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Immigrant Investors
In 1990 The U.S. Congress enacted several major changes to the Immigration laws. One provision had the potential to attract foreign capital and create jobs in the U.S. The employment creation immigrant visa category, commonly referred to as the immigrant investor visa category (also known as the Employment Based Fifth Preference or “EB-5") has for many years been evolving toward its potential. The EB-5 category is set aside for alien entrepreneurs investing in commercial enterprises. Under this program foreign investors can bring new investments into the U.S. at an estimated level of $8.5 billion annually. They can also create 100,000 or more new jobs for U.S. workers each year. Yet, in the first five years after the enactment of this program, it appeared that the government had done everything in its power to insure the program’s failure. The publication of the regulations governing the Immigrant Investor Program was inordinately delayed. Regulations governing the final stage of the permanent residence process were not published until almost two years after the first investor petitions had been approved, and nearly three years after enactment of the provision of law. The rigid adjudication procedures adopted by the U.S. Bureau of Citizenship and Immigration Services (“BCIS (a.k.a INS)”) in immigrant investor cases were particularly discouraging. They set the pace and the tone for the first five years of the program. The BCIS (a.k.a INS) which is a hybrid agency charged with both law enforcement and adjudication of immigration benefits, continually applied a restrictive approach to these cases. The agency exhibited a lack of personnel with business expertise. Most immigration officers possessed neither the efficiency nor the depth of understanding needed to deal with the often complex business, tax, and corporate structuring issues of investment enterprises. Immigrant investor cases were treated with the same prosecutorial attitude as marriage fraud cases. The apparent mission of many BCIS (a.k.a INS) examiners was to find a reason to deny these petitions rather than to encourage investments and employment creation in the U.S. Aside from the combative attitude of the BCIS (a.k.a INS) officials, the program faced other serious problems. The regulations were much more complex and inhospitable than the statute had intended. The relatively burdensome capital investment required for the program coupled with the fact that permanent residence status was achieved only on a conditional basis discouraged many investors. These concerns directed many potential investors to the more favorable programs being offered by Canada and Australia. The initial official interpretations of the law and the regulations rendered the Immigrant Investor Program a second or third choice when compared to the less restrictive requirements of other countries. Prior to enactment, members of Congress had expressed fears that the Immigrant Investor Visa category would be tantamount to selling the United States to foreign interests. As it turned out, these fears were laughable and unfounded. In the first five years, there were not many "buyers." The restrictions and uncertainties noted above had effectively defeated the intent of Congress to create new employment opportunities in the U.S. and to introduce new investment capital. Many economists believe that the worldwide recession and economic uncertainty in the U.S. prior to 1995 also contributed to the lack of interest in this program. For these reasons, immigration lawyers had steered clients away from the program to alternate means of achieving their immigration goals. However, as is discussed here, we believe that the Immigrant Investor Program has come of age. As a result of the program’s initial failure, the government has begun to interpret the program in business terms that make sense. In the past three years, the program has emerged as a viable option for investors and it has the potential of kindling the economic germination in the U.S. that was intended by the Congress seven years ago. To be sure, many issues remain unresolved, but the program as it has evolved offers a greater variety of possibilities and workable structures. It is against this background that we report on the evolution of this program by defining its requirements.
1. Basic Principles
The initial grant of permanent residence is conditioned on subsequent proof that the investment has been made and sustained as required. Two years after becoming a conditional permanent resident under this program, the foreign investors must demonstrate that the commercial enterprise was established; that the required capital was invested; and that the enterprise created or can be expected to create within a reasonable time ten fulltime jobs for American workers. Upon the removal of the condition, the investor and his family’s permanent residence is granted unconditionally and for an indefinite period. As the meaning of the various parts of this program became more clearly defined, the program has begun to emerge as an important option for immigrants. As the definition of the program began to evolve in the language of business rather than that of law enforcement, the program began to attract the interests of the financial world. This remarkable evolution is best explained by reviewing the meaning of the programs components as the regulations and subsequent interpretations have defined them.
