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Newly proposed Senate Bill by Senator Grassley entitled "EB-5 Reform and Integrity Act of 2020"

Posted: December 30, 2020

As expected, Senator Grassley, with significant support, including the support of IIUSA, has proposed a bill to reauthorize the EB-5 Regional Center Program (the "EB-5 Program") in order to "prevent fraud and promote and reform foreign capital investment and job creation in American communities."

The key to this legislation is the backdrop that the EB-5 Program has been extended until June 30, 2021, but, importantly, is no longer subject to the continuing resolution aspects of legislation, which results in a stand-alone program.  As a result thereof, if there is not enough interest to permanently extend the EB-5 Program, there will be a problem if either another short term extension is not approved or if legislation is not adopted ultimately resulting in the termination of the EB-5 Program.

While we believe and hope such a scenario is unlikely, it is interesting that the regional center program is no longer tied to the continuing resolution.  It is important to note that the extension relates to the EB-5 Regional Center Program and not to the often described "Direct" EB-5 Program, the latter of which is permanent.  

It is difficult to predict whether this legislation, as currently proposed, will be passed since we understand that there is a certain degree of resistance from Senators attached to both parties in spite of the EB-5 Program generally deemed to be non-partisan in nature.  

While this analysis is not exhaustive, below are certain elements we found particularly noteworthy in the event the bill is passed: 

1. Program Extension.  The EB-5 Program would be extended through September 30, 2025.

2. Further Regional Center Compliance.  There would be a substantial increase in regional center compliance obligations which, in turn, will result in increased costs passed to the regional centers and/or the new commercial enterprises affiliated with them.

3. Indirect Job Creation.  One current advantage of the EB-5 Program is the ability to count indirect and induced jobs and to the extent the development exceeds a 24 month period, direct jobs.  The bill requires that 10 percent of the jobs be "direct" though employees of the job-creating entity ("JCE") or the new commercial enterprise ("NCE") employee may be included and there appears to be room permitting use of valid economic methodologies for such counting.  Furthermore, tenant occupancy has been re-introduced following lots of starts and stops of this formula with USCIS policy.  

4. Municipal Bonds.  The purchase of municipal bonds by the new commercial enterprise will not be permitted on the primary or secondary markets to the extent the bonds are available to the general public.  While this is not necessarily a departure from current policy, the issue relates to whether this is permissible as a redeployment (which under current policy, redeployments can be made with municipal bonds subject to some restrictions).  Further clarification is required on this point.  

5. Retention of Records.  Regional centers will be obligated to retain records for five years and subject to an audit of such records at least once every five years.  This is not necessarily a large burden on regional centers directly affiliated with the new commercial enterprises; however, with respect to those which are subject to third party sponsorship agreements, this will force closer working relationships and disclosures between the relevant parties.  Either way, there will be a cost to such compliance.  

6. Investment Requirements and Bona Fides of Regional Center Principals.  

(a) The Bill requires full disclosures and has a 10-year look back which can preclude certain individuals with prior criminal, civil or regulatory violations from participating in the regional center ownership/operations, the JCE or the new commercial enterprises.  This builds on the existing system with more direct disclosure requirements.  

(b) Disclosures of commissions to agents and service performers, together with a description of the policies and procedures and due diligence undertaken by the sponsored new commercial enterprise.  If one examines the Form I-526, there are some disclosure requirements but not to such detail as outlined in the bill.

(c) Certification of compliance with securities laws to the best of the certifier’s knowledge following a required due diligence investigation.  Such certifications are to be provided by the regional center and the issuer of the securities.  Interestingly and importantly, the regional centers are now required to use commercially reasonable efforts to monitor and supervise the securities offerings under their sponsorship.  Going to an earlier comment, the burden is increasing on those regional centers that have arms-length third party sponsorship arrangements outside of direct affiliations with the regional centers.  A regional center will no longer be permitted to disclaim detailed knowledge of the content of the securities offerings and actions of the securities issuers.

7. Site Visits under the Integrity Fund.  An integrity fund (see below) will allow capital to be set aside for the Department of Homeland Security personnel to conduct site visits with just a 24-hour notice.  

8. Foreign Investment and Control Restrictions.  The bill clarifies that foreign governments or individuals that are not, otherwise, US nationals or permanent residents, may not have any ownership or control over the regional centers, the new commercial enterprises or the JCEs.  There is a nuance that appears to allow sovereign wealth fund participation, however.  

9. Integrity Fund.  The annual fee imposed on regional centers will be governed by the total number of investors under that regional center’s sponsorship.  If the regional center has 20 or fewer investors at the end of the fiscal year, the annual fee will be $10,000; if more than 20 foreign investors, the annual fee will be $20,000.  For groups which have more than one regional center, this is going to be a heavy burden.   Failure to pay the fees will result in termination of the regional center.  

10. Additional Fees per I-526 Petition.  A separate fee of $1,000.00 per I-526 petition is due and payable separate from the USCIS filing fee.  Such additional fee will be used to support funding of integrity measures.

