INS General Counsel on EB-5s

Memorandum

Date: December 19, 1997

Subject: Sections 203(b)(5) (EB-5) and 216A of the Immigration an Nationality Act

To:Paul W. Virtue, Acting Executive Associate Commissioner, Office of Programs

From: Office of the General Counsel

Background

Under section 203(b)(5) of the Immigration and Nationality Act, as amended (the "Act"), an alien entrepreneur may file a petition for an immigrant visa if he or she seeks to enter the United States to establish a new commercial enterprise. Over the last several years, a number of serious issues have arisen regarding the legality of certain types of business arrangements which have been used to qualify aliens as immigrant investors under section 203(b)(5) of the Act and current regulations of the Immigration and Naturalization Service (the "Service"). This office has been asked to examine a number of petitions which are based on these kinds of arrangements and to provide an opinion as to whether these plans comport with the current statute and Service regulations. In addition, we have been asked to provide appropriate recommendations for handling cases involving such business plans.

The plans in question involve some combination of the following provisions: (1) the use of a down payment of cash with the remainder of the alien's contribution in the form of a promissory note; (2) a multi-year installment payment plan on a promissory note with a substantial balloon payment after the conditions on the alien's lawful permanent resident status are removed; (3) an option given to the alien to sell his or her investment for a fixed price that may be less than, equal to or greater than the alien's cash contribution (usually exercisable before or at approximately the same time as the balloon payment on the promissory note is due); (5) an option given to the enterprise or limited partnership to buy the investment at a fixed price (usually exercisable before or at the same time as the balloon payment on the promissory note is due); (6) a provision that allows or requires the commercial enterprise to place sufficient cash into a bank account to guarantee that funds will be available to repay the alien if the alien exercises the sell option; (7) withholding of a portion of the alien's capital contribution for attorneys' and finders' fees and other administrative costs; and (8) a guaranteed return on the cash portion of the alien's "investment". [1]

These business plans generally involve the creation of a limited partnership that pools the money of alien investors to invest n either a new or troubled business in the United States, frequently in a "regional center." One basic problem with these plans is that the new commercial enterprise being established involves a partnership that is supposed to serve as a conduit for placing the aliens' capital to start-up or existing businesses that will create or sustain employment, but, because of various provisions in the investment or limited partnership agreements, only a small amount of the alien investor's money or other capital is actually able to reach the operations of the employment-creating or preserving business. In addition, these types of arrangements appear to give the alien relatively risk-free debt interests rather than equity interests in the new business. As will be discussed in more detail below. the plans use agreements and investor agreements to permit investments with a minimum of cash provided by the alien are to insulate the alien's cash from the business risks associated with the new commercial enterprise. Because of the complexity of these arrangements, it is difficult to determine in the brief time we have had to review the plans, the full extent to which they violate the Act and the Service's current regulations. Nevertheless, a careful review of current law and several EB-5 petitions which were forwarded to our office from the Texas Service Center clearly demonstrates that these plans do not comply with the existing statute and regulations.

Legal Questions Presented

1. Do investment plans that involve guaranteed interest payments, buy and sell options at a fixed price other than fair market value, and other debt features comport with the statutory and regulatory requirements?

2. Do investment plans involving different combinations of provisions designed to reduce or eliminate the risk to the alien's capital by limiting the amount of capital actually available for the operations of the job- creating enterprise comport with the statutory and regulatory requirements?

3. Do investment plans that allow an alien to earn a fixed return on his investment at the same time that he or she continues to make installment payments on a promissory note comport with statutory and regulatory requirements?

4. Should the Service request that the Department of State cease issuing visas and return petitions for revocation based on investment plans involving these terms.

5. Do plans like those reviewed by our office comport with existing law?

6. Is the Service estopped or otherwise precluded from denying or revoking petitions filed by aliens investing in the plans like those under review based on past approval of petitions earlier policy statements, or informal statements by Service officials?

7. Is the Service estopped or otherwise precluded from terminating the status of a conditional resident alien who has invested in plans like those under review based on past approval of petitions, policy statements, or informal statements by Service officials?

Summary Conclusions

1. No. Such plans appear in fact to constitute "loans" or other debt agreements, and therefore fail to meet the definition of "invest" in our regulations. The regulations expressly prohibit the use of debt arrangements as part of contributions of capital being invested.

