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INS Report on EB-5 Investor Visa Program

Cite as "AILA InfoNet Doc. No. 99033080 (posted Mar. 30, 1999)"

REPORT TO CONGRESS
ON THE EB-5 INVESTOR VISA PROGRAM

INTRODUCTION

The Omnibus Consolidated and Emergency Supplemental Appropriations Act for Fiscal Year 1999, Public Law 105-277, directs the Immigration and Naturalization Service (INS) to report to Congress "to propose any legislative remedies that may be necessary to provide the INS with the tools to ensure that a person gaining citizenship pursuant to the EB-5 program has actually made, and is personally liable for, the required investment and is sufficiently involved in the management of the business invested in, consistent with the intent of Congress when the EB-5 program was created."

Accordingly, this report discusses the need for amendments to sections 203(b)(5) and 216A of the Immigration and Nationality Act (the Act) that establish specific standards designed to ensure that the EB-5. employment creation program promotes investments in U.S. businesses, and creates and preserves employment in the United States in the manner that Congress intended.

Preliminarily, the INS notes that Public Law 105-277 states "[I]t is understood that serious allegations have been made concerning fraudulent activities designed to aid persons in gaining U.S. citizenship pursuant to the EB-5 program without making the contributions to U.S. business that Congress intended." Although the INS maintains data on the total number of EB-5 petitions that are denied for failure to comply with statutory and regulatory requirements, there is not consistent or complete data available on denials that are due, wholly or in part, to fraud. For this reason, the INS is unable to quantify the incidence of fraudulent activity in the EB-5 program. Where appropriate, INS initiates investigations of suspected fraudulent activity and seeks prosecution under applicable statutes. Ongoing investigations are not subject to public disclosure and, therefore, are not discussed in this report

BACKGROUND

From 1965 to 1978 investors were eligible to immigrate to the United States in the nonpreference category. The INS regulations exempted applicants for nonpreference immigrant visas from the general labor certification requirement based on an investment of at least $40,000 (initially $10,000) in a U.S. based business employing at least one U.S. worker.

Because investors were not differentiated from other nonpreference immigrants, data on the number of investors entering as nonpreference immigrants, or any information about their investments, is not available. In late 1979, nonpreference visas became permanently unavailable, effectively ending this means of immigration for investors.

The Immigration Act of 1990 created the immigrant investor program as the fifth preference within the employment-based category (EB-5), marking the first time a category specifically facilitating the admission of investors as lawful permanent residents was included in U.S. law. This preference category allots up to 7-1 percent of the worldwide level of immigration (approximately 10,000 visas annually) to qualified investors and their spouses and children. At least 3,000 of the visa numbers are reserved for investments in targeted areas, defined as rural areas or areas of high unemployment. An investment of at least $1 million in a new commercial enterprise that is established by the immigrant investor, and that employs at least 10 U.S. workers, is required; the required investment is lowered to $500,000 in targeted areas.

Immigrant investors are admitted for 2 years in conditional permanent resident status. During that time they must invest the required capital and create the required employment. Section 216A of the Act provides that, at the end of the 2-year period, the conditions may be removed if the investment was sustained throughout the period of the investor's residence in the United States. Final regulations providing requirements for petitions for employment creation were published at 8 CFR 204.6 on November 29,1991, effective immediately. Final regulations providing requirements for petitions to remove the conditional basis of lawful permanent resident status were published at 8 CFR 216.6 on May 23, 1994.

Prospective immigrant investors petition for themselves on INS Form I-526, "Immigrant Petition by Alien Entrepreneur," which is filed with the required fee and supporting documentation with the INS' Texas or California Service Center, depending on which office has jurisdiction over the area where the commercial enterprise will principally be doing business. The required documentation must show that the immigrant investor has invested, or is investing, the required lawfully-gained capital in a qualifying new commercial enterprise within the United States that the investor has established, and that the investor will create full-time jobs for at least 10 workers. At the end of the 2-year period, the investor must file INS Form I-829, "Petition by Entrepreneur to Remove the Conditions," and demonstrate that the investment has been completed and sustained for the conditions to be removed.

Under current INS regulations, the investment must be in a for-profit commercial enterprise for the conduct of lawful business. The business may be a sole proprietorship, a limited or general partnership, a holding company, a joint venture, a corporation, a business trust, or other public or privately owned entity. A new commercial enterprise may be established through the creation of an original business, purchase of an existing business and restructuring and reorganizing it into a new commercial enterprise, or the expansion of an existing business through a 40 percent net increase in its net worth or in the number of employees.

