INS MEMO REGARDING
EB-5 INVESTOR CASES
|
FREE NEWSLETTER
|
|
Learn how to benefit from United States immigration
laws and procedures from a former INS Attorney (1976-82) with over
30 years of experience.
SHUSTERMAN'S
IMMIGRATION UPDATE is must reading for potential
immigrants, employers, human resources managers,
immigration attorneys, reporters and policy makers.
Join over 57,000 persons in more than 150 countries
in subscribing to our FREE monthly e-mail newsletter.
|
|
INS General Counsel memorandum on various financial relationships
utilized in EB-5 investor cases, and their respective permissibility.
=======
Memorandum
HQCOU 70/6.1 & 70/9-P
_____________________________________________________________________
|
Subject: | Date: December 19, 1997
Sections 203(b)(5) (EB-5) and 216A of the |
Immigration an Nationality Act |
|
_____________________________________________ _____________________________
To: From:
Paul W. Virtue Office of the General Counsel
Acting Executive Associate Commissioner
Office of Programs
Background
Under section 203(b)(5) of the Immigration and Nationality Act, as
amended (the "Act"), an alien entrepreneur may file a petition for an
immigrant visa if he or she seeks to enter the United States to establish a
new commercial enterprise. Over the last several years, a number of
serious issues have arisen regarding the legality of certain types of
business arrangements which have been used to qualify aliens as immigrant
investors under section 203(b)(5) of the Act and current regulations of the
Immigration and Naturalization Service (the "Service"). This office has
been asked to examine a number of petitions which are based on these kinds
of arrangements and to provide an opinion as to whether these plans comport
with the current statute and Service regulations. In addition, we have
been asked to provide appropriate recommendations for handling cases
involving such business plans.
The plans in question involve some combination of the following
provisions: (1) the use of a down payment of cash with the remainder of
the alien's contribution in the form of a promissory note; (2) a multi-year
installment payment plan on a promissory note with a substantial balloon
payment after the conditions on the alien's lawful permanent resident
status are removed; (3) an option given to the alien to sell his or her
investment for a fixed price that may be less than, equal to or greater
than the alien's cash contribution (usually exercisable before or at
approximately the same time as the balloon payment on the promissory note
is due); (5) an option given to the enterprise or limited partnership to
buy the investment at a fixed price (usually exercisable before or at the
same time as the balloon payment on the promissory note is due); (6) a
provision that allows or requires the commercial enterprise to place
sufficient cash into a bank account to guarantee that funds will be
available to repay the alien if the alien exercises the sell option; (7)
withholding of a portion of the alien's capital contribution for attorneys'
and finders' fees and other administrative costs; and (8) a guaranteed
return on the cash portion of the alien's "investment". [1]
These business plans generally involve the creation of a limited
partnership that pools the money of alien investors to invest n either a
new or troubled business in the United States, frequently in a "regional
center." One basic problem with these plans is that the new commercial
enterprise being established involves a partnership that is supposed to
serve as a conduit for placing the aliens' capital to start-up or existing
businesses that will create or sustain employment, but, because of various
provisions in the investment or limited partnership agreements, only a
small amount of the alien investor's money or other capital is actually
able to reach the operations of the employment-creating or preserving
business. In addition, these types of arrangements appear to give the
alien relatively risk-free debt interests rather than equity interests in
the new business. As will be discussed in more detail below. the plans use
agreements and investor agreements to permit investments with a minimum of
cash provided by the alien are to insulate the alien's cash from the
business risks associated with the new commercial enterprise. Because of
the complexity of these arrangements, it is difficult to determine in the
brief time we have had to review the plans, the full extent to which they
violate the Act and the Service's current regulations. Nevertheless, a
careful review of current law and several EB-5 petitions which were
forwarded to our office from the Texas Service Center clearly demonstrates
that these plans do not comply with the existing statute and regulations.
Legal Questions Presented
1. Do investment plans that involve guaranteed interest payments, buy and
sell options at a fixed price other than fair market value, and other debt
features comport with the statutory and regulatory requirements?
2. Do investment plans involving different combinations of provisions
designed to reduce or eliminate the risk to the alien's capital by limiting
the amount of capital actually available for the operations of the job-
creating enterprise comport with the statutory and regulatory requirements?
3. Do investment plans that allow an alien to earn a fixed return on his
investment at the same time that he or she continues to make installment
payments on a promissory note comport with statutory and regulatory
requirements?
4. Should the Service request that the Department of State cease issuing
visas and return petitions for revocation based on investment plans
involving these terms.
5. Do plans like those reviewed by our office comport with existing law?
6. Is the Service estopped or otherwise precluded from denying or
revoking petitions filed by aliens investing in the plans like those under
review based on past approval of petitions earlier policy statements, or
informal statements by Service officials?
7. Is the Service estopped or otherwise precluded from terminating the
status of a conditional resident alien who has invested in plans like those
under review based on past approval of petitions, policy statements, or
informal statements by Service officials?
Summary Conclusions
1. No. Such plans appear in fact to constitute "loans" or other debt
agreements, and therefore fail to meet the definition of "invest" in our
regulations. The regulations expressly prohibit the use of debt
arrangements as part of contributions of capital being invested.
2. No. Such plans impermissibly prevent the alien from placing the
required amount of capital at risk of loss in the employment-generating
business. This is equally true where the new commercial enterprise is in
the business of lending capital to job creating businesses and acting as a
mere conduit between the alien and the job-creating business. Such plans
use a number provision to shield the alien's capital from risk including
the deposit of cash in bank accounts to guarantee repayment of the alien's
money, the use of promissory notes with large final "balloon" payments
combined with the option to "sell" the alien's investment in the business
at a fixed price and guaranteed returns on the alien's cash outlays. Such
plans appear to continue to allow the alien to withdraw his or her capital
prior to the time the balloon payment is due. In addition, the use of
promissory notes in such plans fails to meet the requirement that an aline
invest "capital" having a fair market value equal to or greater than the
amount required in the statute.
3. No. These plans effectively permit the alien to reinvest his or her
return on the initial cash contribution in the new commercial enterprise.
Therefore the alien is not infusing new capital into the enterprise or the
U.S. economy in the statutorily required amount.
4. Yes, for the reasons stated in summary conclusions 1, 2 and 3.
5. No. Based on our review of a number of approved and pending petitions
filed with the Texas Service Center, we have concluded that they fail to
meet the requirements of the statute or the Service's regulations. Any
plans which involve similar terms would also fail to meet current statutory
and regulatory requirements.
6. No. Under the Administrative Procedure Act and relevant cases, the
Service is not bound by its pervious decisions in adjudicating visa
petitions. We recommend, however, that the Service issue a memorandum to
the field consistent with this memorandum and publish that memorandum in
the Federal Register.
7. No. Under the Administrative Procedure Act and relevant case law, the
Service is not bound by its initial grant of a petition when terminating
conditional residence status based on a visa petition that was granted in
error or based on the fact that the alien is subject to termination under
section 216A of the Act. We recommend, however, that the Service issue a
memorandum to the field consistent with this memorandum and publish that
memorandum in the Federal Register.
General Legal Principles
Under section 203(b)(5) of the Act, an alien entrepreneur may file a
petition for an immigrant visa if he or she seeks to enter the United
States to engage in a new commercial enterprise: (a) which the alien has
established; (b) in which the alien either has invested, or is in the
process of investing $1,000,000 (or $500,000 in target employment areas);
and (c) which will benefit the U.s. economy and create ten jobs. In the
case of a "regional center," such jobs may be created indirectly by the
investment. See section 610 of the Departments of Commerce, Justice, and
State, the Judiciary, and Related Agencies Appropriations Act, 1993, Pub.
L. 102-395, 106 Stat. 1874 (Oct. 6, 1992). The Service's regulations at 8
CFR 204.6 establish the criteria for adjudicating alien entrepreneur (EB-
5) visa petitions.
Under 8 C.F.R. 204.6(e) a prospective immigrant investor is required
to show an "actual commitment" of the required amount of capital. Id. In
addition, the Service's regulations expressly prohibit any kind of debt
arrangement. See 8 C.F.R. 204.6(e). Under this regulation, a
contribution of capital will only count as part of the alien's statutorily
required capital contribution amount if it is an equity investment. As a
result, any investment plan that includes a contribution of capital
involving a debt arrangement fails to satisfy the requirements that the
alien invest the required amount of capital in the new commercial
enterprise, even if the plan permits the debt to be subsequently converted
into an equity interest.
More fundamentally, as this office has noted on more than one
occasion, "the statute and the regulations require that an employment
creation immigrant's investment be genuine." See Legal Opinion of the INS
General Counsel (June 27, 1995) at p. 10 and Legal Opinion of the INS
General Counsel (September 10, 1993) at p.7. To ensure that there is a
genuine investment, the petition must be accompanied by evidence that the
petitioner has placed the required amount of capital "at risk" for the
specific purpose of "generating a return on the capital placed at risk." 8
C.F.R. 204.6(j)(2). Further, an alien must place all qualifying capital
he or she invests "at risk" for the entire two-year period of conditional
residence. See Legal Opinions of June 27, 1995, at p. 10 and September 10,
1994, at p. 7. While this office has stated that certain redemption
agreements are permissible, those which allow for the redemption of an
alien's interest in the new commercial enterprise at more than fair market
value fail to meet the "at risk" requirement of the regulations. See Legal
Opinion of September 10, 1993 at p.8. Similarly, although this office has
previously stated that a third party guarantee may be a legitimate means of
reducing a risk from a downturn in business of the new commercial
enterprise, this opinion was based on the assumption that there actually
exists a genuine investment intended to create jobs, i.e., that capital has
actually been made available to and put at risk in job-creating businesses.
In other words, the alien must actually purchase an ownership interest in
the new commercial enterprise by making capital having a fair market value
in the statutory amount fully available for use by the enterprise in
creating or preserving jobs. In the case where the new commercial
enterprise functions as a lender or provider of capital to job-creating or
job-preserving U.s. businesses, the alien's capital must be made fully
available not only to the new commercial enterprise, but also to the job-
creating and job-preserving businesses.