2. The Immigrant Investor Must Make a Capital Investment The definition of capital in the context of this program is primarily designed to ensure that the investment by the alien entrepreneur has placed the capital directly at risk. The prevailing interpretations indicate that capital is to be valuated at fair market value in U.S. dollars and it may have been acquired by any lawful means, including gifts, inheritances, and loans. The BCIS (a.k.a INS) now permits an alien to enter into a redemption, or similar, agreement with an investment fund in which the seller agrees to repurchase the investor's shares in the fund at fair market value following the final determination of the investor’s permanent residence status. After much wrangling over such arrangements the BCIS (a.k.a INS) conceded that this was permissible because the alien risks losing all or part of his own capital in the event the fair market value of the investment has fallen at the time of the repurchase. The BCIS (a.k.a INS) maintains, however, that a buy back agreement which would allow the repurchase, at fair market value, of all or part of an alien's investment of capital, borrowed from a third party lender, following completion of the two-year period, but before any payment on the promissory note is due, would impermissibly shift the risk of loss of the qualifying investment from the alien borrower to the lender. The BCIS (a.k.a INS) interpretation ignores the fact that business transactions routinely include such provisions. When a lender makes a loan without security, the borrower may, without repaying the lender, sell the asset purchased with the loan proceeds. Where an agreement of indebtedness, such as a promissory note exists between the investor and the lender, the investor has a legally binding obligation regardless of what he or she does with the proceeds of the loan. It is irrelevant to the investor (and his risk) what the terms of any borrowing from a third party might have been. The terms of the agreement of indebtedness and repayment are irrelevant because they do not affect the risk of the investor. This is an area that should be addressed by the BCIS (a.k.a INS) to bring its interpretations in line with commonly accepted business practices. The treatment of the issue of risk received a more favorable analysis by the BCIS (a.k.a INS) in the interpretations of permissible guaranty arrangements. The BCIS (a.k.a INS) agreed that a capital investment backed by a third party guaranty, or a promise to reimburse the alien if the investment is unable to return the alien's capital, is “at risk" for purposes of the Immigrant Investor Program. In arriving at this decision the BCIS (a.k.a INS) recognized that the guarantee is only as good as the guarantor. There is risk to the investor even in such guaranties. However, following the same logic, when the thirdparty guaranty is backed by an unconditional federal, state, or municipal obligation, the capital investment will not be considered sufficiently "at risk." Unconditional government bonds appear to effectively remove the requisite element of risk, and therefore ineligible as the basis of a third party guaranty. In further defining capital, the regulations provide that capital cannot include assets directly or indirectly acquired by unlawful means. This requirement emerged as one of the key points of debate in Congress over the possibility that this program could provide a haven for drug proceeds and other ill begotten funds. The consensus reached in the Congress was that the visa should be terminated if it becomes known to the Government that the money invested was obtained by the alien through other than legal means. It should be noted that the focus of this restriction appears to be those funds which can be identified to drug dealers, traffickers in contraband, and money launderers. A special concern regarding the issue of the source of an investor's funds, however, involves persons from a country with foreign exchange regulations which prohibit its citizens from transferring funds from the country, or holding funds and assets outside the country. Apparently the BCIS (a.k.a INS) does not consider these funds to have been obtained through unlawful means. Until now, the BCIS (a.k.a INS) has not required more than evidence of a bank account in a third country or in the U.S., and an explanation of how the money was obtained.
3. The Investor Must Invest or be Actively in the Process of Investing in the Enterprise In refining the definition of invested capital, the BCIS (a.k.a INS) determined that an unsecured promissory note does not qualify because such an instrument is not secured by assets owned by the alien investor. In addition, a promissory note which is "secured" by an alien's assets must be treated as if it were unsecured to the extent that the amount borrowed and invested in the new commercial enterprise exceeds the fair market value of the assets securing the promissory note. Only the amount which is considered secured may be counted as a qualifying investment. This interpretation does not reflect commonly accepted business practices. Banks routinely lend to borrowers with or without security. The bank is entitled to payment and the borrower, who has signed a promissory note to the bank, is responsible for the payment. While the bank takes a commercial risk on the loan, the borrower is also at risk. Should the investment enterprise fail, payment of the promissory note remains a legally binding obligation. In keeping with the spirit of the law, the investor must possess the cash or assets to make up any shortfall to ensure the investment of the requisite amount of capital. It seems to contradict the law to restrict how the investor may handle his assets during the period of conditional resident status. In effect, the BCIS (a.k.a INS) interpretation would result in the freezing of the foreign investor's assets for more than two years. Under such an interpretation, it would be impermissible to trade in securities, real estate, or other personal assets if such assets were committed as security for the promissory note. The requirement of secured promissory notes does not make commercial sense and should be modified.