The Immigrant Investor Pilot Program was created by Section 610 of the Departments of Commerce, Justice, and State, the Judiciary, and Related Agencies Appropriations Art, 1993 (Pub. L. 102-395, October 6, 1992, 106 Stat. 1874) as an adjunct to the employment creation immigrant investor classification. Under this pilot program, immigrant investors may invest the required capital in INS-designated regional, centers, which use the investment capital to create jobs indirectly through revenues generated from increased exports resulting from the pilot program. The pilot program originally authorized up to 300 visas annually for investors whose required capital is invested in approved regional centers established to promote economic growth, export trade, job-creation and increased domestic capital investment on a regional basis. Interim regulations governing this pilot program were published on August 24, 1993.

The pilot program includes a modified job-creation requirement that enables investors in regional centers to credit their investment with indirect job-creation through revenues generated from increased exports. This policy expanded opportunities for investor participation in the immigrant investor program. On November 13, 1997, an amendment to Section 610 of the Departments of Commerce, Justice, and State, the Judiciary and Related Agencies Appropriations Act, 1993, changed the number of visas to be authorized annually in the pilot program. from 300 to 3,000, and extended the pilot program for an additional 2 years, until October 1, 2000.

STATISTICS

As discussed above, the Immigration Act of 1990 allocated approximately 10,000 visa numbers annually to the immigrant investor category. As shown in the following table, participation in the investor program has been far below the numerical limit since the inception of the program, both in terms of petitions received for investor status and immigrants admitted as investors.

Fiscal Year Investor Petitions
Received
Investor Petitions
Approved
Investor Petitions
Denied
Investors Admitted as
Conditional Immigrants*
1992 474 240 40 24
1993 436 384 170 196
1994 513 407 82 157
1995 356 291 109 174
1996 801 616 122 295
1997 1,290 1,110 141 436
1998 1,368 358 290 N/A

*Excludes spouses and children of investors who are also subject to the numerical restrictions.

Close to half (45 percent) of the investors admitted during fiscal years 1994 through 1996 were admitted based on investments in targeted rural or high unemployment areas where a minimum $500,000 investment was required. The remaining 55 percent made their investments in businesses in non-targeted areas requiring a minimum $1 million investment.

Participants in the investor program have come primarily from Asia, with countries from that continent accounting for 81 percent of all immigrant investor admissions during fiscal years 1994 through 1996. During that period, an additional 9 percent of investors came from Europe, and 5 percent came from South America. Approximately three quarters of immigrant investors are males.

Immigrant investors, like other immigrants, tend to concentrate in certain parts of the United States. During fiscal years 1994 through 1996, 44 percent of all immigrants admitted as investors reported that they intended to live in California, followed by 9 percent destined for Florida, 7 percent to the State of Washington, 6 percent to Texas and 5 percent to New York.

INITIAL LOW PARTICIPATION IN THE EB-5 PROGRAM

The following characteristics of the immigrant investor program may help explain why participation in the program has been below authorized levels.

  • Investor uncertainty over removal of conditions. The statute provides for a 2-year conditional residence period, but does not guarantee investors that they will obtain lawful permanent resident status at the, end of that period. The required investment and the required employment creation must be established to the satisfaction of INS prior to the removal of conditions. Potential investors may be deterred out of concern that they will be unable to create the 10 or more jobs, or that other factors may impede their ability to sustain their investment over the 2-year period, resulting in their failure to meet the terms of the program and, subsequently, loss of status. In this regard, INS has received comments from the domestic and international business community that the average commercial enterprise may not be able to create 10 fulltime, permanent jobs with the minimum required amounts of capital in a 2-year period.
  • Investor worldwide income subject to U.S. taxation. During the 2-year conditional period, the immigrant investor is subject to U.S. taxation of his or her worldwide income. This policy may serve as a disincentive to investors who have substantial holdings outside the United States.
  • Availability of alternative nonimmigrant classifications. Potential immigrants may have other routes to achieve lawful permanent resident status that are less expensive and more certain. If an immigrant wishes to enter the United States by means of an investment, he or she may choose an alternative nonimmigrant classification, such as the B, E, or L nonimmigrantclassifications, provided in sections 101(a)(15), (B), (E), and (L) of the Act.
  • Availability of attractive investor programs in other countries. Investor programs in other countries may be more attractive to investors than the U.S. program in that they may require a. lower capital investment and lower standards for job-creation. (See Appendix for information on the Australian and Canadian programs.)
  • Limited program information and outreach. Participation in the EB-5 program depends on the availability of information to potentially interested persons overseas. While U.S. Embassies generally make information on EB-5 requirements available to interested parties, the U.S. Government has not engaged in significant outreach and promotional activity. This role has been filled in some instances by the private sector without Government oversight.