2. No. Such plans impermissibly prevent the alien from placing the required amount of capital at risk of loss in the employment-generating business. This is equally true where the new commercial enterprise is in the business of lending capital to job creating businesses and acting as a mere conduit between the alien and the job-creating business. Such plans use a number provision to shield the alien's capital from risk including the deposit of cash in bank accounts to guarantee repayment of the alien's money, the use of promissory notes with large final "balloon" payments combined with the option to "sell" the alien's investment in the business at a fixed price and guaranteed returns on the alien's cash outlays. Such plans appear to continue to allow the alien to withdraw his or her capital prior to the time the balloon payment is due. In addition, the use of promissory notes in such plans fails to meet the requirement that an aline invest "capital" having a fair market value equal to or greater than the amount required in the statute.

3. No. These plans effectively permit the alien to reinvest his or her return on the initial cash contribution in the new commercial enterprise. Therefore the alien is not infusing new capital into the enterprise or the U.S. economy in the statutorily required amount.

4. Yes, for the reasons stated in summary conclusions 1, 2 and 3.

5. No. Based on our review of a number of approved and pending petitions filed with the Texas Service Center, we have concluded that they fail to meet the requirements of the statute or the Service's regulations. Any plans which involve similar terms would also fail to meet current statutory and regulatory requirements.

6. No. Under the Administrative Procedure Act and relevant cases, the Service is not bound by its pervious decisions in adjudicating visa petitions. We recommend, however, that the Service issue a memorandum to the field consistent with this memorandum and publish that memorandum in the Federal Register.

7. No. Under the Administrative Procedure Act and relevant case law, the Service is not bound by its initial grant of a petition when terminating conditional residence status based on a visa petition that was granted in error or based on the fact that the alien is subject to termination under section 216A of the Act. We recommend, however, that the Service issue a memorandum to the field consistent with this memorandum and publish that memorandum in the Federal Register.

General Legal Principles

Under section 203(b)(5) of the Act, an alien entrepreneur may file a petition for an immigrant visa if he or she seeks to enter the United States to engage in a new commercial enterprise: (a) which the alien has established; (b) in which the alien either has invested, or is in the process of investing $1,000,000 (or $500,000 in target employment areas); and (c) which will benefit the U.s. economy and create ten jobs. In the case of a "regional center," such jobs may be created indirectly by the investment. See section 610 of the Departments of Commerce, Justice, and State, the Judiciary, and Related Agencies Appropriations Act, 1993, Pub. L. 102-395, 106 Stat. 1874 (Oct. 6, 1992). The Service's regulations at 8 CFR § 204.6 establish the criteria for adjudicating alien entrepreneur (EB- 5) visa petitions.

Under 8 C.F.R. § 204.6(e) a prospective immigrant investor is required to show an "actual commitment" of the required amount of capital. Id. In addition, the Service's regulations expressly prohibit any kind of debt arrangement. See 8 C.F.R. § 204.6(e). Under this regulation, a contribution of capital will only count as part of the alien's statutorily required capital contribution amount if it is an equity investment. As a result, any investment plan that includes a contribution of capital involving a debt arrangement fails to satisfy the requirements that the alien invest the required amount of capital in the new commercial enterprise, even if the plan permits the debt to be subsequently converted into an equity interest.

More fundamentally, as this office has noted on more than one occasion, "the statute and the regulations require that an employment creation immigrant's investment be genuine." See Legal Opinion of the INS General Counsel (June 27, 1995) at p. 10 and Legal Opinion of the INS General Counsel (September 10, 1993) at p.7. To ensure that there is a genuine investment, the petition must be accompanied by evidence that the petitioner has placed the required amount of capital "at risk" for the specific purpose of "generating a return on the capital placed at risk." 8 C.F.R. § 204.6(j)(2). Further, an alien must place all qualifying capital he or she invests "at risk" for the entire two-year period of conditional residence. See Legal Opinions of June 27, 1995, at p. 10 and September 10, 1994, at p. 7. While this office has stated that certain redemption agreements are permissible, those which allow for the redemption of an alien's interest in the new commercial enterprise at more than fair market value fail to meet the "at risk" requirement of the regulations. See Legal Opinion of September 10, 1993 at p.8. Similarly, although this office has previously stated that a third party guarantee may be a legitimate means of reducing a risk from a downturn in business of the new commercial enterprise, this opinion was based on the assumption that there actually exists a genuine investment intended to create jobs, i.e., that capital has actually been made available to and put at risk in job-creating businesses.