Specific Legal Principles
1. Under current Service regulations, a debt arrangement between the
alien investor and the new commercial enterprise doe snot constitute an
"investment"
Under current Service regulations "[i]nvest means to contribute
capital." 8 C.F.R. 204.6(c). The regulations specifically provide that
"[a] contribution of capital in exchange for a note, bond convertible debt,
obligation, or any debt arrangement between the alien entrepreneur and the
new commercial enterprise does not constitute a contribution of capital for
the purposes of this part." Id. (emphasis added). Significantly, as
written, this language (especially the language "or any other debt
arrangement") provides the Service with broad discretion to go behind the
nomenclature of the arrangement (e.g., a "limited partnership") and
determine if the transaction is actually, in substance, a loan or other
debt. An arrangement under which a new commercial enterprise guarantees an
annual return on capital, regardless of whether the business is making a
profit is, in fact, little different from a bond or other debt arrangement
whereby the company promises to pay interest payments on capital loaned to
it by an alien. The debt nature of the transaction is even more apparent
when this guaranteed return is combined with an agreement to return some or
all of an alien's contribution regardless of the fair market value of the
underlying business. It makes no difference whether the alien will receive
a return of his or her full cash contribution since, in such a case, the
sole risk of loss of the actual capital contributed faced by the alien is
contractual, ad is not dependent on the business fortunes o any job-
creating or job-preserving enterprise. Further, when he alien may incur
the risk of loss of the funds he or she has lent in the vent the business
fails or is failing, such risk is no different than that incurred by a
bondholder or any other business creditor. Moreover, many arrangements
also allow the business to buy out the alien's "investment" at a fixed
price, regardless of the actual worth of the business. As discussed in
detail below, such arrangements are little different than a standard debt,
since, unlike an equity holder, an alien under such an agreement faces no
"upside" or "downside" potential from his or her "investment." Further,
even if the new commercial enterprise doe snot exercise the buy-out option
and the alien does not exercise the sell option and remains in the
investment, such an arrangement is analogous to a convertible debt, whereby
the alien has the option of converting a bond or other debt instrument into
an equity holding.
In preparing this memorandum we have carefully reviewed the Service's
previous memoranda and correspondence on the EB-5 issue. It is clear that
the Service has not previously considered the debt nature of these
arrangements. An October 20, 1997, memorandum stated that "a contractual
provision for such guaranteed payments may, in certain cases, be consistent
with a genuine investment." Memorandum of October 20, 1997, from Office of
Adjudications. Our determination here is not necessarily inconsistent with
this statement since that the statement does not purport to justify all or
even most plans having such contractual provisions and it did not analyze
these provision sunder the regulation forbidding "debt arrangements."
However, a guaranteed return on an investment is strong evidence that the
investment constitutes a debt arrangement, which is prohibited by the clear
language of the Service's regulations.
2. Plans that prevent any portion of the alien's statutory minimum
capital contribution from being placed at risk do not meet the current
statutory and regulatory requirements
To ensure that there is a real investment, the alien is required to
show an "actual commitment" of the required amount of capital. Id. This
requirement is intended in part to serve as a safeguard against immigration
fraud. See Legal Opinion of September 10, 1993, at p. 5. Because current
regulations broadly defined what constitutes a "commercial enterprise,"
what constitutes "risk of loss" as required by the regulations will depend
on the specific type of business involved. For example, where the new
commercial enterprise is a limited partnership which is in the business of
providing or lending capital to troubled or new U.S. businesses, there can
be no "risk of loss" or capital intended to meet the statutory job creation
requirement if the limited partnership doe snot make the funds available to
the job-creating U.s. business or use them to obtain funds for use in such
a business, but merely deposits the capital in a bank account in the name
of the limited partnership. This is also true where the alien contributes
capital to a limited partnership that is to act as a conduit to place the
alien's capital in such businesses, but instead, deposits some or all of
the capital in a bank or trust account, or otherwise fails to make the
alien's capital fully available to such businesses. In addition, plans
involving a payment of any immigration attorney's fees, or unreasonably
high finder's fees, legal fees, or administrative fees out of the alien
capital contribution fail to meet the requirement that the capital be
placed at risk "for the purpose of generating a return on the capital being
placed at risk."
3. Under current regulations, in order for a promissory note to
constitute "capital," the note must have a fair market value in U.S.
dollars equivalent to the amount of the note which is used to meet the
minimum statutory capital requirement
The Service's regulations at 8 C.F.R. 204.6(e) define "capital" to
mean, among other things, "indebtedness secured by assets owned by the
alien entrepreneur, provide 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 sued to secure any of the
indebtedness." See also 8 C.F.R. 204.6(j)(2)(v). Although the regulations
permit non-cash goods and instruments, such a machinery and certain secured
promissory notes, as statutory capital in the alien's investment, the
regulations also state that "[a]ll capital shall be valued at fair market
value in United States dollars." 8 C.F.R. 204.6(e). Thus, a promissory
note used as capital must itself have a fair market value in U.S.
dollars.[2] To establish that value, it must be shown that the note is
negotiable and has a cash value equivalent to the amount of capital
contribution it represents, even if it never actually negotiated. For
example, in a case where the new commercial enterprise depends on obtaining
loans from a warehouse lender in order to lend sufficient funds to troubled
businesses to create U.S. jobs, the warehouse, in assessing the
creditworthiness of the new commercial enterprise, must be able to value
the promissory note, for purposes of making a loan to the business, as the
equivalent of cash in the amount of the capital contribution that the note
is claimed to represent. In every case it is the fair market value of the
note, not the fact amount, that will be controlling in deciding whether
adequate capital has been invested. The burden is on the petitioner to
establish that the fair market value is satisfied through the submission of
appraisals of the note from independent sources.
As indicated above, a promissory note must also be secured by an
alien's assets. 8 C.F.R. 204.6(e); 8 C.F.R. 204.6(j)(2)(v). In a previous
legal opinion this office has indicated that the regulations do not require
that indebtedness used as capital meet the requirements of a secured
transaction under Article 9 of the Uniform Commercial Code. See Legal
Opinion of the INS General Counsel (June 27, 1995) at p. 9, n.9. Still,
this office has previously concluded that, to be deemed "secured" for
purposes of meeting the definition of "capital," not only,y must the
promissory note itself have a fair market value equivalent to cash, but
that the underlying collateral itself must have a fair market value in the
amount of the note. Id. at 8-9. Among other things, the new commercial
enterprise must be able to enforce the note against such collateral for the
amount of the note used to meet the minimum statutory capital requirements.
An under-collateralized note will be deemed to be "unsecured" for any
portion of the collateral which is less than the amount of the note applied
to meet the minimum statutory capital requirements. Id. at 8-10. Where
the note is secured by foreign assets, such assets must have a fair market
value in U.S. dollars equal to the amount of the note, and the commercial
enterprise must be able to enforce against the collateral.[3] In
addition, the alien must be able to demonstrate throughout the two year
conditional residency period and at the time of the filing of the petition
for removal of the condition that the alien continues to possesses assets
of sufficient fair market value to secure the note.
A prior Service policy memorandum stated that "if all other statutory
and regulatory requirements are met, an adjudicating officer may approve a
petition involving a small initial down payment ... and the execution of a
promissory note to the new commercial enterprise for the balance of the
requisite statutory amount." Memorandum of October 20, 1997, from Office
of Adjudications to all Regional Directors, et al. Our analysis here doe
snot address the validity of such notes as a general matter. Rather, if
such notes do not have the requisite fair market value or are not properly
secured, then the petition should be denied because "all other statutory
and regulatory requirements" have not been met, particularly the
requirement than an alien invest or be in the process of investing the
required minimum amount of capital.
4. Under current law, an alien must "infuse" new capital into a new
commercial enterprise and therefore my not apply any profits, proceeds, or
interest derived from invested capital toward meeting his or her
obligations on a promissory note used as capital
The statute specifically requires that the alien "invest" capital in a
new commercial enterprise. INA 203(b)(5). The term "invest" is defined
in the regulations as "to contribute capital." 8 C.F.R. 204.6(e) The
legislative history clearly shows that section 203(b)(5) contemplates an
"infusion" of capital from the alien into the new commercial enterprise.
See Legal Opinion of the INS General Counsel (Sept. 10, 1993) at p. 4; S.
Committee on the Judiciary rep. 55, 101st Cong., 1st Sess. (1989), p. 21.
For this reason, an alien may not count towards meeting the statutory
capital requirement any profits, proceeds, or interest derived from the
alien's capital contribution. Thus, were an investment plan involves the
use of a promissory note and a series of installment payments, the
installment payments must come from funds other than those generated by the
investment itself. For example, the capital "infusion" requirement is not
met where the new commercial enterprise "parks" or otherwise sets aside an
alien's cash contribution in a bank account, and all or some of the alien's
installment payment on a note used as "capital" derives from interest on
the bank account. An alien cannot be deemed to have complied with the
capital infusion requirement if any portion of the alien's payment on the
installment derives from dividends or other funds received through
operations of the new commercial enterprise. See De Jong v. INS, Civ. No.
6:94cv850 (unpublished, E.D. Tex., Jan. 16, 1997)(dairy farm investment
derived from "culled" cows).
5. Regardless of the form of the new commercial enterprise (e.g. limited
partnership or otherwise), it is unlikely that the job creation requirement
of the statute and regulations can be met unless the alien's capital is
made fully available to and is actually used by job creating U.S.
businesses.
The core purpose of the EB-5 program is to create full-time jobs for
U.S. workers. In the case of a "regional center," such job creation may be
generated indirectly. In all cases, however, the alien must demonstrate
that his or her individual capital contribution will actually result in job
creation. See 8 C.F.R. 204.6(g), (j)(4), and (m)(7). Implicit in the
statutory and regulatory rules is the requirement that the alien must make
an actual commitment to make the statutory capital amount fully available
to, and intend that such capital will actually be used by, the new
commercial enterprise for the purpose of creating such jobs. The mere loan
or transfer of capital in any form to the new commercial enterprise and the
subsequent "parking" of such capital in a bank account or the equivalent
without it actually being put to use by the new commercial enterprise for
the purpose of creating or preserving jobs fails to meet current statutory
or regulatory requirements, though a business may make provision for
reasonable cash reserves. In such a case, the idle capital cannot
reasonably be expected, even in a regional center, to create or preserve
the requisite ten full-time positions, and evidence of jobs created or
preserved must be accompanied by evidence of a nexus between the alien's
investment and the jobs.