INCREASE IN PARTICIPATION IN THE INVESTOR PROGRAM IN 1996

Increased participation in the program occurred in 1996 and 1997 for two primary reasons. First, the Immigrant Investor Pilot Program attracted investors because of its modified employment creation requirements. After 1996, the INS saw a rise in investments in approved regional centers, Second, private sector promoters began to market the immigrant investor program overseas. However, this was not without problems.

Many of these private sector entities promoted pooled investment arrangements formalized in complex financial agreements. Initially, such arrangements appeared to be carefully tailored to meet the statutory requirements, and to enable companies to amass large, pooled amounts of capital for the purposes of undertaking more extensive employment creation. Accordingly, the INS approved certain of these complex financial arrangements. Closer scrutiny of these agreements, however, revealed terms that failed to comport with the statutory requirements. These arrangements often contained one or more of the following elements:

  • Passive investment. Regulatory language authorizing passive investments grew out of INS' response to public comments proposing passive investments to expand interest in the EB-5 program. Technical financial agreements that appeared to ensure compliance with regulatory requirements enabled increasing numbers of passive investors to participate in the program with little involvement in the company, and in ways that ensured the company received little or no investment capital for purposes of employment creation.
  • Debt investment. After 1996, INS saw a rise in the use of debt investments. These were often presented as financial arrangements that initially appeared to comport with the statutory requirements. For example, loans, guaranteed buy-back or redemption agreements, promissory notes, and other notes are debt investment mechanisms that do not constitute the long-term commitment of equity capital to new commercial enterprises in the United States so that jobs can be created with that capital. Many of these debt investment mechanisms included provisions that relieved the immigrant investor of the burden of the investment immediately upon achieving lawful permanent resident status.
  • Investment for which the immigrant was not at risk. After 1996, INS saw an increase in investments involving capital that was not the immigrant investor's own but, rather, that of a limited partnership, bank, the new commercial enterprise itself, or another party participating through complicated debt arrangements. Such arrangements effectively transformed an immigrant's investment into an investment by the third party or new commercial enterprise for which the investor bore little or no liability.

INS ACTIVITIES IN 1998

The sharp rise in the use of investment arrangements containing features that appeared not to comport with the requirements of section 203(b)(5) and section 216A of the Act prompted a legal review by the INS that was completed in December 1997. Pending completion of the review and determination of the appropriate means of dealing with the fact that many pending EB-5 petitions did not meet the requirements of the Act, the INS placed a hold on certain petitions for immigrant investor classification.

Over the summer, the INS issued, among others, four precedent decisions providing guidance on these complex financial arrangements. These precedent decisions clarified many fundamental statutory and regulatory requirements, including that:

  • The INS immigrant investor program is an equity investment program and, therefore, loans and redemption agreements between the investor and the new commercial enterprise are unacceptable;
  • Only capital that is the investor's own, and that is legitimately obtained, may be counted as capital;
  • Only capital placed at risk for purposes of job-creation within the 2-year period will be counted as part of the investment funds; accordingly, fees and expenses paid to attorneys and funds in reserve funds or corporate accounts will not be counted as investment capital;
  • Promissory notes must meet specific standards in order to qualify as capital, for example, the assets used to secure the note must be specifically identified and must be the investor's own;
  • An investor must establish the job-creating new commercial enterprise;
  • An investor's business plan must be comprehensive, credible, and detailed; and
  • Investments in regional. centers and targeted areas of high unemployment must be in job-creating businesses located within those specific, areas if the investor is to take advantage of the modified statutory provisions for those areas.

The INS ended the hold placed on the immigrant investor visa petitions that were found to be problematic. In July 1998, the INS provided extensive supplemental training on legal and financial matters to 25 Service officers, including 19 adjudicators and supervisors from all INS Service Centers. A team of adjudicators that was trained in July adjudicated most of the petitions in September and October; remaining petitions were returned to the Service Center where they were originally filed for priority processing. A second training session was held in October that also included INS investigators. On December 4, 1998, the INS published a notice in the Federal Register announcing the consolidation of processing of all EB-5 petitions at the Texas and California Service Centers.

CURRENT ACTIVITIES

The INS continues to consider ways to improve the program within the current statutory framework.

  • Evaluation of the Immigrant Investor Pilot Program. The INS has approved 25 regional centers to undertake a wide range of economic activities with immigrant investor capital. The Immigrant Investor Pilot Program is intended to assess whether immigrant investor capital can stimulate job-creation, economic growth, export trade, and domestic capital investment in approved regional centers. The pilot program has been in existence for 6 years and is now ready for a full evaluation.