In other words, the alien must actually purchase an ownership interest in the new commercial enterprise by making capital having a fair market value in the statutory amount fully available for use by the enterprise in creating or preserving jobs. In the case where the new commercial enterprise functions as a lender or provider of capital to job-creating or job-preserving U.s. businesses, the alien's capital must be made fully available not only to the new commercial enterprise, but also to the job- creating and job-preserving businesses.

Specific Legal Principles

1. Under current Service regulations, a debt arrangement between the alien investor and the new commercial enterprise doe snot constitute an "investment"

Under current Service regulations "[i]nvest means to contribute capital." 8 C.F.R. § 204.6(c). The regulations specifically provide that "[a] contribution of capital in exchange for a note, bond convertible debt, obligation, or any debt arrangement between the alien entrepreneur and the new commercial enterprise does not constitute a contribution of capital for the purposes of this part." Id. (emphasis added). Significantly, as written, this language (especially the language "or any other debt arrangement") provides the Service with broad discretion to go behind the nomenclature of the arrangement (e.g., a "limited partnership") and determine if the transaction is actually, in substance, a loan or other debt. An arrangement under which a new commercial enterprise guarantees an annual return on capital, regardless of whether the business is making a profit is, in fact, little different from a bond or other debt arrangement whereby the company promises to pay interest payments on capital loaned to it by an alien. The debt nature of the transaction is even more apparent when this guaranteed return is combined with an agreement to return some or all of an alien's contribution regardless of the fair market value of the underlying business. It makes no difference whether the alien will receive a return of his or her full cash contribution since, in such a case, the sole risk of loss of the actual capital contributed faced by the alien is contractual, ad is not dependent on the business fortunes o any job- creating or job-preserving enterprise. Further, when he alien may incur the risk of loss of the funds he or she has lent in the vent the business fails or is failing, such risk is no different than that incurred by a bondholder or any other business creditor. Moreover, many arrangements also allow the business to buy out the alien's "investment" at a fixed price, regardless of the actual worth of the business. As discussed in detail below, such arrangements are little different than a standard debt, since, unlike an equity holder, an alien under such an agreement faces no "upside" or "downside" potential from his or her "investment." Further, even if the new commercial enterprise doe snot exercise the buy-out option and the alien does not exercise the sell option and remains in the investment, such an arrangement is analogous to a convertible debt, whereby the alien has the option of converting a bond or other debt instrument into an equity holding.

In preparing this memorandum we have carefully reviewed the Service's previous memoranda and correspondence on the EB-5 issue. It is clear that the Service has not previously considered the debt nature of these arrangements. An October 20, 1997, memorandum stated that "a contractual provision for such guaranteed payments may, in certain cases, be consistent with a genuine investment." Memorandum of October 20, 1997, from Office of Adjudications. Our determination here is not necessarily inconsistent with this statement since that the statement does not purport to justify all or even most plans having such contractual provisions and it did not analyze these provision sunder the regulation forbidding "debt arrangements." However, a guaranteed return on an investment is strong evidence that the investment constitutes a debt arrangement, which is prohibited by the clear language of the Service's regulations.

2. Plans that prevent any portion of the alien's statutory minimum capital contribution from being placed at risk do not meet the current statutory and regulatory requirements

To ensure that there is a real investment, the alien is required to show an "actual commitment" of the required amount of capital. Id. This requirement is intended in part to serve as a safeguard against immigration fraud. See Legal Opinion of September 10, 1993, at p. 5. Because current regulations broadly defined what constitutes a "commercial enterprise," what constitutes "risk of loss" as required by the regulations will depend on the specific type of business involved. For example, where the new commercial enterprise is a limited partnership which is in the business of providing or lending capital to troubled or new U.S. businesses, there can be no "risk of loss" or capital intended to meet the statutory job creation requirement if the limited partnership doe snot make the funds available to the job-creating U.s. business or use them to obtain funds for use in such a business, but merely deposits the capital in a bank account in the name of the limited partnership. This is also true where the alien contributes capital to a limited partnership that is to act as a conduit to place the alien's capital in such businesses, but instead, deposits some or all of the capital in a bank or trust account, or otherwise fails to make the alien's capital fully available to such businesses. In addition, plans involving a payment of any immigration attorney's fees, or unreasonably high finder's fees, legal fees, or administrative fees out of the alien capital contribution fail to meet the requirement that the capital be placed at risk "for the purpose of generating a return on the capital being placed at risk."

