Funds for investment in EB-5 obtained through unsecured loans are now legal under the new Law of Zhang.
What is the Law of Zhang?
The recent decision by Zhang (Zhang v. USCIS Civil Action No. 2015-0995 (DDC 2018)) has the potential to greatly assist investors in financing investments that may qualify for immigration benefits under the EB-5 program. Understand the case here:
Prior to Zhang, USCIS imposed requirements on loans that an investor could use to create the funds (assets) that would be used for investment in EB-5. USCIS treated the proceeds of the loan as contributed “indebtedness,” which, under the regulations, required the debtor to be the primary debtor of the debt and to guarantee the debt with assets of at least equal value to the debt.
USCIS regulatory basis
In Zhang, Ira Kurzban successfully argued that loan proceeds were simply cash and not “contribution indebtedness.” In assessing the cash, the USCIS lacked the regulatory basis for imposing any conditions on how the money was obtained (qualities of the loan transaction), and demanded that the money came from legal sources. USCIS could not require, for example, that the loan transaction be a secured loan, nor could it require the investor to be the principal debtor.
Furthermore, the court has led the USCIS to ask (for its regular practice) to create requirements that go beyond what is contained in the appropriate rules (under the Administrative Procedure Act). This case opens up jurisprudence for a large number of USCIS practices for similar challenges.
Legally obtained capital and job creation
Fortunately, the court ruled, not only from a legal point of view, but also from a political perspective. In the original USCIS requirement, it was basically imposing a standard where only the value of an investor’s asset could be used to finance the investment. The court basically said correctly, “who cares,” as long as capital has been legally obtained and jobs are created in the United States economy, why would it matter if the source were debt or assets.
The USCIS should not worry too much about it. The policy is still solid. If the investor borrows the money from a friend and then fails to pay, this is a problem between the investor and his lender. Under the long-standing EB-5 rules, the EB-5 investor would not have the right to repay the investment (to repay the loan); nor should the investor use the EB-5 investment as a form of collateral for the loan (as this may have unpleasant consequences for immigration if collateral is confiscated). Regardless of what happens with the loan that produced the cash loan resources, the NCE still has the money, so the United States economy has obtained the intended benefit for which our country is providing legal permanent residence.
New possibilities for EB-5 investors
The holding company Zhang has the potential to open EB-5 to a much larger number of potential investors. Many potential investors do not have $ 500,000 in current cash or assets needed to secure a loan (as required by the now-defunct USCIS rule). Many have, however, friends and relatives with the necessary money they would be willing to lend to the investor.
Under the old rule, they could not invest asking for the funds because the ‘cash resources’ of that loan would not have met the requirements imposed by the USCIS. The only alternative would have been a gift or donation, which was often not desirable and created possible tax consequences. Now, under Zhang’s jurisprudence, unsecured loans are perfectly permissible.
Keep in mind that cash loan proceeds should still be proven by legal sources. If the loan is made from a trustworthy financial institution, based on current award standards, this should be sufficient; however, in the case of a loan from friends or relatives, prove the legality of how the lender got the funds would still be required.
This decision greatly expands the EB-5 market because many countries donate gifts, but not loans. Relatives may also be more willing to lend money, rather than offer it, dramatically expanding the capital available to a potential EB-5 investor. We hope that this decision will dramatically expand the EB-5 markets, especially in countries like Brazil, where donations are taxed with high taxes.
Original source: Witeradvogados