11. Registration with USCIS.  There are detailed provisions involving direct and third-party promoters that will require registration with USCIS.  Department of Homeland Security appears to carry, under the bill, broad powers to prescribe what standards will suffice for such registration.  

12. Debarment Rules, Priority Dates and Age-out Protections.  There are provisions dealing with debarments of regional centers and NCEs or JCEs, with a 180-day time period for investors to move to a new NCE, JCE or a new regional center.  This is substantially beneficial since those impacted investors have, as history as shown, been left in very gray areas and irrespective of good faith measures, been subject to denial of their immigration benefits.  The key is that the NCE can now affiliate with another regional center within 180 days of termination of the old regional center and there protections against material change findings.  Additionally, those impacted investors will be permitted to retain their priority dates and their age-out kids will also be protected.  With respect to the age-outs, the dependents must remain unmarried to enjoy this benefit.    

13. NCE Fund Administrator.  There are detailed restrictions involving administration of EB-5 funds.  There is a waiver if there is an annual audit that is provided by an independent CPA.  More than likely that would be the ultimate result since the fund administrator must be an independent licensed professional such as an attorney, accountant, a broker-dealer or someone else the Secretary of Homeland Security deems to be acceptable.  Fortunately, there are existing groups within the industry that have the knowledge and expertise to provide such services to the NCEs and regional centers.  This requirement, however, while adding protections for investors, will come at additional cost.  

14. Renewal of Conditions.  There is a potential of a one-year extension allowance to provide for compliance and job creation for I-829 petitions.  This is particularly helpful since it adds context to the existing rules that indicate that jobs must be created within two years of conditional permanent residency or within a reasonable period thereafter.  Having a pre-defined time removes some of that uncertainty.  One catch is that the investors must remain invested with the NCEs during that extension period.   

15. Investment in Entity Type.  There is a recognition that an investor no longer needs to invest in the limited partnership and can invest in any entity formed for a for-profit purpose.  This is merely a clarification of the interpretation that the limited partnership concept was not exclusive.

16. Reforms.  An affiliated job-creating entity which is controlled or managed by people involved with the regional center or the new commercial enterprise requires more disclosure.  In other words, if the developer has an interest or management rights to the NCE, even though it has no affiliation with the regional center, then it becomes an affiliated person whereby there are certain restrictions and notice requirements and certifications.

17. Capital Requirements.  The Bill excludes the ability to obtain funding from the NCE.  It also excludes capital invested with the guaranteed rate of return to an alien investor as well as a guarantee of repayment by the NCE.  There can be no mandatory buy-back options or put/sell-back options in favor of the investor since that would violate the "at risk" requirement.  Alternatively, it is acceptable for the NCE or JCE to have a buy-back option that results in the withdrawal of the interest of the alien investor after the fulfillment of the two-year sustainment period.

18. Concurrent Filing of EB-5 Petition and Application for Adjustment of Status.  This recognizes that those investors who will not be subject  to retrogression and are eligible for a visa at the time of I-526 petition filing, may concurrently apply for the I-526 and the adjustment of status (assuming they are residing in the US at the time of I-526 filing).  

19. Procedure for Granting Immigrant Status.  It is clear that the legislation in existing petitions are grandfathered and the Act is only prospective in nature and will be effective upon enactment of the bill and/or 90 days thereafter pursuant to particular section of same.

20. Timely Process.  There is a proposal for new increased fees, following a study by Department of Homeland Security, which will allow for timely (and faster) adjudications.  The proposed timelines are as follows:  

(a) initial and amended regional center approvals within 180 days or if the underlying exemplar is in a TEA, then it will be adjudicated in 90 days; 
(b) I-526 petition adjudications in non-TEA projects are to be adjudicated in 240 days while those based on TEA projects will be adjudicated in 120 days; 
(c) I-829 adjudications are to be adjudicated within 240 days.  

21. Paperwork Reduction.  A sensible provision has been added to allow for a one-time filing of the project paperwork such that there is no need to continually file the projects each time an investor files an I-526 petition.  USCIS’s current policies results in a large waste of paper given that the average I-526 petition is easily hundreds of pages when combined with the project documents.  

22. Improper Activities.  There are now reporting requirements for anybody seeking preferential treatment and full transparency in connection therewith.  Accordingly, if any politician or other party of influence tries to affect the processing of various petitions, that would be deemed an improper activity and reported accordingly.

The new legislation does not address the various issues contained in the new regulations that became effective November 21, 2019 nor the redeployment provisions set forth in the amended Policy Memorandum dated July 24, 2020 (collectively, the "New Regulations").  That is intentional given the fact that there technically is no need to otherwise address/modify regulations that were in place (not that we agree with that statement since we believe an overhaul of the regulations would be beneficial for the EB-5 program).  It is much harder to change legislation down the road once it is approved and that is part of the negotiation strategy in connection with the new legislation.  Ultimately, as noted at the onset of this summary, there is no certainty whether the new proposed legislation will be approved in its current form or otherwise.