3. Under current regulations, in order for a promissory note to constitute "capital," the note must have a fair market value in U.S. dollars equivalent to the amount of the note which is used to meet the minimum statutory capital requirement

The Service's regulations at 8 C.F.R. 204.6(e) define "capital" to mean, among other things, "indebtedness secured by assets owned by the alien entrepreneur, provide that the alien entrepreneur is personally and primarily liable and that the assets of the new commercial enterprise upon which the petition is based are not sued to secure any of the indebtedness." See also 8 C.F.R. 204.6(j)(2)(v). Although the regulations permit non-cash goods and instruments, such a machinery and certain secured promissory notes, as statutory capital in the alien's investment, the regulations also state that "[a]ll capital shall be valued at fair market value in United States dollars." 8 C.F.R. 204.6(e). Thus, a promissory note used as capital must itself have a fair market value in U.S. dollars.[2] To establish that value, it must be shown that the note is negotiable and has a cash value equivalent to the amount of capital contribution it represents, even if it never actually negotiated. For example, in a case where the new commercial enterprise depends on obtaining loans from a warehouse lender in order to lend sufficient funds to troubled businesses to create U.S. jobs, the warehouse, in assessing the creditworthiness of the new commercial enterprise, must be able to value the promissory note, for purposes of making a loan to the business, as the equivalent of cash in the amount of the capital contribution that the note is claimed to represent. In every case it is the fair market value of the note, not the fact amount, that will be controlling in deciding whether adequate capital has been invested. The burden is on the petitioner to establish that the fair market value is satisfied through the submission of appraisals of the note from independent sources.

As indicated above, a promissory note must also be secured by an alien's assets. 8 C.F.R. 204.6(e); 8 C.F.R. 204.6(j)(2)(v). In a previous legal opinion this office has indicated that the regulations do not require that indebtedness used as capital meet the requirements of a secured transaction under Article 9 of the Uniform Commercial Code. See Legal Opinion of the INS General Counsel (June 27, 1995) at p. 9, n.9. Still, this office has previously concluded that, to be deemed "secured" for purposes of meeting the definition of "capital," not only,y must the promissory note itself have a fair market value equivalent to cash, but that the underlying collateral itself must have a fair market value in the amount of the note. Id. at 8-9. Among other things, the new commercial enterprise must be able to enforce the note against such collateral for the amount of the note used to meet the minimum statutory capital requirements. An under-collateralized note will be deemed to be "unsecured" for any portion of the collateral which is less than the amount of the note applied to meet the minimum statutory capital requirements. Id. at 8-10. Where the note is secured by foreign assets, such assets must have a fair market value in U.S. dollars equal to the amount of the note, and the commercial enterprise must be able to enforce against the collateral.[3] In addition, the alien must be able to demonstrate throughout the two year conditional residency period and at the time of the filing of the petition for removal of the condition that the alien continues to possesses assets of sufficient fair market value to secure the note.

A prior Service policy memorandum stated that "if all other statutory and regulatory requirements are met, an adjudicating officer may approve a petition involving a small initial down payment ... and the execution of a promissory note to the new commercial enterprise for the balance of the requisite statutory amount." Memorandum of October 20, 1997, from Office of Adjudications to all Regional Directors, et al. Our analysis here doe snot address the validity of such notes as a general matter. Rather, if such notes do not have the requisite fair market value or are not properly secured, then the petition should be denied because "all other statutory and regulatory requirements" have not been met, particularly the requirement than an alien invest or be in the process of investing the required minimum amount of capital.