ANALYSIS OF SELECTED VISA PETITIONS
The content of the "investment" plans
The Southern Service Center has provided our office with three visa
petitions for review as examples of plans that present many of the problems
discussed above. These cases were selected as representative of plans used
in hundreds of visa petitions filed by aliens. They were chosen for review
because plans like these have been the subject of numerous cables from
State Department consular posts questioning their validity and because the
Service Centers themselves have identified other issues regarding such
plans.
While there are differences in the precise details of the arrangements
made in the plans and differences in the underlying businesses that are the
targets of the "investments," all the plans share some or all of the
following characteristics: 1) the alien's "investment" is in the form of
an initial cash payment with the balance as a promissory note to the new
commercial enterprise; 2) the payments on the promissory note are scheduled
with small yearly payments for five to six years and a large final payment
at the end of the note, usually representing the majority o the statutorily
required investment amount; 3) a guaranteed return on the cash the alien
provides to the commercial enterprise; 4) a release from the obligations
under the promissory note in the event of the insolvency of the
partnership; 5) an option on behalf of the alien to "sell" his or her
"investment" back to the new commercial enterprise for a fixed price at the
time the final balloon payment on the promissory note is due or before; 6)
an option on behalf of the commercial enterprise to "buy" the "alien's"
investment at a fixed price at the time the final balloon payment is due or
before; and 7) a requirement that the new commercial enterprise deposit
sufficient funds in a bank account to meet its obligations under the sell
option agreement.
The details of a representative visa petition
We will review briefly the details of one plan that is similar to many
others to illustrate the typical structure of plans used by a number of
different programs. Our purpose here is not to judge the merits of this
particular plan for adjudication purposes but to use an example to help
explain these complex arrangements generally. The principal legal
instruments defining the terms of the investment are a deposit agreement, a
promissory note, an investment agreement and an agreement of limited
partnership. Under the promissory note and the investment agreement the
alien is to make a "capital contribution" to the partnership of $500,000.
The alien will pay $120,000 in cash and owe the rest on a promissory note.
Of the $120,000 cash, $30,000 goes directly to the partnership as a
"refundable advance of initial expenditures to the Partnership." The
$30,000 is refunded only in the event that the visa petition is not
approved or the condition on the alien's residence is not removed because
of a failure to create the required number of jobs and the partnership
cannot find another suitable investment for the alien's money. The other
$90,000 goes into an escrow account and, under the terms of the investment
and deposit agreements, will be released to the partnership upon approval
of the alien's immigrant visa or adjustment of status application. The
$375,000 balance of the alien's "contribution" is payable in six
installments. There are five annual installments of $18,000 each, the
first being due one year from the date the alien is admitted to the
partnership. Six years from the date of the alien's admission to the
partnership a final payment of $290,000 is due.
Under the investment agreement, the partnership must pay the alien a
12% annual return on his or her cash contribution for five years,
irrespective of whether the enterprise is making any profits, and the alien
may receive a share of the profits of the partnership to the extent that
his or her share of the profits exceeds the 12% return.
The investment agreement also states that "in the event of the
bankruptcy, the insolvency, or the failure of the Partnership to pay the
annual return on capital, to pay the sell option price, or to pay any
judgment, the Partnership shall be deemed in breach of its obligations to
the Limited Partners .. and [the alien] shall have no further obligation to
the Partnership and ... shall not be obligated to make any further payments
under the Limited Partnership Agreement, the Investment Agreement or the
Promissory Note." The promissory note expressly incorporates by reference
the terms of the investment and limited partnership agreements.
The investment agreement and the limited partnership agreement provide
the alien the option to "sell" his or her partnership interest back to the
partnership. In addition, these agreements give the partnership the option
to buy the alien's interest in the partnership. In the particular petition
used as an example here the investment agreement contains provisions on the
buy and sell options that are inconsistent with the limited partnership.
The investment provides that the alien has "the right to require the
Partnership to purchase [his or her] limited partnership interest (or
ownership interest in the General Partner, if applicable) at a price equal
to [his or her] total contributed capital, less [his or her] first six
installment payments, plus [his or her] pro rata share of profits ...."
The partnership has a "buy option" under the same conditions. Under the
limited partnership agreement, however, the alien has a sell option that
may be exercised five years after the alien's admission to the partnership
for "an amount equal to the full amount of Capital Contributions to the
Partnership but the [alien] less the four annual cash payments made by the
[alien]." The limited partnership agreement also gives the partnership a
buy option exercisable after 3 years. It is not clear which of these sell
and buy options will be enforceable by the alien and the partnership, as
the investor agreement expressly endorses the terms of the limited
partnership agreement. It is also unclear whether the buy and sell options
remain permanently open to the alien and the partnership or terminate on or
after final payment on the promissory note.
Finally, and significantly, the limited partnership agreement states
that the "General Partner on behalf of the Partnership shall deposit with
the Banks from the Initial Cash Payments sufficient Reserve Funds to
satisfy the Partnership obligations under [the alien's sell option] and to
defray such costs and expenses of the Partnership as determined by the
General Partner." In other words, the partnership has an obligation to
deposit enough money in a bank account to pay the alien if he or she
decides to leave the investment.[4] This money, therefore, never becomes
available to the job-creating U.S. business.
Legal analysis of the representative plan
Under the legal analysis presented above, it is clear that
arrangements of this type are not consistent with the Act or current
Service regulations. There are five fundamental problems with the plan
detailed above. First, it is clear that the plan is essentially a debt
arrangement and not an equity investment in the new commercial enterprise.
Second, under the plan discussed above the alien's capital is not placed
at risk. Third, the full statutory amount of capital is not made available
for use by any U.S. business for employment creation or business
operations. Fourth, under this plan, the promissory note used to meet the
minimum capital requirement does not have a fair market value equivalent to
the statutorily required investment amount. Finally, the guaranteed
payment on the alien's cash contribution in the plan amy be used to make
payments on the promissory notes. As a result, thee is an insufficient
infusion of new capital into the business.
The representative plan is a debt arrangement and is therefore
precluded under current regulations.
The plan analyzed herein (and others that our office reviewed) is
essentially a debt arrangements rather than an equity investment in the new
commercial enterprise. As such, it is not a valid investment under 8
C.F.R. 204.6, as discussed above. The distinction between debt and
equity in any investment situation is complicated and has ramifications in
many areas of commercial and tax law. Because of this complexity it is not
possible to present one simple definition of debt and equity that permits
easy application to the plan under consideration here. Nevertheless, a
review of relevant materials and case law leads to the conclusion that
under this plan the alien is providing a large amount of debt, and little,
if any, equity capital, to the new business, and the plan must be
classified as a "debt arrangement." Therefore an alien who participates in
such a plan fails to "invest" his or her capital in the new enterprise as
required by the regulations.
Most discussion of the distinction between debt and equity arises in
the tax and securities law context. There is well-developed law on the
question, and we consider the analysis in the tax and securities arenas
generally applicable to the use of term debt in our regulation. The
classic definition of debt is "an obligation to pay a sum certain at a
fixed maturity date along with a fixed percentage of interest payable
regardless of the debtor's income." Mertens Law of Federal Income
Taxation, 26.16. An investor owning an equity interest is "one embarking
on the corporative venture, taking the risks of loss attendant upon it, so
that he or she may enjoy the chances of profit." Id. "It is settled that
no simple rule exists for determining whether an instrument should be
classified as debt or equity; the ultimate test is whether in substance the
arrangement more clearly resembles debt or equity ...." Monon Railroad v.
Commissioner, 55 T.C. 345 (1970), citing John Kelly Co. v. Commissioner,
236 U.S. 521, 530 (1945). Therefore, in analyzing the plan outlined above
we are guided by the general rule applied by courts in making debt/equity
determinations that "the form that the transaction takes is not
controlling, but rather the substance." Hambuechen v. Commissioner, 43
T.C. 90, 98 (1964), citations omitted.
Under these general definitions, the plan under consideration should
be classified as a debt arrangement rather than equity, despite the fact
that the "investment" has some equity characteristics. The alien's "sell
option" and the partnership's "buy option" set the maturity date of the
loan, and the investment agreement provides a fixed interest rate of return
that is due irrespective of the income and fortunes of the commercial
enterprise. As the above analysis of the limits on the risk to the alien's
money demonstrates, the alien is not taking the risk of loss on the change
that he or she be able to enjoy the profits of the business, as the Service
regulations require. Rather, the alien is guaranteed a return, and,
because of the partnership's buy option, the alien does not really enjoy
the chance of profit. If the business were profitable and the value of
the alien's share increased, the partnership (the majority if which is
owned by the general partner and not the aliens) could, and if it is
economically rational would, buy out the alien's share for the fixed price
at or below what the alien has paid into the business and below the
increased value of the alien's share in the business. Accordingly, as a
general matter, this agreement appears to be more in the nature of debt
than equity.
A more detailed analysis of the complex factors that must be weighed
in making the determination of whether a particular transaction is debt or
equity supports this general conclusion. Most cases addressing the debt
versus equity issue involve investments in corporations rather than
partnerships. However, in the leading case on the debt versus equity
question in partnerships, the Tax Court held that the factors to be
considered for partnership investments are the same as those for
investments in corporations between partnership and corporate investments.
Hambuechen, supra, 43 T.C. at 101-102.
A review of the relevant cases and treatises shows that the factors
evidencing debt are: (1) an unconditional promise to pay; (2) a fixed
maturity date; (3) a fixed interest rate (whether set as an percentage of
the investment or a percentage of profits of the investment); (4) intent to
repay; (5) the general partners are liable to the creditor for repayment of
the debt; (6) presence of a sinking fund to provide repayments; (7)
existence of security for the alleged loan; (8) a redemption or retirement
provision; and (9) the fact that a third party lender would make a loan
under similar circumstances.
The factors evidencing equity are: (1) funds are placed at the risk
of the business in the expectation of earning a profit; (2) payment is
subject to the rights or creditors at liquidation; (3) the business is
adequately capitalized; (4) payment can be made only from future profits;
(5) funds are used to acquire capital assets; (6) the investor has the
right to participate in shareholder functions, such as voting; (7) the
investor has the right to participate in the proceeds of a solvent
dissolution of enterprise.
