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What does “at risk” mean in EB-5?

By Suzanne Lazicki

Suzanne Lazicki is a business writer, EB-5 expert, and the owner of Lucid Professional Writing (www.lucidtext.com). Suzanne founded Lucid Professional Writing in 2009, and started the blog the following year as a way to keep her EB-5 clients informed about industry developments. 

What does “at risk” mean in EB-5?

EB-5 policy specifies that “To qualify as an investment, the immigrant investor must actually place his or her capital at risk.” 

The phrase “at risk” has a special definition in the EB-5 context that differs somewhat from common and tax usage. Certainly, EB-5 investors need not invest in risky projects.  The requirement reflects a basic immigration policy concern: to ensure that EB-5 capital is not “buying a green card,” but invested in business that creates jobs and economic benefit. 

An EB-5 investment is “at risk” if the capital is actually and fully invested, with a risk of loss and a chance for gain, and fully deployed in an active job-creating entity. The definition comes from regulations and two precedent decisions.

1. 8 C.F.R. § 204.6(j)(2)

From 8 C.F.R. § 204.6(j)(2):
– The petition must be accompanied by evidence that the petitioner has placed the required amount of capital at risk for the purpose of generating a return on the capital placed at risk. Evidence of mere intent to invest, or of prospective investment arrangements entailing no present commitment, will not suffice to show that the petitioner is actively in the process of investing. 

2. Matter of Izummi

From Matter of Izummi, and provisions in the USCIS Policy Manual Vol. 6, Part G, Ch. 2 Sec. A that cite Matter of Izummi: 
– For the alien’s money truly to be at risk, the alien cannot enter into a partnership knowing that he already has a willing buyer in a certain number of years, nor can he be assured that he will receive a certain price. 
-Any agreement between the immigrant investor and the new commercial enterprise that provides the investor with a contractual right to repayment is an impermissible debt arrangement.
-The full amount of money must be made available to the business(es) most closely responsible for creating the employment upon which the petition is based.
– If the immigrant investor is guaranteed a return, or a rate of return on all or a portion of his or her capital, then the amount of any guaranteed return is not at risk. (The investor can receive profit distributions, but the distribution cannot be a portion of the investor’s minimum qualifying investment and cannot have been guaranteed to the investor.)
– If the investor is guaranteed the right to eventual ownership or use of a particular asset, the expected present value of the guaranteed ownership or use of such asset will count against the total amount of the investor’s capital contribution in determining how much money was placed at risk. 

Matter of Ho

From Matter of Ho:
– Before it can be said that capital made available to a commercial enterprise has been placed at risk, a petitioner must present some evidence of the actual undertaking of business activity; otherwise, no assurance exists that the funds will in fact be used to carry out the business of the commercial enterprise.

Examples of how USCIS applies the at-risk requirement

Non-precedent decisions from the Administrative Appeals Office (AAO) provide practical examples of how USCIS applies the at-risk requirement in the regional center context, where the EB-5 petitioner invests in a new commercial enterprise (NCE) that then funds a job-creating entity (JCE). 

“Made available”:

The EB-5 investment must be made available for job creation. The EB-5 investor petitioner in APR052018_05B7203 put capital in escrow for an NCE that planned to make a loan to a JCE. However, the NCE’s program description memorandum and the loan agreement did not obligate the NCE to fund the loan to the JCE, or to necessarily loan the full amount of the petitioner’s investment. USCIS denied the investor’s petition in part for failure to demonstrate that her investment would certainly be made available in its entirety to the JCE. As an additional problem, the job-creating project finished construction while the petitioner’s funds were still in escrow, awaiting I-526 approval. USCIS wondered “why the JCE would still need her $500,000, or how the funds would create any jobs.” With no bridge financing agreement, the Petitioner was unable to show how her funds could still be considered “at risk” in the sense of being deployed to create jobs.

“Business activity”:

The JCE must be prepared to deploy the EB-5 funds.  APR022018_01K1610 concerns a request for exemplar I-526 approval that USCIS initially denied, in part based on finding insufficient evidence of business activity. Having conducted a site visit and viewed no construction activities, USCIS doubted that investor funds were at risk in the sense of being deployed in an active job-creating entity. On appeal, the applicant provided evidence of business activity including construction contracts, building permits, inspection records, and fee receipts. The AAO then agreed that “Thus, the Applicant demonstrates that its project has undertaken meaningful business activity and placed the EB-5 capital at risk.”

