U.S. Court of Appeals Holds That Loan Proceeds Qualify as Cash, Not Indebtedness, For EB-5 Purposes

Steven C. Reingold, Rohit Kapuria


On October 27, 2020, the United States Court of Appeals for the District of Columbia Circuit issued a decision discussing the investment in a new commercial enterprise (an “NCE”) of loan proceeds by investors seeking to obtain visas under the employment-based, fifth preference immigrant visa program (the “EB-5 Program”). Confirming the decision of the United States District Court for the District of Columbia, the Court of Appeals held in Zhang v. United States Citizenship and Immigration Services, No. 19-5021, 2020 WL 6277726 (D.C. Cir. Oct. 27, 2020), that under the regulations implementing the EB-5 Program, the proceeds of a loan qualify as cash, rather than indebtedness, as a result of which an investor who obtains a loan to make the required investment in an NCE need not demonstrate that the loan was secured by the investor’s personal assets.

By way of background, the Immigration and Naturalization Act (the “INA”), as amended in 1990, provides that for an immigrant investor to qualify for a visa under the EB-5 Program, the investor must have, in addition to satisfying other requirements, either “invested” or be “actively in the process of investing” a minimum amount of capital in an NCE, which must create at least ten full-time jobs.  Under the INA and the regulations in effect at the time the plaintiffs in Zhang filed their Form I-526 petitions, the minimum amount of capital was $1,000,000, unless the investment was made in a targeted employment area—that is, an area determined to maintain a high unemployment threshold or a rural area—in which case the minimum was reduced to $500,000.  (As of November 21, 2019, the minimum amounts were increased to $1,800,000 and $900,000 respectively.)

The implementing regulations, in 8 C.F.R. § 204.6(e) (“Section 204.6(e)”), defined “capital” and “invest,” but did not define “cash” or “indebtedness,” the two words at issue in Zhang. During a conference call with interested parties held on April 22, 2015, the Deputy Chief of the Immigrant Investor Program Office (the “IPO”) of the United States Citizenship and Immigration Services (“USCIS”) made a bold EB-5 policy decision, arguing that when a foreign investor invests the cash proceeds of a loan in an NCE, USCIS will treat the investment as “indebtedness” rather than “cash” under Section 204.6(e)’s definition of “capital,” thus requiring the investor to have collateralized the obligation represented by the loan with the investor’s personal assets (the “collateralization test”). As a necessary component of the collateralization test, if an investor used loan proceeds to fund an investment in whole or in part, the investor would have to identify the method by which the underlying collateral was initially obtained, and would have to provide a legal and, often times, registered set of loan documents describing the terms of the secured obligation. Assuming, for example, that the loan was made pursuant to an agreement between an investor and the investor’s employer and was secured by future salary and bonus, or that the loan proceeds originated from cash an investor received from the investor’s own company that was secured by undistributed profits the investor was owed by the company (as was the fact pattern for Zhang), the collateralization test would be difficult, if not impossible, to document. The security could be deemed speculative, irrespective of the fact that the employer or the company was content with the risk of non-repayment of the obligation.

Viewing the IPO’s statement as, amongst other things, an improper interpretation of Section 204.6(e) and an impermissible attempt at promulgating a new regulation without engaging in the required notice and comment procedure, two foreign investors, whose Form I-526 petitions had been denied solely because USCIS determined that loan proceeds they invested in an NCE constituted indebtedness that was not secured by their assets, filed suit. The investors challenged USCIS’s interpretation of Section 204.6(e), arguing in part that USCIS could not deprive investors of the chance to immigrate to the United States on the premise that the cash proceeds of a loan are not really “cash.” The investors also sought class certification to represent all foreign investors whose Form I-526 petitions had been denied for failing to satisfy the collateralization test that USCIS announced in April 2015.  It is estimated that hundreds of investors received denials of their Form I-526 petitions between April 2015 through December 2018.

After the parties filed cross-motions for summary judgment and the plaintiffs filed a motion to certify the class, the District Court held that USCIS’s interpretation of Section 204.6(e) was both erroneous and improper rulemaking, and certified a class that includes all foreign investors who filed a Form I-526 petition and who

(1) invested cash in a new commercial enterprise in an amount sufficient to qualify as an EB-5 investor; (2) obtained some or all of the cash invested in the new commercial enterprise through a loan; (3) filed a Form I-526 petition based on that investment; and (4) received or will receive a denial of their I-526 petition solely on the ground that the loan used to obtain the invested cash fails the collateralization test described in the USCIS 2015 IPO Remarks announcement.

The District Court then vacated the denial of the class members’ Form I-526 petitions and remanded the case to USCIS for further consideration.

On appeal, the Court of Appeals held that the District Court correctly concluded that loan proceeds are considered “cash” and not “indebtedness” under Section 204.6(e). Viewing those terms in light of their ordinary meanings and the clear language and structure of the EB-5 Program’s regulations, and rejecting USCIS’s semantic and statutory construction arguments, the Court of Appeals determined that loan proceeds clearly fall within the definition of “cash,” and that once a foreign investor receives the proceeds of a loan and invests those proceeds in an NCE, the foreign investor has satisfied the regulatory requirement as long as the proceeds were lawfully acquired. Having done so, the Court of Appeals declined to determine whether USCIS’s April 2015 pronouncement constituted rulemaking that ran afoul of the required procedure or simply an explication of USCIS’s position regarding collateralization, stating that because Section 204.6(e) governed, it did not need to consider those issues.

Turning to the issue of class certification, the Court of Appeals rejected USCIS’s untimely effort to challenge the scope of the class. USCIS contended for the first time on appeal that the District Court improperly defined the class to include foreign investors whose Form I-526 petitions were denied as far back as 1991, when the EB-5 Program’s regulations were first promulgated, and thus ignored the six-year statute of limitations applicable to claims against the federal government. Setting aside the issue of whether USCIS forfeited the argument as a result of its failure to raise it before the District Court, the Court of Appeals denied the argument on its merits. It held that the District Court repeatedly recognized and applied the limitations period when it certified the class and limited it to those foreign investors whose Form I-526 petitions were denied solely on the basis that they failed to satisfy USCIS’s 2015 interpretation of Section 204.6(e). As a result of the decision of the Court of Appeals in Zhang, a foreign investor who filed a Form I-526 petition on or after June 23, 2009—the date that is six years before the date on which the plaintiffs in Zhang filed their complaint—and who received a denial based solely upon USCIS’s application of the collateralization test to the cash proceeds of a loan obtained to invest in an NCE, can seek to have the denial of the Form I-526 petition reconsidered. The procedure for doing so is set forth under the “Class Action Member Identification Notice” section of the EB-5 Program page of USCIS’s website, which is located here. The decision is not only a victory for the hundreds of investors who may now comfortably pursue reconsideration of denied Form I-526 petitions or new EB-5 petitions, but also serves as a reminder to the IPO that it cannot continue to make policy decisions without first going through the proper administrative process.

Steven C. Reingold
Rohit Kapuria