A review of the plan being used as an example here with respect to
each of these factors reveals that the debt characteristics far outweigh
such plan's equity characteristics, and that, on balance, it should be
considered a debt arrangements and not equity an investment. This plan
clearly exhibit must of the nine factors listed as evidencing debt, and may
exhibit them all:
1. The investment agreement, limited partnership agreement, and
promissory all contain a clear unconditional promise to repay at
least a portion of the aline's money.
2. The buy and sell options ...(indecipherable)
3. There is a fixed interest rate calculated as 12% of the cash
given to the enterprise plus a portion of profits.
4. The agreements on their face evidence an intent on the part of
the partnership to repay, and the guarantee of repayment is
certainly one of the principal features that attracts aliens to
these plans.
5. It appears from the text of the partnership agreement that the
general partner is liable for the repayment of the amount
guaranteed in the sell option. Section 10.06 of the partnership
agreement states that "[e]xcept for the Limited Partner's Sell
Option, the Limited Partners shall look solely to the assets of
the Partnership for return of their Capital Contributions,
and if the Partnership property remaining after the payment or
discharge of debts, obligations and liabilities of the
Partnership is insufficient to return Capital Contributions, they
shall have no recourse therefor against the General Partner of
the Liquidator." (Emphasis added.) This language implies that
the general partner or partners are in fact liable to the limited
partners for the amount due under the sell option provisions.
6. The "cash reserve" which the partnership must maintain to meet
its obligations under the sell option is in essence a sinking
fund that is used to pay aliens as they leave the partnership.
7. It may also be possible to view the cash reserves as security on
the loan, though this is a question of fact that we cannot decide
here.
8. The buy and sell options appear to be redemption or retirement
provisions.
9. If the loan is discounted for the alien's willingness to pay a
certain price for obtaining lawful permanent resident status,
then it is possible that a third party would make a loan under
similar circumstances through this is a fact question we cannot
decide here.
The plan under consideration also exhibit some equity characteristics.
From the partnership agreement it appears that the alien investors do have
some shareholder rights such as voting and consultation in management
decisions. Also, it appears that for some purposes the rights of the alien
investors are subject to the rights of creditors, but they may well be on
par with creditors with respect to the amount due them under the sell
option. Aliens also have some right to participate in the solvent
dissolution of the partnership, but that right is greatly limited by the
fact that the partnership has an absolute right to buy the aliens'
interests in the partnership at a time that is likely to be prior to any
solvent dissolution of the business. Finally, because much of what the
aliens contribute to the new enterprise is either a promise to pay or debt,
these businesses may be undercapitalized.
However, from our review of the relevant material it is clear that
the most important aspects of an equity investment are that the alien's
capital be at risk of loss and profit and only receive a return from the
profits of the business. These aspects are lacking in the plan under
review. As outlined above, a substantial portion, if not al, of the
alien's contribution is shielded from the risk of the new commercial
enterprise through a variety of provisions in the agreements. In addition,
payment on the alien's "investment" is not made solely from future profits,
but guaranteed, regardless of the profitability of the enterprise.
In sum, we believe that the representative plan and all similar plans
are debt arrangements and therefore, under 8 C.F.R. § 204.6(e), aliens who
participate in them have failed to invest the requisite amount of capital
in the new commercial enterprise. Three arguments might be raised against
this conclusion. First, it may be argued that because the plans have some
equity characteristics they cannot be classified as debt arrangement.
However, the cases on this issue frequently classify an investment as debt
even when it exhibits some equity characteristics. For example, in Paulsen
v. Commissioner of Internal Revenue, 469 U.S. 131 (1985), the Supreme Court
was faced with determining the debt or equity nature of shares in Citizens
Federal Saving and Loan Association, a federally chartered mutual savings
and loan association. The Court held that "the debt characteristics of
Citizens' shares greatly outweigh the equity characteristics" and concluded
that they were debt arrangements. The Court reached this conclusion in
part because the shareholder's "investment was virtually risk free and the
dividends for savings accounts were equivalent to prevailing interest rates
...." Id. at 140. The Supreme Court came to this conclusion despite the
existence of a number of seemingly significant equity characteristics of
the Citizens shares, including that they were the only ownership
instruments in the corporation, that the interest on the accounts was in
the form of dividends and not set at a fixed amount as a return on the
investment, that the shareholders had voting rights and that they had a
right to participate in the net proceeds of a solvent dissolution. Id. at
138-39. The argument that these plans are not debt arrangements may also
be made based on a interpretation of the regulations. It might be argued
that the because these investment plans have some equity characteristics,
they are not "debt arrangements" but rather "debt/equity arrangements" and
therefore not prohibited under the regulations reference to "any debt
arrangement." This argument fails on two accounts. The regulations
specifically prohibit "convertible debt," which is a type of debt/equity
arrangement. In addition, we read "any debt arrangement" to mean any
arrangement that includes debt features because the wording of the
regulation evidences an intent to be expansive in coverage. Moreover, as
indicated above, the courts often classify arrangements having some equity
characteristics as debt.
Second, it might be argued that because the alien's sell option doe
snot entitle him or her to the return of his or her full contribution, it
is an equity investment. It could be argued that the party of the alien's
"investment" that is not returned is equity. However, because of the way
in which the buy and sell options are structured this is a weak argument.
If the alien exercises the sell option or the partnership exercises its buy
option, the portion of the alien's money that is not returned remains with
the partnership, but the alien relinquishes his or her complete interest in
the partnership. That is, he or she retains no interest, debt or equity.
Thus this portion of the alien's contribution is more in the nature of a
payment, fee or penalty for withdrawal rather than an equity investment,
and any loss incurred is contractual in nature and not dependent on the
profitability of the business.
Finally, it might be argued that if neither the alien nor the
partnership exercises their options, then the investment is an equity
investment, and the alien becomes an equity holder. Even assuming that
this were true, this would only indicate that the investment is convertible
debt and not equity. The regulations specifically prohibit the use of
convertible debt. See 8 C.F.R. § 204.6(e).
The alien's capital is not placed at risk.
All of the above-listed seven characteristics of the example
investment individually go to reduce the risk to the alien's capital.
Whether or not each characteristic standing alone is consistent with
current law, when all or some of them are used together, they all but
eliminate the required risk by substantially limiting the amount of the
alien's cash that is available to the employment-creating business and by
guaranteeing the alien a return on his or her investment and the return of
some or all of his or her capital contribution. For this reason, such plan
does not comport with existing law.
Under the plan detailed above, one of the principal mechanisms by
which the alien's capital is shielded from the risk associated with the new
commercial enterprise is by placing the aline's cash contribution in a bank
account as reserves to be kept available to repurchase the alien's share in
the future. The sole risk of loss an alien faces if his or her capital is
"parked" in a bank account is that the bank will become insolvent. This
risk, however, exists independent of the activities of the new commercial
enterprise. If the alien placed his or her money directly into a U.S. bank
account, the alien obviously would not qualify for an EB-5 visa, despite
the risk of bank failure. The fact a limited partnership is created to
place the alien's money in a bank account doe snot turn the deposit into an
EB-5 qualified investment.[5] Arguably, there is also some risk that the
partnership itself will fail and the alien will lose his or her cash to the
creditors of the partnership. However, this risk is minimal in an
investment plan in which the partnership does little more than act as a
repository of the alien's cash and promissory note. The alien's
"investment" is not put at risk as capital in a new, job-creating
enterprise or enterprises. The risk involve din handling money to a
partnership that in turn places the money into a bank account is clearly
not the type of risk Congress intended -- that the alien's capital be used
by the new commercial enterprise to create directly or indirectly full-time
U.S. jobs -- nor the type of risk required by the regulations.
Another means by which the investment plan impermissibly prevents
placing the alien's money at risk in the job-creating commercial enterprise
is to insulate the alien from los due to a business downturn through use of
a promissory note. The terms of the promissory note and the investment
agreement will ordinarily function to avoid the actual investment of cash
in the job-creating enterprise. In the plan detailed above, the promissory
note is structured so that the alien only makes small annual payments on
the note for a period of five or six years and then a large "balloon"
payment at the end of the term. Along with this arrangement is a clause
that in the event of the insolvency of the partnership or the failure of
the partnership to make guaranteed interest payments, the alien's
promissory note is automatically forgiven, thus shielding the amount of
"capital" represented by the promissory note (over 75% of the alien's
claimed capital contribution under the plan) from the risk of failure of
the new enterprise and protecting it from the creditors of the new
enterprise. As indicated above, a prior Service policy memorandum has
stated that the use of promissory notes with a substantial balloon payment
due after the date of removal of the condition on the alien's permanent
residence "does not by itself mean that a petition should be denied."
Memorandum of October 20, 1997. In the plan under review it is not the
existence of the promissory note and balloon payment by itself that runs
afoul of the regulations, but rather the terms of the promissory note
combined with other terms in the investment plan which together
impermissibly shield the alien's capital from risk.
Finally, the investment plan detailed here also provides an option for
the alien to withdraw his or her capital investment before or at the time
the alien makes the balloon payment. The amount of the balloon payment
cannot be deemed to meet the "at risk" requirement of the regulations
because the amount of the balloon payment is not available to the job-
creating business during the payment period of the promissory note and the
alien can ensure that it never becomes available. The practice of
permitting the sell option to be exercised prior to the alien's making the
final payment on the promissory note was expressly rejected in Service
internal policy memoranda issued on October 1, 1996, and in December 16,
1996, and October 20, 1997. With regard to the particular petition
detailed above, it should be noted that the terms of the agreement do not
comply with the policies set forth in these memoranda, even assuming that
the terms of the investment agreement (which permits the sell option to be
exercised on the same date as the balloon payment comes due) are binding
and the terms of the partnership agreement are not. Specifically, under
the language of the investment agreement, although the final payment on the
promissory is due on the same date that the alien may exercise his or her
sell option, the agreement nevertheless permits the alien to exercise his
or her sell option prior to actually making the final payment.[6]
An agreement that uses promissory notes combined with buy-and sell-
back options impermissibly avoids risk in contravention of current
regulatory requirements because it greatly reduces the possibility that the
aline's funds will be made available to job-creating or job-preserving U.S.
businesses. Moreover, the fact that such a plan allows the commercial
enterprise to retain some of the contributed capital after the alien sells
or the partnership buys the alien's interest merely highlights the fact
that any "risk" incurred by the alien is contractual in nature and is
therefore unrelated to the activities of the business.