“Chance for gain”:

The EB-5 investment in the NCE must have the purpose of generating a return. In APR112018_01B7203, the EB-5 investor petitioner had signed a Limited Partnership agreement giving her no rights to the partnership’s profits. The agreement offered the investor an interest payment upon maturity of the loan between the NCE and JCE, but only at the option and sole discretion of the general partner, and from unspecified sources. USCIS denied the petition. “Discretionary chance for return which is unrelated to the investment does not satisfy the regulatory requirement for capital at risk.… An investment return needs to be both the purpose of the investment and derived from the underlying investment.” On the other hand, there’s no EB-5 requirement for how profitable an investment must be. In MAY182017_01B7203, USCIS tried to deny the petition because the investment terms appeared to preclude any chance for the EB-5 investor to break even on her investment in the foreseeable future. The AAO disagreed, finding that: “Neither the statute nor the regulation suggests that we should evaluate whether a particular investment is a good one for the investor, only that it constitutes an at-risk equity investment in the NCE. As the Petitioner is not guaranteed a return and the various agreements obligate the JCE to distribute profits, the record establishes a risk for both loss and gain.” (Of course, the investor should evaluate for herself whether the investment is a good one. The point is that timing and amount of profit is not a USCIS issue.)

“Risk of loss”:

The return on an EB-5 investment cannot be guaranteed. In 2018, call options became a test case for what can be considered a guaranteed return indicative of a prohibited debt arrangement between the EB-5 investor and the NCE. The EB-5 investor petitioner in Matter of C-F- originally had her I-526 denied because the NCE’s limited partnership agreement contained a provision that allowed the general partner, at its sole discretion, to notify the investor of its desire to redeem her interest at a price equal to all accrued and unpaid preferred returns and 100 percent of the investor’s capital contributions to the NCE. The AAO initially dismissed C-F-’s appeal (JAN172018_10B7203), agreeing with USCIS that the petitioner “did not demonstrate that she would risk suffering a loss on her investment consistent with an equity interest.” The question then went to district court, where the judge found that a call option is not a debt arrangement when it lacks this core feature of debt: the creditor’s contractual right to receive particular amount of money from debtor at a particular time. USCIS went on revise the EB-5 Policy Manual in October 2018 to specify that a redemption provision in the agreement between the EB-5 investor and NCE creates an impermissible debt arrangement if it is (a) mandatory or (b) exercisable by the investor, but not necessarily problematic if exercisable by the NCE.  “USCIS generally disfavors redemption provisions that indicate a preconceived intent to exit the investment as soon as possible, and notes that one district court has drawn the line at whether the investor holds the right to repayment.” The AAO then reopened Matter of C-F’s appeal and approved her petition (MAY302019_01B7203).

EB-5 Due diligence questions

Due diligence on an EB-5 offering should consider the at-risk requirement. Some questions to ask, in reviewing transactional documents and business plans:

  • Does the NCE offering agreement or limited partnership agreement offer the EB-5 investor terms consistent with an equity interest?
  • Do the business plan and offering show that the EB-5 investor has a chance both to profit and to lose from the investment?
  • Does the NCE offering guarantee the EB-5 investor a rate of return or asset that could be counted against the qualifying investment amount?
  • Do transactional documents obligate the NCE to make the full amount of EB-5 investment available to the JCE? Would any fees reduce the amount of capital that reaches the JCE?  
  • Does the business plan show how and when the JCE will deploy the full amount of EB-5 capital?
  • Does the business plan show that the job-creating project is well on the way to implementation, and prepared to move forward with EB-5 funds? 

These questions apply to the I-526 stage. The current USCIS Policy Manual extends the at-risk requirement up to the I-829 stage, asking the investor to demonstrate that “the required funds were placed at risk throughout the period of the petitioner’s conditional permanent residence in the United States.” This opens the complex issue of redeployment, which is a subject for another blog post.  

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