholder teleconference on Feb. 26, 2015, that where loan proceeds are gifted
to the petitioner, the funds are not subject to the limitations on
“indebtedness” under the regulation. This begs the question as
to whether willing borrowers and lenders can adjust the terms of
their deal to conform to USCIS requirements, such as by means
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of loan forgiveness or gift agreement, a waiver, or a conveyance
of a property right in the asset used as collateral. Many of these
actions could clearly cure the stated deficiency in the source
of funds, but USCIS decisions on these issues have uniformly
adhered to the formality memorialized in Matter of Katigbak,
holding that a petition may not be approved unless it was
approvable at the time of filing. For curable cases, then, absent
relief through appeal or litigation, the only reliable solution is
withdrawal, reinvestment with qualifying capital, and refiling
(i.e. starting from scratch).
Where to From Here?
The EB-5 stakeholder community knows from its experience
with previous policy changes (i.e. tenant occupancy, 2.5 year
“rule” for job creation, etc.) that it is not reasonable to assume
that the IPO will change its mind or willingly ameliorate
adverse impacts of its unpredictable changes of regulatory
interpretation on investors. Recent criticisms of the IPO make
re asonable accommodations even less likely. In light of this
reality, investors and their counsel should be proactively reviewing pending petitions and the source of funds for completed
investments to determine whether the new policy renders the
petition (or soon to be filed petition) not approvable. Where
the petition includes a child approaching age 21 (keep in mind
that adjudication delays, appeals or litigation can add months
and/or years to final adjudication times), it is worthwhile to
evaluate whether the client’s needs are best served by a wait-andsee approach, challenging a NOID (with or without an effort
to cure), appealing, litigating, withdrawing/curing/re-filing,
abandoning the effort, or starting anew.
For EB-5 projects and regional centers, the new policy also
warrants some proactive assessment of potential impacts. It is
impossible to gauge how significant the projected spike in I-526
denials will be; if S.1501 becomes law, it will be higher still.
Offering documents should be reviewed to determine the likely
expectations of the parties in the event of denial, and projects/
regional centers should consider whether higher-than-expected
denial rates or even more extended delays will compromise the
financial viability of the project. Where the timing of final adjudications has the potential to impact project success, counsel
should be consulted for guidance regarding agency practices and
available options. Proactively working with investors to identify
and possibly cure potential denials before adjudication can help
to avert adverse impacts to the project as a whole.
EB5 INVESTORS MAGAZINE