4. The Enterprise Must Benefit the U.S. Economy and Must Create Employment for Ten U.S. Workers Although the job creation issue has not been considered one of the more problematic concepts in the program, it has required some refinement and interpretation. The BCIS (a.k.a INS) rules define fulltime employment based on employment slots requiring 3540 hours a week. The definition of full-time employment may vary from one occupation to another. Those slots may be filled by more than one person, but a slot filled by two parttime workers only counts as providing fulltime employment for one U.S. worker. On the other hand, positions that are strictly parttime may not be combined to equal one fulltime position. The regulations allow more than one alien to use the same commercial enterprise as the basis for a petition, provided each individual investor invests the required amount, and each investment results in the creation of at least 10 jobs. Not all the investors in an enterprise are required to be petitioning for Immigrant Investor status, as long as the source of all capital invested is identical and all invested capital has been derived from lawful means.
5. The Investment Must be Made in a "New Commercial Enterprise" or a "Troubled Business" The BCIS (a.k.a INS) General Counsel has stated that a mutual investment fund constitutes a commercial enterprise for purposes of the program. An alien who invests in such a fund, however, must be engaged in the management of the new commercial enterprise. In addition, if the investment fund is organized as a partnership, an alien seeking Immigrant Investor status must show that he or she is engaged in either the direct management or policy making activities of the partnership. There are various ways in which a new commercial enterprise can be established. The Investor can create an original business; buy and reorganize an existing company; or, invest $1 million in an existing business without reorganizing or reincorporating if the infusion of capital results in a substantial change in the existing business. In the latter case, substantial change is defined as an increase of at least 40 percent in net worth or number of employees, or both. The rules allow an alien investor to qualify for an immigrant visa by taking over a troubled business if the acquisition will save jobs. To qualify as “troubled” a business must have been in existence for at least two years and sustained a net loss of at least 20 percent of the company's net worth. Under these circumstances the investment need not create ten new jobs. Instead there must be evidence that the number of existing employees is or will be maintained at the pre investment level.
6. The Investor Must be Engaged in the Management of the Enterprise Considerable debate has surfaced on the issue of whether a limited partner is sufficiently engaged in policy making to qualify for an Immigrant Investor visa. The BCIS (a.k.a INS) has recently conceded that limited partners who subscribe to a partnership agreement providing rights, powers, and duties normally granted to limited partners under the Uniform Limited Partnership Act, are sufficiently engaged in policy making. Limited partnerships are an attractive form for investment enterprises and are often used to pool investments. This, then renders the limited partnership an extraordinary tool in that the investor can invest in a limited partnership as a qualifying enterprise.
7. Today, the Immigrant Investor Program is an Inviting Prospect As we have seen the basic principles of the program set out at the beginning of this report, have produced a great deal of discussion and interpretation. Today the program is more welcoming to foreign investors than it was shortly after enactment. In part the relinquishing of the hardline attitude toward the program is due to the realization that investors were not standing in line to invest in America. The most Immigrant Investor petitions that have been filed in any one-year period since the program’s inception has been less than 10 percent of the visas available for that purpose. The true meaning of the Immigrant Investor Program is just now emerging. Despite all the favorable changes in the administration of the program by BCIS (a.k.a INS), for the program to work successfully, foreign investors cannot work alone. The investment must be carefully chosen. Careful thought must be given to research on labor intensive industries which have a good growth potential over the course of three to five years. Thoughtful preparation cannot only result in U.S. permanent residence, but may also pay substantial profits or dividends. At more than 50 percent, the failure rate of new enterprises must be taken seriously. Investors must make every effort to minimize the risk of failure and loss of capital. Most businessmen and economists who have analyzed the Immigrant Investor Program are very encouraged by the developments in the regulations and recent interpretation by the BCIS (a.k.a INS). From a practical and legal perspective, utilizing as many of the tools and devises which have been made available by the liberalization of the regulations is the key to success. The prospects of combining, for instance, the concept of investors pools and mutual investment funds as devises to spread the risk are truly exciting. This would mean that investors can effectively pool their capital and further spread the risk by investing in a mutual investment fund. Such devises can greatly minimize the risk which would otherwise be born by a single investor in a single business enterprise. While some issues (such as the prohibition of unsecured promissory notes) remain unresolved, the bulk of the issues that have been raised relative to the Immigrant Investor Program have been resolved in favor of the investors. For the most part, the BCIS (a.k.a INS) has recognized that the program must be administered and regulated in accordance with business principles. While the regulations have opened a number of doors, investors will do well to proceed with caution. The business environment in the United States is very fast paced and sophisticated. Much of this sophistication has been introduced to the program. Foreign investors who have been discouraged by the program in the past might do well to give it a second look.
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