It is important to note that the impermissible insulation from risk
discussed here is substantially different from that discussed in our legal
opinion of September 10, 1993. In that opinion our office indicated that
an alien may enter into an agreement with a third party to guarantee that
the aline receives a return on his or her investment. In contrast to
arrangements described above, a third party guarantee does not prevent the
alien's capital from being placed at risk for the purpose of generating a
return on risk capital used by the new commercial enterprise. For a third-
party guarantee to be permissible, the alien would have to place his or her
money into the new commercial enterprise for the use of the business.
Similarly, where the new commercial enterprise functions as a conduit for
investment into job-creating U.S. businesses, the alien's funds must be
made available for the use of those job-creating U.S. businesses. That
capital would be at risk of loss and could be used by the enterprise. The
third party guarantee protects the alien from risk, but does not prevent
capital from being placed at risk in the new enterprise. Moreover, in our
legal opinion of June 27, 1995, we specifically held that an agreement that
the new commercial enterprise buy back the alien's investment after the
two-year conditional residence period but prior to the final payment to a
third party lender who provided the alien's capital was impermissible
because it shielded the alien from the risk of loss. Such an agreement
impermissibly shifted the risk of loss to the third party lender. Plans
involving the provisions outlined above are similar to that which we
rejected in our legal opinion, except that they do not involve a third
party lender.
It can be argued he plan detailed above does in fact meet the risk
requirements in the regulations. The argument would run as follows. The
requirement in the regulation is that the "required amount of capital be
placed at risk for the purpose of generating a return on the capital place
at risk. Evidence of mere intent to invest, or of prospective investment
agreements entailing no present commitment, will not suffice to show that
the petition is actively in the process of investing. 8 C.F.R. §
204.6(j)(2). The regulations define "capital" to include "indebtedness
secured by assets owned by the aline entrepreneur ..." (i.e. secured
promissory notes). Further, the regulations state that evidence to "show
actual commitment of the required amount of capital ... may include but is
not limited to ... evidence of any loan or mortgage agreement, promissory
note, or other evidence of borrowing ...." 8 C.F.R. § 204.6(j)(2)(v)
(emphasis added). Arguably, under these rules the plans under
consideration conform to the regulation in that the promissory note
constitutes capital and has been provided as evidence the actual commitment
of capital. However, we note that, as discussed above, the promissory note
must have a fair market value sufficient to meet the alien's statutory
investment requirement. If it doe not then it is not a sufficient
contribution of capital. In addition, the combination of the terms of the
promissory note and sell and buy options undercuts any finding that the
note represents a sufficient "actual commitment" of the requisite amount of
capital. By requiring an "actual" commitment, the regulations make clear
that the Service is not to elevate form over substance.
The example plan permits reinvestment of the proceeds of the new
commercial enterprise to be counted as part of the required amount of
capital invested and therefore do not constitute an "infusion" of
capital as required by the statute
Under the reviewed plan, the alien begins to receive guaranteed yearly
payments on his or her investment at the same time the alien begins to make
the installment payments on the promissory note. The note payments and the
yearly return have roughly equal values. Therefore the alien's payment on
the promissory note essentially comes from the return on his or her
original cash contribution and is not an investment or infusion of new
capital into the new enterprise. In fact, advertisements and internal
documents form one company that organizes EB-5 investments state that the
return on the investment will be directly applied to make the payment son
the promissory note so that the alien doe snot have to make any further
cash payments to the commercial enterprise. The company's training manual
provided to "finders" of alien investors states specifically that "[t]he
investor must execute a promissory note for the full amount of the
investment ... After the initial payment the partnership makes guaranteed
annual distributions to the limited partner which are used to offset the
annual payments that the investor is required to make on the promissory
note." As indicated above, the Service has denied at least one petition
based on the fact that the capital being contributed was coming from the
new commercial enterprise itself and the District Court upheld the
Service's decision. See De Jong v. INS, Civ. No. 6:94cv850 (unpublished,
E.D. tex. Jan. 16, 1997).
The promissory notes do not have sufficient fair market value to meet
the alien's capital investment requirements under the statute and
regulation.
As indicated above the Service's regulations require that all capital
be valued at fair market value in United States dollars. See 8 C.F.R. §
204.6(e). In the plan discussed in detail above, the promissory note was
contributed as $380,000 worth of capital. However, such a promissory note
most certainly does not have a fair market value of $380,000 dollars, even
if adequately secured by the alien's property. With respect to its value
to the new commercial enterprise prior to the time the balloon payment is
due the note, which is collateralized by foreign assets, is either non-
negotiable, or, even if negotiable, would be subject to a heavy discount.
As noted above, in a case where the new commercial enterprise is in the
business of lending to job-creating U.S. businesses which is dependent on
loans from a third party, such as a warehouse lender, the lender would not
consider the note to have the same value as cash for purposes of
determining loan amounts. Further, with respect to the final balloon
payment of $290,000, the promissory notes are nearly valueless. As soon
as, and perhaps before, the alien becomes liable to make the balloon
payment, the alien has a right to sell his interest back to the partnership
for a sum equal to or greater than the value of the balloon payment. Upon
sale of the alien's interest the note is extinguished. Further, if the
partnership fails to make this or any other payment to the alien, the
alien's obligations under the note are extinguished. Even if the alien
cannot exercise the sell option until the day the final payment is due, the
alien would appear to have a clear avenue to avoid payment on the note. If
the alien wishes to avoid the final payment, he or she simply needs to
withhold it and then exercise the sell option. Presumably the partnership,
having failed to receive the alien's final payment, would not pay the alien
the sell price. Under the agreement, this sequence of events would cause
the note to be cancelled automatically.
The full statutory amount is never committed to the new commercial
enterprise
A further problem with the plan detailed above is that the full
statutory amount of capital is never actually committed to the new
commercial enterprise as required under current regulations. See 8 C.F.R.
§ 204.6(j)(2).[7] The majority of the money, $290,000, does not become
available to the business until six years after the initial investment, and
at that time (and perhaps before) the alien may withdraw that portion of
his or her investment as soon as it is made (though the partnership has six
months in which to make actual payment), if the alien does not use the
above noted strategy to avoid payment altogether. In addition, under the
plan used as an example here, it would appear that the majority of the cash
that is put into the new enterprise is not made available to any job-
creating business; there is a requirement to maintain such cash in a bank
account to cover contractual buy back obligations. In cases in which an
alien has already been granted condition resident status, it is important
to closely scrutinize what has been done with the cash contributed. If any
portion exceeding that required for normal cash reserves has not been used
in the actual operations of the business, but has been held in a bank or
trust account, then that portion of the cash cannot be counted towards the
minimum investment amount required under the statute.
It might be argued that under current laws and regulations the
existing plans are valid even if the money never reaches the target
business. Because the term "capital" is defined in regulation to include
promissory notes and the presentation of a promissory note is considered
evidence of commitment of capital, the aliens using these plans could argue
that by providing the new business with a promissory note, they have met
the requirement of committing required amount of capital to the new
enterprise be placed at risk. They might argue that if they can
demonstrate employment creation as matter of fact, then they do not need to
show that the capital was actually made available to the target business.
While these arguments might be used to demonstrate minimal compliance with
the letter of the regulations, it is clear that any plan that permits an
alien's money to sit in an interest-bearing account until it is later
returned to the alien frustrates the whole purpose of a statutory and
regulatory scheme designed to grant visas to "alien entrepreneurs" who
"establish a new commercial enterprise" for the purpose of generating
profit on capital placed at risk. In fact, if the alien's money is not
being used by the employment-creating business, that fact raises serious
questions as to whether the jobs allegedly created or preserved can
honestly be attributed to the alien's "investment."
The Service's authority to deny or revoke petitions
In creating the EB-5 program, Congress expanded the Service's mission
to include adjudication of potentially complex business visa petitions. In
implementing this legislation, the Service fashioned an essentially sound
regulatory framework to address the sometimes competing aims of encouraging
aliens to invest in job-creating or job-preserving businesses in this
country and the need to guarantee that investments meet the statutory
requirements and are not designed to circumvent the immigration laws. In
the first years following the inception of the EB-5 program, however, the
Service lacked sufficient empirical or theoretical knowledge of business
practice to gain a full understanding of the great potential for evasion of
these new statutory and regulatory requirements. Over time, however, the
Service has gained a continuously greater understanding of the complex
business arrangements employed by prospective immigrant investors and
program sponsors.
With its increased knowledge, it is now clear to the Service that the
programs discussed above violate existing law. The fact that the Service
has favorably adjudicated a number of petitions involving the business
plans we now find to be deficient under the current statute and regulations
does not, as a matter of law, prevent the Service from denying future
petitions involving such plans. See e.g. Federal Trade Comm'n v. Crowther,
403 F.2d 510, 513-14 (D.C. Cir. 1970) (an agency "is not bound to decide
all future cases in the same way as it has decided a like one in the
past"); National Black Media Coalition v. Federal Communications Comm'n,
775 F.2d 342, 364 (D.C. Cir.) (an agency may change its interpretation of
law, "especially where the prior interpretation is based on error, no
matter how longstanding"), cert. denied, 429 U.S. 890 (1976). As the
Supreme Court stated in NLRB v. Weingarten, 420 U.S. 251 (1975), to hold
that an agency's decisions freeze the development of important aspects of
the law "would misconceive the nature of administrative decision-making.
`Cumulative experience begets understanding and insight by which judgments
... are validated or qualified or invalidated. The constant process of
trial and error, on a wider and fuller scale than a single adversary
litigation permits, differentiates perhaps more than anything else the
administrative from the judicial process'" Id. at 265-66, quoting NLRB v.
Seven-Up Co., 344 U.S. 344, 349 (1953). Rather, courts have held that an
agency must provide a reasoned explanation of the basis for denying an
application or petition if such denial results from a change in policy.