    Accordingly, the INS intends to announce in the Federal Register its plan to evaluate the Immigrant Investor Pilot Program. One issue that the evaluation will focus on is the indirect job-creation requirement that has posed significant administrative challenges for the INS. At the conclusion of the evaluation, the INS may recommend regulatory and/or legislative changes.

  • Guidance on removal of conditions. The INS expects to issue detailed guidance for adjudicating officers on procedures and requirements for petitions on Form I-829 seeking the removal of conditions at the end of the 2-year conditional period. In particular, this guidance will address cases where INS has since determined the initial investment may not have comported with the requirements of the Act.
  • Backlog reduction. The INS has made EB-5 backlog reduction a priority, and expects that by March 31 the backlog will be significantly reduced, if not eliminated. All trained adjudicators are being utilized in this effort, and additional special training is planned in order to reduce the backlog.
  • Consideration of Federal agency involvement. The INS is studying existing Federal and State programs that, as part of their mission, work with commercial firms to use equity capital for economic growth and employment creation. In particular, INS is interested in programs that provide financial controls, monitoring, and oversight after the capital is committed to job-creation purposes. In preliminary discussions with the Small Business Administration and the Maritime Administration, INS is exploring ways that the equity investment capital of immigrant investors might be used for job-creation purposes in small businesses and shipyards under the Small Business Investment Company Program, and Title XI of the Merchant Marine Act, 1936, as amended.

ISSUES AND LEGISLATIVE RECOMMENDATIONS

1. Need for affirmation that the immigrant investor program is an equity investment program. The statutory language should be amended to make explicit the requirement that investors make equity investments, and amended to adopt INS' interpretation of the existing statutory language.

Recommendation: The INS recommends legislation at 203(b)(5)(A)(ii) providing that immigrant investors must make an equity investment in the new commercial enterprise, clearly precluding debt investments.

2. Lack of capital invested for job-creation purposes. Under the current statutory authority, the required capital may be invested in the new commercial enterprise over the 2-year conditional period. The statute does not provide a fixed date by which the immigrant investor must have invested the required capital.

Recommendation: The INS recommends that legislation require that the full amount of equity capital be invested prior to petition approval. The words "or, is actively in the process of investing," should be deleted from both section 203(b)(5) and 216A of the Act. In this way, the full amount of the equity capital is actually committed to the new commercial enterprise, is immediately available for use in its operations for job-creation purposes, and remains available for the 2-year conditional period.

3. Direct and passive investment. The current statutory authority is broad enough to encompass both passive investors and entrepreneurs directly involved in the operations of the business. However, the current statutory structure has not provided for the strict financial controls, monitoring, record-keeping, and auditing necessary to track the capital of passive investors and determine whether it is managed and used for job-creation purposes, or whether job-creation is actually occurring. Passive investments have made the program more difficult for INS to administer.

Recommendations: The INS recommends that Congress consider whether it intended for passive investors to participate in the immigrant investor program. If Congress did not intend to permit passive investment, the statute needs to be amended to reflect this. If Congress determines to limit access to the EB-5 program to immigrant entrepreneurs directly involved in the day-to-day management of the enterprise and its operations, Congress may wish to consider providing guidance on the level of direct involvement in the operations of the enterprise necessary for an investor to qualify to immigrate under section 203(b)(5) of the Act.

Similarly, if Congress determines that passive investment should remain an option, Congress may want to consider providing guidance on the requirements for passive investment. In such a case, the INS recommends that legislation create a dual system, authorizing participation in the EB-5 program as either an immigrant entrepreneur or a passive investor, and provide a separate set of criteria for each track.

In setting criteria for participation as a passive investor, the statute should address the financial controls necessary to ensure that the required capital from each of the pooled investors is genuinely available to the new commercial enterprise for job-creation purposes. Congress may want to consider the opportunities offered by the Federal and State program discussed earlier to attract the foreign equity capital of passive investors and, at the same time, to provide necessary monitoring and oversight of financial management and the job-creation requirements.

4. Need for clarification of application of section 275(d) of the Act. This section currently provides penalties for an individual who knowingly establishes a commercial enterprise in order to evade the immigration laws, but provides no penalties for commercial promoters or other firms or organizations that may use the EB-5 program to evade immigration laws.

Recommendation: The INS recommends legislation clarifying that this section is applicable to any person, enterprise, or entity that intends to evade the immigration laws by knowingly misrepresenting the EB-5 program, either orally or in writing, by advising, marketing, promoting, or arranging access to it through any other means.

 
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