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The Department of Homeland Security (DHS) published new regulations on July 24, 2019 that seek to modernize the EB-5 program and will greatly increase the cost of obtaining the so-called “golden visa” starting November 21, 2019.
Congress established the EB-5 program in 1990 to allow foreign nationals to obtain lawful permanent resident status by investing at least $1 million in a new commercial enterprise that will create at least 10 full-time jobs in the United States.Under the program, DHS can specify a lower investment amount if the investment is in a Targeted Employment Area (TEA), which is defined to include certain rural areas and areas of high unemployment. Under the current rules, investors have been able to obtain an EB-5 visa by investing $500,000 in a project within a TEA.
Now, nearly three decades after the creation of the program, DHS has issued new rules that increase the required minimum investment amount and reform how an area can be designated as a TEA.
Increased Investment Amounts
Beginning November 21, 2019, the EB-5 program will generally require applicants to invest $1.8 million in a new commercial enterprise to obtain permanent residency through the program. The new rules continue to provide for a 50% reduction when visa seekers invest in a TEA, so the minimum investment amount in a TEA will rise from $500,000 to $900,000 (rather than the $1.35 million DHS initially proposed). However, the new rules also make it much harder for a project’s location to qualify as a TEA.
DHS has based the increased investment amounts on the effects of inflation since the EB-5 program launched in 1990. In recent years the demand for EB-5 visas has far exceeded supply, making it reasonable to expect that the program could continue to provide a flow of job-creating foreign direct investment at higher investment levels. However, by making a single adjustment for 30 years of inflation, the agency is almost doubling investment amounts overnight. Moreover, the great majority of EB-5 investments have been at the $500,000 level. If the increased minimum investment amounts and more restrictive TEA designations combine to make $1.8 million the new norm, many fear the increase will discourage new investors to the point that the EB-5 program ceases to serve as a meaningful source of alternative project financing.
Changes to TEA Designation
The new rules change the process of designating a project’s location as a TEA in several ways, which will make TEA status harder to obtain outside of rural areas. Specifically, the new rules make the following modifications:
- Previously, the government of each state had the authority to define a specified geographic area or political subdivision as a TEA based on high unemployment; now, DHS instead will make those designations.
- To obtain designation as a TEA based on high unemployment (defined as 150% or more of the national average), project sponsors can no longer combine many contiguous census tracts to define an area that meets the standard. Under the new rules, project sponsors may include only census tracts that are “directly adjacent” to the tract where the new commercial entity principally does business when determining unemployment levels.
- DHS had originally proposed to create a separate TEA designation category for any city or town with a population of 20,000 or more and with high unemployment. The final rules, however, limit this category to towns and cities outside of metropolitan statistical areas (MSAs). As a result, projects in major metropolitan areas must continue to rely on census tract unemployment statistics to obtain TEA status, and they must do so under the newly restricted methodology.
These changes are significant and will prevent TEA status for many EB-5 projects that might previously have qualified. For example, many EB-5 projects in the heart of Manhattan, Los Angeles, Las Vegas and Chicago have qualified for TEA status based on high unemployment in nearby census tracts. In particular, it has been common industry practice for project sponsors to tack several contiguous census tracts together to qualify for TEA status based on average unemployment rates, a procedure sometimes criticized as “EB-5 gerrymandering.” The new rules substantially restrict the ability to combine census tracts in this way. If the census tracts where a project principally does business do not of themselves have unemployment of at least 150% of the national average, then TEA status can be achieved only if adding the immediately adjacent tracts results in a weighted average unemployment rate at that level.
The new rules do not affect TEA designation methodology for rural areas.
The new rules also contain a number of other reforms. Among these is relief to investors in projects that change materially for reasons outside of the investors’ control after they have submitted their immigration applications. Investors will be able to retain the priority dates for their applications, where previously they may have been required to re-apply and go back to the end of the ever-lengthening queue for EB-5 visas.
The new rules take effect for investors who submit their initial EB-5 application – the “I-526 petition” – on or after November 21, 2019. Both the minimum investment amount and the TEA status of the relevant project will be determined under the old rules until that date. Practitioners in the industry expect a flurry of activity as project sponsors move quickly to take in investors under the current rules. Projects currently open for investors, or planning to launch soon, especially those that may lose TEA status under the new rules, will find themselves under strict time pressure.
In addition to consulting with immigration counsel on the direct effect of the new rules, project sponsors with offerings in progress or planned for the near future should consult with corporate and securities counsel to determine how they may need to change their offering documents. Project sponsors may also need to modify organizational documents to handle investors who will have contributed very different amounts of capital under the two different regimes. They will likely need to revise offering memoranda to disclose the ramifications of the new rules, and ideally to bridge the old and new rules and accept investors under both regimes. In particular, EB-5 offerings that may have been open for some time and are seeking to place their final investments in the pre-November 21 crush may need to supplement their offering memoranda and modify their organizational documents.
There has been much debate about whether the new investment levels will further weaken the appeal of the EB-5 program, which already suffers from the effects of long agency processing times for applications and the years-long waiting lists for visas for investors from many countries. Industry advocates have responded by seeking to convince Congress to rescind the new rules, or to adopt other long-proposed EB-5 reforms that might revitalize the program. While the long-term outlook remains unclear, many are seeking to seize the opportunity presented by the impending changes to launch or complete offerings at what now look like bargain prices for immigrant investors.
Charles Kaufman is an attorney and shareholder of Lexcuity PC (fka Homeier Law PC), a leading law firm advising clients in both traditional and non-traditional financing. With over 23 years of experience advising growing businesses, providing leadership in crowdfunding, corporate finance, legal and strategic affairs and global compliance, Charles is a key advisor in the cryptocurrency and STO space helping companies navigate the ever-changing regulatory landscape.
Michael B. Saryan is an attorney and senior counsel at Lexcuity PC (fka Homeier Law PC), where he advises clients in securities law matters and corporate transactions. Michael maintains a focus on keeping at the forefront of new regulations for compliance and best practices in securities offerings and the EB-5 space. For nearly a decade, Michael has advised businesses in various stages of their lifecycles – from emerging companies to Fortune 100 companies – guiding his clients to navigate the legal landscape of corporate and securities laws. Michael typically advises clients raising capital through private securities offerings or experiencing a major corporate event, and he serves as outside general counsel for many of his clients.
Equities Contributor: Lexcuity PC
Source: Equities News