Delta Air Lines v. Civil Aeronautics Bd., 561 F.2d 293, 311 (D.C. Cir.
1970), cert. denied, 434 U.S. 1045 (1978).
Denials of new petitions
As discussed above, the actions to be taken based on this memorandum
would not result from a reassessment of current Service policy, but would
derive directly from existing statutory and regulatory law. For this
reason, it is our opinion that no advance notice is required to adjudicate
petitions in a manner consistent with this memorandum. As in all cases,
of course, the Service should provide a reasoned explanation as to the basis
for any such denial, a d discuss, if appropriate, why such decision might be
different from that made in similar cases in the past. Further, because the
substantive legal standards which apply to approvals of petition are the same
as those which apply to revocation of petitions, an unsuccessful petitioner
would not be able to argue successfully that the Service erroneously denied
his or her petition based on the prior grant of similar petitions in the past,
since such erroneously approved petitions would also be subject to revocation.[8]
Revocation of erroneously approved petitions
Similarly, the fact that the Service erroneously approved individual
petitions, regardless of how many, does not now bind it, with its greater
understanding of the true nature of these business plans, from instituting
revocation proceedings in accordance with section 205 of the Act. Even in
the absence of a specific statutory provision authorizing reconsideration
of decisions (including final decisions) courts have consistently held that
every agency has the "inherent power to reconsider its own decision within
a reasonable period of time." Bookman v. U.S., 453 F.2d 1263, 1265-66 (Ct.
Cl. (1972); see also, Dunn and Bradstreet v. U.S. Postal Service, 946 F.2d
189, 193 (2d Cir. 1991) ("[i]t is widely accepted that an agency may, on
its own initiative, reconsider its interim or even its final decisions,
regardless of whether the applicable statute and agency regulations
expressly provide for such review.") and Belville Mining Company v. U.S.,
999 F.2d 989, 100 (6th Cir. 1993).
In revoking the petitions under consideration here, however, the
Service need not rely solely on this inherent power because Congress has
specifically granted the Attorney General (and the Service by delegation)
broad authority to revoke approval of "any petition," "at any time, for
what [s]he deems good and sufficient cause." Section 205 of the Act. The
regulations implementing section 205 of the Act provide Service officers
with great discretion to revoke the approval of a visa petition. Section
205.2(a) of the Service's regulations states that any Service officer
authorized to approve a petition under section 204 of the Act may revoke
the approval of that petition upon notice to the petitioner on any ground
other than those specified in section 205.1 when the necessity for the
revocation comes to the attention of the Service.[9]
Should the Service decide to revoke the approval of the petitions at
issue here, it would be on the ground that, although the petitions were
approved, the petitioners had not in fact established eligibility under the
controlling statute and regulations. It is axiomatic that there is "good
and sufficient cause" to revoke an approved petition when it is discovered,
upon further and closer review, that the approval was not in accordance
with existing statutory and regulatory requirements governing adjudication
of the petition. In fact, the BIA has ruled that the realization by the
district director that he erred in approving the petition, however arrived
at, may be good and sufficient cause for revoking his approval, providing
the district director's revised opinion is supported by the record.
Matter of Ho, 19 I&N Dec. 582, 590 (BIA 1988); see also Matter of Li, 20
I&N Dec. 700 (BIA 1993) (determining that ineligibility as a matter of law
is good and sufficient cause). The authority to revoke visa petitions is
enhanced by the preliminary nature of the grant of a petition. An alien
cannot claim to have relied on it as a final determination that he or she
is admissible or would be admitted. As the Ninth Circuit has held, "a visa
petition is not the same thing as a visa. An approved petition is only a
preliminary step in the visa application process." Tongatapu Woodcraft
Hawaii v. Feldman, 736 F.2d 1305, 1308 (9th Cir. 1984). Based on the
above, it is clear that the Service has the authority to review visa
petitions and revoke approval when it has been improperly granted.
Termination of conditional permanent residence
The Act and regulations also specifically provide a procedure for
correcting an erroneously approved immigrant investor petition even after
the alien has been granted his or her immigrant visa. Under section
216A(b) of the Act the Service may terminate an alien's conditional
permanent resident status at any time it determines that the requirements
of section 203(b)(5) of the Act have not been met. Section 216A(b)(1) of
the Act.
Because an alien who has been granted conditional residence presumably
will have made an "investment" of some kind in a U.S. business and will
have moved his or her residence to the United States, such an alien might
argue that it would be arbitrary and capricious action for the Service to
terminate his or her conditional residence since the alien acted in
reliance on the Service's approval of the petition. The alien might argue
further that the Service would therefore be estopped from terminating
conditional residence. However, as in the case of revocation of a visa
petition, the Service has inherent and statutory authority to reconsider
its decision and terminate conditional residence. Such a reliance or
estoppel argument, however, would be weak for a number of reasons. First,
while there is some authority for the proposition that an agency cannot
reconsider a decision when it knows that the affected party will act in
reliance on the decision, see e.g. McAllister v. United States, 3 Cl. Ct.
394, 398 (1983), it is clear that "reliance on [an] erroneous ...
determination is no bar to reconsideration, based on ... inherent agency
authority." Belville Mining Company v. U.S., 999 F.2d at 999. Second, in
enacting section 216A of the Act, Congress has specifically granted the
Service the continuous authority to reconsider whether an alien granted
conditional residence is in compliance with the terms of the section
203(b)(5) of the Act. Third, the grant of resident status is by the terms
of the statute "conditional." Therefore, the alien cannot argue that he or
she took any action in reliance on the expectation that the Service would
remove the condition and make his or status permanent. Finally, as a
general rule, the doctrine of estoppel cannot be used against the
government. As the Supreme Court indicated in Office of Personnel
Management v. Richmond, 496 U.SD. 414 (1990), the Courts of Appeals have
searched "for an appropriate case in which to apply estoppel against the
Government, yet [the Supreme Court] has reversed every finding of estoppel
[it has] reviewed." Id. at 422.
Proceedings after removal of conditions
Moreover, the Act and regulations provide a procedure for the
rescission of such permanent resident status after removal of conditions if
the initial grant was based on an erroneously approved immigrant investor
petition. See section 246 and 8 C.F.R. part 246. Alternatively, the
Service may place an alien whose status was erroneously adjusted, or who
was erroneously admitted as a lawful permanent resident, in removal
proceedings.
While this memorandum merely directs that the Service reconsider or
adjudicate petitions in light of existing statutory and regulatory law, an
alien might argue that, b following this memorandum, the Service would in
fact be engaging in prospective, legislative rule making that would require
prior public notice and comment under the Administrative Procedures Act
(APA). 5 U.S.C. § 553(b), (e). See, e.g., Patel v. INS, 638 F.2d 1199
(Board of Immigration Appeal's imposition of a "judicially-created" job
creation requirement under the old investor exemption to the labor
certification requirement in former section 212(a)(14) of the Act rather
than waiting for the Service to finalize its proposed rule was an
impermissible circumvention of the APA); and Ruangswang v. INS, 591 F.2d 39
(1978). However, even if we were to concede that the Service is adopting a
rule by correcting the erroneous decisions of its adjudicators, such a rule
would be an interpretive rule, and thus fall within the exception to the
APA's notice and comment requirements. 5 U.S.C. §552(b)(A). Here the
Service is only applying the plain language of a properly issued
regulation, or, at most, interpreting language already in such a
regulation. "The agency is not adding or amending language to the
regulation, hence it is not subject to notice and comment procedures."
Beazer East Co. v. EPA, 963 F.2d 603, 606 (3rd Cir. 1992).[10]
Previously issued memoranda and correspondence
The Service, as part of its ongoing efforts to deal with highly
complex questions posed in the administration of the EB-5 program, has
issued limited guidance with respect to certain discrete issues which have
arisen in the context of adjudicating petitions involving sophisticated
business plans. Such limited guidance has been issued in the form of
policy memoranda, correspondence, or other form of communication, parts of
which may be inconsistent wit this memorandum and existing statutory and
regulatory law. To the extent that these memoranda are inconsistent with
the interpretation of the regulations and statute set forth in this
memorandum, they are superseded by this memorandum. If the Service should
encounter arguments that it is somehow bound or estopped by these previous
memoranda, it must be noted that "not all agency publications are of
binding force" and these internal memoranda are most likely the kind of
agency publications that are not enforceable against and agency. Lyng v.
Payne, 476 U.S. 926, 937 (1986).
Even if one were to accept, arguendo, that the Service is not
permitted to alter prior erroneous interpretations of the statute and
regulations, as we have explained, the large majority of the legal
deficiencies contained in the plans analyzed in this memorandum simply have
not been addressed in any prior Service statement or communication. For
example, the Service has not previously analyzed whether, or to what
extent, these plans are debt arrangements. Because of the complexity of
the plans, adjudicators have simply failed to recognize that these plans
are in fact debt arrangements, and, therefore, the Service has improperly
approved many petitions that, as shown above, do involve debt arrangements.
It might also be argued that the Service's prior memoranda approve certain
aspects of these plans that, when taken together, make them debt
arrangements. Even assuming this to be true, this does not permit, much
less require, the Service to approve a petition involving a debt
arrangement that is expressly and unequivocally prohibited by regulation.
"It has been well established in a variety of contexts that properly
promulgated, substantive agency regulations have the `force and effect of
law.'" Chrysler Corporation v. Brown, 441 U.S. 281, 296 (1979), citations
omitted. The Service and its adjudicators are bound by the Services
regulations (see, e.g., U.S. v. Caceres, 440 U.S. 741 (1979)) and, as
stated above, the Service has both inherent and clear statutory authority
to reconsider and reverse decisions that contravene the regulations. It
fact, the Service has a legal duty to enforce its regulations properly,
and, as we have noted above, it is highly unlikely that it would even be
deemed estopped from doing so.
In sum, the Service may deny or revoke the petitions, or terminate the
conditional residence, of aliens whose petitions are based on plans that do
not comport with the current statute and regulations without the need for
additional formal rulemaking under the APA or special published notice in
the Federal Register. Nevertheless, as a courtesy to the public, this
office recommends that the Service publish field guidance consistent with
this memorandum in the Federal Register, accompanied by a statement that
such guidance supersedes any prior inconsistent guidance to the field.