4. Under current law, an alien must "infuse" new capital into a new commercial enterprise and therefore my not apply any profits, proceeds, or interest derived from invested capital toward meeting his or her obligations on a promissory note used as capital

The statute specifically requires that the alien "invest" capital in a new commercial enterprise. INA § 203(b)(5). The term "invest" is defined in the regulations as "to contribute capital." 8 C.F.R. 204.6(e) The legislative history clearly shows that section 203(b)(5) contemplates an "infusion" of capital from the alien into the new commercial enterprise. See Legal Opinion of the INS General Counsel (Sept. 10, 1993) at p. 4; S. Committee on the Judiciary rep. 55, 101st Cong., 1st Sess. (1989), p. 21. For this reason, an alien may not count towards meeting the statutory capital requirement any profits, proceeds, or interest derived from the alien's capital contribution. Thus, were an investment plan involves the use of a promissory note and a series of installment payments, the installment payments must come from funds other than those generated by the investment itself. For example, the capital "infusion" requirement is not met where the new commercial enterprise "parks" or otherwise sets aside an alien's cash contribution in a bank account, and all or some of the alien's installment payment on a note used as "capital" derives from interest on the bank account. An alien cannot be deemed to have complied with the capital infusion requirement if any portion of the alien's payment on the installment derives from dividends or other funds received through operations of the new commercial enterprise. See De Jong v. INS, Civ. No. 6:94cv850 (unpublished, E.D. Tex., Jan. 16, 1997)(dairy farm investment derived from "culled" cows).

5. Regardless of the form of the new commercial enterprise (e.g. limited partnership or otherwise), it is unlikely that the job creation requirement of the statute and regulations can be met unless the alien's capital is made fully available to and is actually used by job creating U.S. businesses.

The core purpose of the EB-5 program is to create full-time jobs for U.S. workers. In the case of a "regional center," such job creation may be generated indirectly. In all cases, however, the alien must demonstrate that his or her individual capital contribution will actually result in job creation. See 8 C.F.R. §§ 204.6(g), (j)(4), and (m)(7). Implicit in the statutory and regulatory rules is the requirement that the alien must make an actual commitment to make the statutory capital amount fully available to, and intend that such capital will actually be used by, the new commercial enterprise for the purpose of creating such jobs. The mere loan or transfer of capital in any form to the new commercial enterprise and the subsequent "parking" of such capital in a bank account or the equivalent without it actually being put to use by the new commercial enterprise for the purpose of creating or preserving jobs fails to meet current statutory or regulatory requirements, though a business may make provision for reasonable cash reserves. In such a case, the idle capital cannot reasonably be expected, even in a regional center, to create or preserve the requisite ten full-time positions, and evidence of jobs created or preserved must be accompanied by evidence of a nexus between the alien's investment and the jobs.

Analysis of selected visa petitions

The content of the "investment" plans

The Southern Service Center has provided our office with three visa petitions for review as examples of plans that present many of the problems discussed above. These cases were selected as representative of plans used in hundreds of visa petitions filed by aliens. They were chosen for review because plans like these have been the subject of numerous cables from State Department consular posts questioning their validity and because the Service Centers themselves have identified other issues regarding such plans.

While there are differences in the precise details of the arrangements made in the plans and differences in the underlying businesses that are the targets of the "investments," all the plans share some or all of the following characteristics: 1) the alien's "investment" is in the form of an initial cash payment with the balance as a promissory note to the new commercial enterprise; 2) the payments on the promissory note are scheduled with small yearly payments for five to six years and a large final payment at the end of the note, usually representing the majority o the statutorily required investment amount; 3) a guaranteed return on the cash the alien provides to the commercial enterprise; 4) a release from the obligations under the promissory note in the event of the insolvency of the partnership; 5) an option on behalf of the alien to "sell" his or her "investment" back to the new commercial enterprise for a fixed price at the time the final balloon payment on the promissory note is due or before; 6) an option on behalf of the commercial enterprise to "buy" the "alien's" investment at a fixed price at the time the final balloon payment is due or before; and 7) a requirement that the new commercial enterprise deposit sufficient funds in a bank account to meet its obligations under the sell option agreement.

