In our earlier post, we discussed that USCIS is moving forward with what portends to be a major overhaul of the EB-5 regulations. As promised, we're getting back to you with our thoughts on "Which elements of the program will change?" Let's start with one thing of which we are absolutely certain...
No one knows for sure, at least not right now.
The government does not make drafts of regulations public prior to Notices of Proposed Rulemaking. The Office of Information and Regulatory Affairs (OIRA) is presumably now marking up the new draft regulations, which could require additional rounds of edits between the agencies. The EB-5 industry (in particular) tends to attract a lot of rumors that can send stakeholders into great worry. At this point, any speculation on what the regulations might contain in final form is just that – speculation.
Further, the regulations will be subject to notice and comment. It is impossible to state what a final codified regulation will entail once stakeholders have had a chance to comment. Likewise, we cannot pinpoint when any such changes will be made effective. And finally, a new Administration will take power on January 20th. Incoming President Trump's USCIS might have a more liberal take on EB-5 or could upend a draft regulation. However, we think the change in administration will not have as great an effect on EB-5 compared to other immigration programs.
Every prognosis therefore, including this one, needs to be taken with a grain of salt and viewed with an understanding that uncertainty exists with what USCIS will eventually finalize.
With that disclaimer, we can make a few educated guesses on what might change based on the signals we've seen. It is no secret that USCIS has been in consultation with legislators that crafted draft legislation overhauling the program, all of which has stalled to date. Meaningful change can, however, be made through the regulatory process given that the EB-5 statute leaves a great deal of "gaps" for the agency to fill. Further, a significant amount of EB-5 policy is currently in operation through memoranda and/or its Policy Manual. In a few weeks, USCIS will effectuate a massive overhaul of the EB-1, EB-2, and EB-3 regulations that were in a similar posture. We can therefore look to draft legislation, memoranda, and current agency practice to forecast what might be coming through rulemaking.
Here's what we think is most likely to change:
- Increased investment amounts
and changes between TEA and non-TEA minimums. The current
base investment amount is USD $1 million of capital. An investment
made into a new commercial enterprise principally doing business in
a Targeted Employment Area may instead leverage a minimum of
$500,000 These minimum investment amounts have not changed since
the program's inception in the early 1990s, even though
inflation has cut the buying power of a dollar by nearly one-half since that time. Proposed
bills have sought to increase the investment amounts, but as a
matter of practice, legislative reform may prove to be unnecessary.
Why?
In its present form, the Immigration and Nationality Act allows USCIS to "from time to time prescribe regulations increasing the dollar amount" of the minimum investment and in the context of TEAs the regulations may "specify an amount of capital ... that is less than (but not less than 1/2 of) the (non-TEA) amount." Further, the regulations can leverage a now-unused part of the INA allowing for an "adjustment for high employment areas" that multiply the base amount by up to three times.
In other words, USCIS could, through regulation:
- Change the current two-tiered system of investments into three tiers;
- Institute a "high employment area" regime and EB-5 investors using these projects could pay up to 3x the investment amount compared to others; and/or
- Diminish the delta between TEAs and
non-TEAs so that the distinction becomes less meaningful from a
capital contribution perspective.
Will the TEA and non-TEA amounts increase? Probably – but it's too early at this point to state what the increase will be with any degree of certainty. Previous legislative proposals have discussed a $1.2 million / $800,000 split, but there is no guarantee that USCIS will parrot such proposals in new rulemaking.
- Changing the procedure for obtaining TEA designations. Presently, the regulations bestow significant discretion in state governments to designate what constitutes a TEA. This has proven to be controversial in some circles given that states may be incentivized to attract EB-5 projects in competition with to their neighbors and accordingly may liberalize their TEA designation procedures as much as possible. The status quo could greatly be curtailed and current practices are ripe for amendment given great changes in the industry since its inception.
- Codification of "new" source of funds provisions relating to indebtedness. In 2015, USCIS began denying certain types of cases where investors made cash investments arising from indebtedness that were previously approvable. The specifics of USCIS' rationale are too detailed for the purpose of this article, however, we are of the opinion that the present regulations are sufficiently clear that such denials are contrary to law and should be invalidated by the federal courts. Further, legislative proposals (probably influenced by USCIS), have sought to curtail use of loan proceeds as EB-5 investments coming from institutions other than commercial banking institutions, even though such funds are legally obtained. USCIS could adapt new regulations addressing either or both indebtedness issues.
- A new ability to retain priority dates. The OIRA Summary references the institution of an "opportunity to mitigate the harsh consequences of unexpected changes to business conditions through priority date retention in limited circumstances." Under the rules first instituted in the May 30th Memo, if an I-526 is approved but there is a "material change" to the business before the immigrant achieves conditional residency, a new petition (with a new priority date) must be filed. For China-born investors facing multi-year retrogression, the consequences would be catastrophic. The ability to retain a prior priority date -- which is similarly done in certain family and other employment-based situations at present -- would be a welcome development.
- Codifying elements of the
Policy Manual / May 30 Memorandum. Much of EB-5 practice,
especially with respect to project-side filings, are found only in
agency memoranda, even though they are relatively settled practice.
USCIS regulations will likely codify these and other existing
provisions to provide sufficient clarity and predictability. We can
even hope that voluminous project documentation could be
incorporated by reference, as some legislative proposals have
sought to do, which would reduce adjudication times and save on
filing costs.
We think the following could change, but it's not clear that the upcoming regulation will tackle these issues:
- An overhaul of the I-829 process. The condition removal regulations are in badly need of a refresher. It is not clear whether they will be addressed in the proposed rulemaking. The OIRA web site references only 8 C.F.R. 204.6 § and 8 U.S.C. § 1153(b)(5), however, the I-829 provisions are found at 8 C.F.R. § 216.6 and 8 U.S.C. § 1186b. Might USCIS only be focusing on the I-526 at this time?
- Concurrent adjustment filings. Legislative proposals have sought to permit concurrent filing for non-backlogged investors, instead of current policy requiring first an I-526 approval. At present, EB-1 through EB-3 immigrants may concurrently file for adjustment with their petitions by way of regulation (8 C.F.R. § 245.2(a)(2)(i)(B)), which does not apply to EB-4 and EB-5. Several years ago, EB-4 plaintiffs sued the government and invalidated that regulation in the District Court but it was reinstituted on appeal. Will USCIS take this present opportunity to expand concurrent filings? We hope so.
And we are virtually certain that this most pressing issue won't be addressed:
- More visa numbers. Demand is too great for the approximate 10,000 EB-5 visas available each year, resulting in a significant backlog for PRC-born investors. Stakeholders depend upon robust participation in the program from Mainland China.
Only Congress can increase the number of visas, but agency rulemaking could end the current practice of counting dependents towards the quota, which would greatly improve efficiency for EB-5 and all other preference categories. Many backlog problems within our legal immigration system could be fixed if a different agency -- the Department of State -- would take aim at the regulations at 22 C.F.R. § 42.32 and only count principal immigrants, sending many categories towards "Current" in the Visa Bulletin.
The new regulations are likely to be a mixed bag for the industry with both positive and negative elements for practically every competing interest. One silver lining may be that enacting substantive changes through regulation will diminish the uncertainty associated with potential 11th hour legislation filed/leaked shortly before the scheduled sunset of the Regional Center program. Such practices have become too common over the past 18 months, creating unnecessary anxiety and stymieing investment. Investors and project principals want change that is known sufficiently in advance and predictable, and regulatory reform is more likely to bring that about. Legislative compromise and a long-term extension might also be easier if contentious issues are settled through regulation and accepted by the industry.
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