Conclusions
Based on our review of the available materials, including a number of
visa petitions filed with the Service, we conclude that the business plans
under review fail to comport with the current statute and regulations for
EB-5 visas. Accordingly, we have determined that the Service must review
the files of aliens who have filed or been granted visa petitions in EB-5
cases to determine if the petitions comport with the law as discussed in
this memorandum. In any case where an examiner has determined, in
accordance wit normal procedures for adjudication as set forth in 8 C.F.R.
part 103, that the underlying plan fails to meet the statutory or current
regulatory requirements, such petition must be denied. In cases in which a
visa petition has been granted and the alien is awaiting the issuance of an
immigrant visa or adjustment of status, a petition based on a investment
plan that does not meet the requirements of law must be revoked in
accordance with 8 C.F.R. part 205. If the petitioner indicates that he or
she is willing to modify the terms of the "investment" to comport with
existing statutory or regulatory requirements, the petitioner should be
instructed to file, as appropriate, a new or amended petition. In addition
the Service should terminate the status of aliens granted conditional
permanent residence based on visa petitions not in compliance with the
current statute and regulation. Specifically conclude that:
1. If an examiner determines that a particular petition relies on any
kind of debt arrangement as a part of the minimum "investment," the
examiner must deny or revoke the petition as a matter of law because it
fails to meet the requirements of current Service regulations.
2. If an examiner determines that a promissory note used to meet the
statutory minimum contribution of capital does not have a fair market value
equivalent to amount of the minimum capital contribution the note
represents, the examiner must deny or revoke the petition as a matter of
law because it fails to meet the requirements under current Service
regulations.
3. If an examiner determines that an insufficient portion of the alien's
capital contribution will be made available for use by actual job-creating
or job-preserving U.S. businesses, the examiner must deny or revoke the
petition as a matter of law because it fails to meet the requirements under
current Service regulations.
4. If an examiner determines that the capital contributed by an alien has
not actually been placed at risk for the purpose of generating a return on
the capital placed at risk, the examiner must deny or revoke the petition
as a matter of law because it fails to meet the requirements under current
Service regulations.
5. If an examiner determines that any portion of the capital invested by
the alien will be applied toward meeting payment obligations on a
promissory note used as capital, the amount of the alien's capital
contribution must be reduced by that amount. If after such reduction the
alien falls below the required minimum investment amount, the petition must
be denied or revoked as a matter of law because it fails to comply with the
Service's current regulations.
I. Recommended procedures with respect to: (a) pending and future
petitions at Service Centers and (b) revocation of petitions prior to the
granting of an immigrant visa, and recommendations to the Department of
State with respect to procedures to follow for pending visa applications.
We recommend that Service Centers (or consular officers) adjudicating
EB-5 cases involving any or all of the features described above make an
assessment as to whether the plan presented in fact constitutes a genuine
investment and otherwise meets the requirements of the statute and current
regulations. To this end, we recommend that the Office of Programs prepare
a policy memorandum summarizing the criteria discussed in this memorandum
for determining whether an arrangement meets current regulatory
requirements. The substantive standards for approval and revocation of an
EB-5 petition are the same; the basic difference between these types of
actions is that, unlike at the initial petition approval stage, in a
revocation proceeding, the burden is on the Service, and not on the alien.
In all cases where an examiner determines that a petition should be denied
or revoked, the examiner should contact HQBEN before issuing the denial
notice or the notice of intent to deny.
We note that the State Department Visa Office has informed our office
that it will adhere to Service guidelines with respect to standards for the
adjudication and approval of EB-5 visa applications. For this reason, the
policy memorandum should also be disseminated to the appropriate State
Department authorities. Specifically, this policy memorandum should
contain the following instructions:
1. Service Centers should assess whether the "investment" arrangement is
in fact an impermissible debt arrangement. We strongly recommend that the
policy memorandum explain that the existence of guaranteed returns and a
fixed buy-back amount or a buy-back at other than fair market value at the
time of repurchase is a strong indication that the arrangement is in fact a
debt arrangement, and therefore specifically precluded under current
regulations. Examiners should be reminded that the principal
characteristic of a debt arrangement is that, unlike equity, under a debt
arrangement an alien is contractually assured a specific return regardless
of whether the underlying business is generating a profit or loss.
Moreover, the fact that the commercial enterprise may not at some point be
able to meet a scheduled guaranteed payment will not change the nature of a
debt agreement into an equity relationship. A creditor always faces the
risk that the debtor will become insolvent.
Examiners should be reminded further that not only are debt
arrangements impermissible under the current regulations, but "convertible
debt" arrangements are also precluded. In this regard, examiners should be
reminded that even if the alien is given a contractual right to remain in
the "investment" after making a final payment on an installment agreement,
such a right may in fact simply be in the nature of a convertible debt,
whereby the alien may convert the debt relationship into an equity
relationship with the enterprise. Moreover, if the various contracts
submitted indicate that the commercial enterprise has the right to buy out
the alien's ownership interest at a fixed price or at other than fair
market value at the time of repurchase, such an arrangement may in fact not
even rise to the level of a convertible debt, but may simply be a debt
arrangement. The policy memorandum should contain a brief discussion of
the need to weigh the debt characteristics of the arrangement against the
equity characteristics of the arrangement. The policy memorandum should
set forth the nine criteria for establishing the existence of a debt, as
well as the six criteria for establishing the existence of equity.
2. Service Centers should assess whether or not any promissory note used
toward meeting the statutory capital amount has a fair market value in U.S.
dollars sufficient to meet, in combination with case and other capital
contributed, the statutory minimum requirement. In this regard, Service
Centers should provide the petitioner with the opportunity to establish the
value of the note by presenting a written appraisal from one or more
reliable independent sources. In all cases, however, the burden is on the
petitioner to establish eligibility for petition approval and thus, the
actual fair market value in U.S. dollars of the promissory note.
Therefore, a mere contractual clause or other pronouncement that the
parties to the promissory note have agreed that the note shall have a
specified "fair market value" is insufficient to meet this requirement.
Moreover, if the examiner is not satisfied that the statutory minimum
requirement has bee met, he or she may ask for additional evidence.
Examiners should be made aware of the effect of a balloon payment and
buy/sell-back provision on the fair market value of the note. If the
provisions of the plan allow the alien to extinguish the alien's obligation
on the note by means other than full payment of the amount due on the note,
then the value of the note will be greatly reduced to any prospective
purchaser of the note. Finally, examiners should be reminded that there
may, of course, be other indications that the promissory note does not have
sufficient fair market value to meet the statutory and regulatory
requirements.
3. Examiners must be satisfied that the investment and limited
partnership agreements submitted with the petition will ensure that a
sufficient portion of the alien's capital contribution will actually be
made available for use by actual job-creating or job-preserving U.S.
businesses. We recommend that adjudicating officers pay close attention to
the details of the respective investment and, in the case of a limited
partnership, the limited partnership agreement, to determine what portion
of the alien's contribution actually becomes available to job-creating U.S.
businesses. In this regard, adjudicators should pay close attention to any
contractual clauses requiring that certain portions of any alien's
investment capital be set aside in bank accounts or otherwise withheld form
the operations of job-creating businesses to meet buy-back obligations.
Similarly, examining officers should assess what amount, if any, of the
alien's capital contribution will be applied to "administrative fees."
Certain types fees, such as immigration attorney fees, that are not related
to the operations of the new commercial enterprise cannot be paid out of
the alien's capital contribution. For other fees, the burden is on the
petitioner to establish that such fees are not unreasonable. An examining
officer should be satisfied that the amount of capital that, per the
investment and/or limited partnership agreement, can actually be made
available to job-creating businesses (as opposed to, for example, that made
available to a limited partnership organized for the purpose of investing
funds in job-creating businesses) will be sufficient to ensure the
requisite job creation or preservation. Further, in determining whether
the proposed "investment" can reasonably be expected to create the
requisite jobs, the examiner may request that the petitioner demonstrate
that money invested in the particular "investment" plan has historically
been made actually available for the use of the job-creating U.S.
businesses. Further, in case of "regional centers," examiners should be
satisfied that the "methodologies" used by the prospective investor with
request to projected indirect job creation are in fact "reasonable." Thus,
they may take into consideration all relevant factors affecting such
projections, including the fair market value of any promissory note used as
capital. The issue of whether or not the alien's capital contribution has
actually been made available to the job-creating U.S. business should also
be carefully scrutinized at the time the alien petitions for the removal
the condition on his or her permanent resident status.
4. On a similar note, examiners should be satisfied that the capital
contributed will actually be placed at risk for the purpose of generating a
return on the capital placed at risk. We further recommend that the policy
memorandum make clear that the burden is on the petitioner to establish
that any capital contributed is actually placed at risk for the purpose of
generating a return on the capital placed at risk. In this regard, the
existence of guaranteed returns and a fixed buy-back amount at other than
fair market value is not only a strong indication that the arrangement is
actually a debt arrangement, and therefore precluded under current
regulations, but also may impermissibly reduce or eliminate an alien's risk
of loss from the "investment."
5. Examiners must be satisfied that no portion of capital invested by the
alien will be applied toward meeting payment obligations on a promissory
note used as capital. Examiners should be reminded that Congress intended
aliens to "infuse" capital into new commercial enterprises. The
regulations specifically preclude the use of any assets of the underlying
business to secure a promissory note used as capital. Similarly, an alien
may not use the assets or proceeds of the new commercial enterprise to meet
the statutory minimum requirements. Adjudicators should therefore examine
the documents submitted in support of a petition to determine whether they
permit an alien to apply interest or proceeds from any cash or other
capital contribution toward making installment payments on a promissory
note used to meet the minimum capital requirements. Such proceeds may not
be counted in any way as part of the alien's minimum capital contribution.
At the time that the alien petitions for the removal of the condition on
his or her permanent resident status, the examiners should closely
scrutinize the financial transaction in the investment to determine if any
of the capital or proceeds of the new commercial enterprise have been used
to meet the alien's required minimum investment amount.