The details of a representative visa petition

We will review briefly the details of one plan that is similar to many others to illustrate the typical structure of plans used by a number of different programs. Our purpose here is not to judge the merits of this particular plan for adjudication purposes but to use an example to help explain these complex arrangements generally. The principal legal instruments defining the terms of the investment are a deposit agreement, a promissory note, an investment agreement and an agreement of limited partnership. Under the promissory note and the investment agreement the alien is to make a "capital contribution" to the partnership of $500,000. The alien will pay $120,000 in cash and owe the rest on a promissory note. Of the $120,000 cash, $30,000 goes directly to the partnership as a "refundable advance of initial expenditures to the Partnership." The $30,000 is refunded only in the event that the visa petition is not approved or the condition on the alien's residence is not removed because of a failure to create the required number of jobs and the partnership cannot find another suitable investment for the alien's money. The other $90,000 goes into an escrow account and, under the terms of the investment and deposit agreements, will be released to the partnership upon approval of the alien's immigrant visa or adjustment of status application. The $375,000 balance of the alien's "contribution" is payable in six installments. There are five annual installments of $18,000 each, the first being due one year from the date the alien is admitted to the partnership. Six years from the date of the alien's admission to the partnership a final payment of $290,000 is due.

Under the investment agreement, the partnership must pay the alien a 12% annual return on his or her cash contribution for five years, irrespective of whether the enterprise is making any profits, and the alien may receive a share of the profits of the partnership to the extent that his or her share of the profits exceeds the 12% return.

The investment agreement also states that "in the event of the bankruptcy, the insolvency, or the failure of the Partnership to pay the annual return on capital, to pay the sell option price, or to pay any judgment, the Partnership shall be deemed in breach of its obligations to the Limited Partners .. and [the alien] shall have no further obligation to the Partnership and ... shall not be obligated to make any further payments under the Limited Partnership Agreement, the Investment Agreement or the Promissory Note." The promissory note expressly incorporates by reference the terms of the investment and limited partnership agreements.

The investment agreement and the limited partnership agreement provide the alien the option to "sell" his or her partnership interest back to the partnership. In addition, these agreements give the partnership the option to buy the alien's interest in the partnership. In the particular petition used as an example here the investment agreement contains provisions on the buy and sell options that are inconsistent with the limited partnership. The investment provides that the alien has "the right to require the Partnership to purchase [his or her] limited partnership interest (or ownership interest in the General Partner, if applicable) at a price equal to [his or her] total contributed capital, less [his or her] first six installment payments, plus [his or her] pro rata share of profits ...." The partnership has a "buy option" under the same conditions. Under the limited partnership agreement, however, the alien has a sell option that may be exercised five years after the alien's admission to the partnership for "an amount equal to the full amount of Capital Contributions to the Partnership but the [alien] less the four annual cash payments made by the [alien]." The limited partnership agreement also gives the partnership a buy option exercisable after 3 years. It is not clear which of these sell and buy options will be enforceable by the alien and the partnership, as the investor agreement expressly endorses the terms of the limited partnership agreement. It is also unclear whether the buy and sell options remain permanently open to the alien and the partnership or terminate on or after final payment on the promissory note.

Finally, and significantly, the limited partnership agreement states that the "General Partner on behalf of the Partnership shall deposit with the Banks from the Initial Cash Payments sufficient Reserve Funds to satisfy the Partnership obligations under [the alien's sell option] and to defray such costs and expenses of the Partnership as determined by the General Partner." In other words, the partnership has an obligation to deposit enough money in a bank account to pay the alien if he or she decides to leave the investment.[4] This money, therefore, never becomes available to the job-creating U.S. business.

Legal analysis of the representative plan

Under the legal analysis presented above, it is clear that arrangements of this type are not consistent with the Act or current Service regulations. There are five fundamental problems with the plan detailed above. First, it is clear that the plan is essentially a debt arrangement and not an equity investment in the new commercial enterprise. Second, under the plan discussed above the alien's capital is not placed at risk. Third, the full statutory amount of capital is not made available for use by any U.S. business for employment creation or business operations. Fourth, under this plan, the promissory note used to meet the minimum capital requirement does not have a fair market value equivalent to the statutorily required investment amount. Finally, the guaranteed payment on the alien's cash contribution in the plan amy be used to make payments on the promissory notes. As a result, thee is an insufficient infusion of new capital into the business.

The representative plan is a debt arrangement and is therefore precluded under current regulations.

The plan analyzed herein (and others that our office reviewed) is essentially a debt arrangements rather than an equity investment in the new commercial enterprise. As such, it is not a valid investment under 8 C.F.R. § 204.6, as discussed above. The distinction between debt and equity in any investment situation is complicated and has ramifications in many areas of commercial and tax law. Because of this complexity it is not possible to present one simple definition of debt and equity that permits easy application to the plan under consideration here. Nevertheless, a review of relevant materials and case law leads to the conclusion that under this plan the alien is providing a large amount of debt, and little, if any, equity capital, to the new business, and the plan must be classified as a "debt arrangement." Therefore an alien who participates in such a plan fails to "invest" his or her capital in the new enterprise as required by the regulations.

Most discussion of the distinction between debt and equity arises in the tax and securities law context. There is well-developed law on the question, and we consider the analysis in the tax and securities arenas generally applicable to the use of term debt in our regulation. The classic definition of debt is "an obligation to pay a sum certain at a fixed maturity date along with a fixed percentage of interest payable regardless of the debtor's income." Mertens Law of Federal Income Taxation, § 26.16. An investor owning an equity interest is "one embarking on the corporative venture, taking the risks of loss attendant upon it, so that he or she may enjoy the chances of profit." Id. "It is settled that no simple rule exists for determining whether an instrument should be classified as debt or equity; the ultimate test is whether in substance the arrangement more clearly resembles debt or equity ...." Monon Railroad v. Commissioner, 55 T.C. 345 (1970), citing John Kelly Co. v. Commissioner, 236 U.S. 521, 530 (1945). Therefore, in analyzing the plan outlined above we are guided by the general rule applied by courts in making debt/equity determinations that "the form that the transaction takes is not controlling, but rather the substance." Hambuechen v. Commissioner, 43 T.C. 90, 98 (1964), citations omitted.

Under these general definitions, the plan under consideration should be classified as a debt arrangement rather than equity, despite the fact that the "investment" has some equity characteristics. The alien's "sell option" and the partnership's "buy option" set the maturity date of the loan, and the investment agreement provides a fixed interest rate of return that is due irrespective of the income and fortunes of the commercial enterprise. As the above analysis of the limits on the risk to the alien's money demonstrates, the alien is not taking the risk of loss on the change that he or she be able to enjoy the profits of the business, as the Service regulations require. Rather, the alien is guaranteed a return, and, because of the partnership's buy option, the alien does not really enjoy the chance of profit. If the business were profitable and the value of the alien's share increased, the partnership (the majority if which is owned by the general partner and not the aliens) could, and if it is economically rational would, buy out the alien's share for the fixed price at or below what the alien has paid into the business and below the increased value of the alien's share in the business. Accordingly, as a general matter, this agreement appears to be more in the nature of debt than equity.

A more detailed analysis of the complex factors that must be weighed in making the determination of whether a particular transaction is debt or equity supports this general conclusion. Most cases addressing the debt versus equity issue involve investments in corporations rather than partnerships. However, in the leading case on the debt versus equity question in partnerships, the Tax Court held that the factors to be considered for partnership investments are the same as those for investments in corporations between partnership and corporate investments. Hambuechen, supra, 43 T.C. at 101-102.

A review of the relevant cases and treatises shows that the factors evidencing debt are: (1) an unconditional promise to pay; (2) a fixed maturity date; (3) a fixed interest rate (whether set as an percentage of the investment or a percentage of profits of the investment); (4) intent to repay; (5) the general partners are liable to the creditor for repayment of the debt; (6) presence of a sinking fund to provide repayments; (7) existence of security for the alleged loan; (8) a redemption or retirement provision; and (9) the fact that a third party lender would make a loan under similar circumstances.

The factors evidencing equity are: (1) funds are placed at the risk of the business in the expectation of earning a profit; (2) payment is subject to the rights or creditors at liquidation; (3) the business is adequately capitalized; (4) payment can be made only from future profits; (5) funds are used to acquire capital assets; (6) the investor has the right to participate in shareholder functions, such as voting; (7) the investor has the right to participate in the proceeds of a solvent dissolution of enterprise.