6. Examiners must carefully review agreements that include a promissory
note and buy- and sell-back agreements in light of the Service's prior
policy memoranda. Specifically, these policy memoranda have consistently
and clearly stated that investment plans must "specifically provide that an
investor may not exercise a sell option (and the new commercial enterprise
cannot exercise a buy-out option) until the promissory note is paid in
full." (emphasis added). The adjudicator should closely review the terms
of the agreement to ensure that the agreements legally bind the alien to
fully pay off the note prior to the exercise of a sell or buy agreement.
The fact that sell and buy options cannot be exercised until after the date
that the promissory note is due (as opposed to actually paid) does not mean
that this requirement is met; the sell and buy options must be specifically
conditioned on full payment of the note. It should be noted that, under
basic principles of contract law, oral agreements between the new
commercial enterprise and the aliens, or written or oral assurances from
the new commercial enterprise's representatives that the option will not be
exercised until after payment is made are not sufficient, as they do not
legally bind the alien nor in any way prevent the alien from exercising the
sell option prior to making full payment on the promissory note.
II. Recommended procedures with respect to aliens who have been lawfully
admitted or permanent residence under section 203(b)(5) of the Act but
whose conditional basis for such status has not yet been removed.
A. In general
The status of an lien who has been granted conditional permanent
resident status on the basis of an erroneously granted immigrant investor
visa petition is, by statute, subject to termination at any time up to the
removal of the conditions of such status. Prior to the two-year
anniversary of the date of the alien's admission, the Service may initiate
termination proceedings if an alien has been granted conditional resident
status based on a visa petition that does not comport with the statute or
regulation because it is based on an investment plan containing the
provisions discussed above. In any case in which termination proceedings
have not been initiated, the Service should carefully examine the alien's
petition for removal of conditions (which will be filed as the alien nears
the end of the two-year conditional period) to determine whether the alien
has complied with the statutory and regulatory requirements, including, but
not limited to, whether: (1) the alien has actually contributed "capital,"
as defined in the regulations; (2) if so, the alien has placed the capital
"at risk" for the purpose of generating a return of such capital placed at
risk; and (3) such capital was in fact made available to job-creating U.S.
businesses during the two-year period of conditional residence. If it is
determined that the alien failed to meet any of these requirements, or
otherwise is subject to termination of his or her resident status under
section 216A, the adjudicating officer must terminate the resident status
in accordance with that provision and 8 C.F.R. 216.6.
B. Termination prior to the filing of the Form I-829
If in the cases under consideration here the Service decides, as a
general rule, not to initiate termination proceedings prior the two year
anniversary of the alien's admission, we recommend that the service,
nevertheless, initiate termination proceedings prior to the second
anniversary of the alien's admission as a lawful permanent resident under
section 203(b)(5) of the Act in all cases where the Service becomes aware
that the new commercial enterprise is no longer in existence.
C. Termination after filing of the Form I-829
We recommend that adjudicators adhere to the following procedures in
adjudicating Forms I-829 involving "investment" arrangements containing any
of the above discussed features. Preliminarily, we note that, unless
waived by the director, an alien is required to appear for a personal
interview before the conditions on his or her permanent resident status may
be removed. Section 216A(c)(1)() of the Act. Further, the burden is on
the alien to establish compliance with the statutory requirements for
maintaining EB-5 classification. Section 216A(c)(3)(A) of the Act. Upon
finding that the facts alleged in the petition are not true, the Attorney
General is required to terminate the alien's conditional permanent resident
status. Section 216A(c)(3)(C) of the Act. Finally, an alien whose
permanent resident status is terminating may request a review of the
determination in a removal proceeding. Section 216A(c)(3)(D) of the Act.
In adjudicating the petition to remove conditions, adjudicators should
determine whether the alien has met current statutory and regulatory
requirements, including, but not limited to, determining whether the alien
in fact invested "capital" as defined in the regulations at 8 C.F.R.
204.6(e), bearing in mind that any promissory note used to met the minimum
capital requirements must have a fair market value in U.S. dollars. Thus,
even if a balloon payment on a promissory note will not be due until some
period after the conditions would be removed, the petitioner must be able
to establish the fair market value of the note at the time the conditions
are removed.
In addition, adjudicators should determine whether in fact the full
amount of statutory capital contributed has actually been made available to
job-creating U.S. businesses. Where the new commercial enterprise is a
limited partnership which serves as a conduit for investment in job-
creating businesses, it is not sufficient that the alien's capital has been
made available to the limited partnership; to meet the job creation
requirements, such capital must have "passed through" to the actual job-
creating businesses. In determining whether the funds have actually been
made available to such businesses, adjudicators should take into account
the fact that a business may legitimately require reasonable cash reserves.
Where, however, the business is unduly "cash heavy," this is an indication
that the capital has in fact not been placed "at risk" but has instead been
"parked" in violation of current regulatory requirements. In such a case,
the petition to remove conditions may be denied under sections
216A(c)(3)(C) and (d)(1)(B) of the Act, i.e., on the basis that the alien
failed to invest the requisite capital.
In adjudicating petitions to remove conditions in cases involving
investment plans of the type discussed in this memorandum, examiners should
first review the written record. If upon review of that record an examiner
has doubts as to whether petition to remove the condition should be
approved, or believes that permanent resident status should be terminated,
the examiner should contact HQBEN prior to scheduling an interview.
III. Recommended procedures in cases where the conditions of an alien's
permanent resident status have already been removed
Absent clear evidence of fraud, we recommend that the Service, at this
time, not commence rescission proceedings, or issue notices to appear, in
cases involving plans of the type reviewed above, where the conditions of
an alien investor's permanent resident status have already been removed.
This office will address this issue further at a future date.
IV. Federal Register Notice.
Although the Service is not required to do so by law, we recommend
that the Service, as a courtesy to the general public, publish in the
Federal Register any instructions to the field it may issue as a result of
this memorandum. We recommend further that the Service hold pending cases
in abeyance until such time as HQBEN publishes these instructions in the
Federal Register. We also recommend that such Federal Register Notice
begin with language to the following effect:
"The Immigration and Naturalization Service (the "Service") has
completed the first phase of its review of the alien entrepreneur immigrant
visa ("EB-5") program under section 203(b)(5) of the Immigration and
Nationality Act, as amended (the "Act"). Based on this review, the Service
has discovered that a number of petitions may have been approved despite
certain features which, upon closer analysis, do not conform to the current
statute and regulations because they involve debt arrangements, fail to
meet the minimum capital contribution requirements, or fail to place the
alien's capital at risk for the purpose of generating a return. The
service is issuing this notice to make clear to the public that any such
petition is subject to revocation pursuant to section 205 of the Act and
the Service's implementing regulations at 8 C.F.R. part 205. In addition,
the Service wishes to note that the conditional permanent resident status
of an alien who has been granted status on the basis of such a petition is
subject to termination pursuant to section 216A of the Act. Further, the
Service wishes to make clear that any petition which fails to comport with
existing regulations must be denied. Consistent with the above, and as a
courtesy to the public, the Service is now publishing in the Federal
Register the following policy memorandum which it has distributed to
adjudicators and field officers. This policy memorandum provides guidance
to adjudicators in applying current regulations to a variety of complex
business arrangements.
This memorandum supersedes any prior memoranda or correspondence issued by
the Service to the extent that such prior memoranda or correspondence are
inconsistent wit it."
David A. Martin
General Counsel
FOOTNOTES:
[1] These issues are not the only issues that might give rise to problems in
the plans under consideration and other plans, but those which have been
clearly identified thus far as requiring immediate attention. The absence of
any or all of these provisions does not, by itself, demonstrate that an EB-5
visa petition should be approved.
[2] In determining the fair market value of a promissory note, it is also
necessary to take into account the present value of the note as discounted
for inflation.
[3] The regulations further provide that no portion of the note may be
secured by assets of the new commercial enterprise. 8 C.F.R. 204.6(e).
Similarly, as noted immediately below, an alien may not apply profits or
proceeds derived from the alien's capital contribution toward meeting his or
her obligations on a note used toward meeting the minimum statutory capital
amount.
[4] Based on conversations with the Service Centers and the State
Department, it is our understanding that the vast majority of cases involving
these types of plans are very similar to the plan described above. However,
there are other petitions that use plans with different proportions of cash
and debt, including some all cash options. In one visa petition the
"subscriber" (investor) agreement offers the alien a payment and sell-back
options under which the alien may make an initial cash contribution of
$500,000 and exercise a sell-back option either three years or 5 years from
the date of the grant of conditional residence. If the sell option is after
5 years, the price is $535,000. If it is exercised after 3 years the price
is $475,000. It should be noted that while such a plan does not have all of
the objectional features of the type being reviewed in this memorandum and we
have not had an opportunity to review this plan fully, it appears to involve
an impermissible debt arrangement.
[5] We do not exclude the possibility that a business might maintain
reasonable cash reserves, but in the petition under review, the funds cannot
be considered reasonable cash reserves because the purpose of the "reserves"
is to fund the purchase of the alien's interest and not cover business
contingencies or normal operating expenses. According to an attorney in the
Department of Justice commercial litigation section our office has consulted,
cash reserves of normal businesses rarely exceed 3 months operating expenses.
In the case under review, the amount of the reserves constitutes a
substantial portion of all the capital invested.
[6] In this regard, the November 3, 1997, memorandum to the Service from the
alien's counsel regarding the petition reviewed above appears to be
inaccurate. It states that "the sell option may not be exercised until all
payments required by the promissory note have been made." Id. at 5 (emphasis
added). The agreement we have reviewed does not include such a requirement.
[7] Further review may reveal additional legal problems with these plans.
[8] Similarly, an alien's conditional resident status would also be subject
to termination if the status was granted based on an erroneously approved
petition.
[9] Section 205.1 of the Service's regulations sets out the conditions under
which certain visa petitions are revoked automatically.
[10] Courts have adopted a very lenient standard of review of an
administrative agency's interpretation of its own regulations. As stated in
Beazer East, Inc., 963 F.2d at 605, "[w]hen we review an administrative
agency's interpretations of its own regulations, we defer to the agency's
construction of the language of its own regulation, `unless it is plainly
erroneous or inconsistent with the regulation.'" (quoting Ford Motor Credit
Co. v. Milhollin, 444 U.S. 555 (1980).
Schedule A Legal Consultation
Return to How to Obtain a Green Card Through Investment
Return to Immigration Guide Homepage