A review of the plan being used as an example here with respect to each of these factors reveals that the debt characteristics far outweigh such plan's equity characteristics, and that, on balance, it should be considered a debt arrangements and not equity an investment. This plan clearly exhibit must of the nine factors listed as evidencing debt, and may exhibit them all:

1. The investment agreement, limited partnership agreement, and promissory all contain a clear unconditional promise to repay at least a portion of the aline's money.

2. The buy and sell options ...

[Editor’s Note: Number “2” was indecipherable in the copy of the memo received by AILA.

3. There is a fixed interest rate calculated as 12% of the cash given to the enterprise plus a portion of profits.

4. The agreements on their face evidence an intent on the part of the partnership to repay, and the guarantee of repayment is certainly one of the principal features that attracts aliens to these plans.

5. It appears from the text of the partnership agreement that the general partner is liable for the repayment of the amount guaranteed in the sell option. Section 10.06 of the partnership agreement states that "[e]xcept for the Limited Partner's Sell Option, the Limited Partners shall look solely to the assets of the Partnership for return of their Capital Contributions, and if the Partnership property remaining after the payment or discharge of debts, obligations and liabilities of the Partnership is insufficient to return Capital Contributions, they shall have no recourse therefor against the General Partner of the Liquidator." (Emphasis added.) This language implies that the general partner or partners are in fact liable to the limited partners for the amount due under the sell option provisions.

6. The "cash reserve" which the partnership must maintain to meet its obligations under the sell option is in essence a sinking fund that is used to pay aliens as they leave the partnership.

7. It may also be possible to view the cash reserves as security on the loan, though this is a question of fact that we cannot decide here.

8. The buy and sell options appear to be redemption or retirement provisions.

9. If the loan is discounted for the alien's willingness to pay a certain price for obtaining lawful permanent resident status, then it is possible that a third party would make a loan under similar circumstances through this is a fact question we cannot decide here.

The plan under consideration also exhibit some equity characteristics. From the partnership agreement it appears that the alien investors do have some shareholder rights such as voting and consultation in management decisions. Also, it appears that for some purposes the rights of the alien investors are subject to the rights of creditors, but they may well be on par with creditors with respect to the amount due them under the sell option. Aliens also have some right to participate in the solvent dissolution of the partnership, but that right is greatly limited by the fact that the partnership has an absolute right to buy the aliens' interests in the partnership at a time that is likely to be prior to any solvent dissolution of the business. Finally, because much of what the aliens contribute to the new enterprise is either a promise to pay or debt, these businesses may be undercapitalized.

However, from our review of the relevant material it is clear that the most important aspects of an equity investment are that the alien's capital be at risk of loss and profit and only receive a return from the profits of the business. These aspects are lacking in the plan under review. As outlined above, a substantial portion, if not al, of the alien's contribution is shielded from the risk of the new commercial enterprise through a variety of provisions in the agreements. In addition, payment on the alien's "investment" is not made solely from future profits, but guaranteed, regardless of the profitability of the enterprise.

In sum, we believe that the representative plan and all similar plans are debt arrangements and therefore, under 8 C.F.R. § 204.6(e), aliens who participate in them have failed to invest the requisite amount of capital in the new commercial enterprise. Three arguments might be raised against this conclusion. First, it may be argued that because the plans have some equity characteristics they cannot be classified as debt arrangement. However, the cases on this issue frequently classify an investment as debt even when it exhibits some equity characteristics. For example, in Paulsen v. Commissioner of Internal Revenue, 469 U.S. 131 (1985), the Supreme Court was faced with determining the debt or equity nature of shares in Citizens Federal Saving and Loan Association, a federally chartered mutual savings and loan association. The Court held that "the debt characteristics of Citizens' shares greatly outweigh the equity characteristics" and concluded that they were debt arrangements. The Court reached this conclusion in part because the shareholder's "investment was virtually risk free and the dividends for savings accounts were equivalent to prevailing interest rates ...." Id. at 140. The Supreme Court came to this conclusion despite the existence of a number of seemingly significant equity characteristics of the Citizens shares, including that they were the only ownership instruments in the corporation, that the interest on the accounts was in the form of dividends and not set at a fixed amount as a return on the investment, that the shareholders had voting rights and that they had a right to participate in the net proceeds of a solvent dissolution. Id. at 138-39. The argument that these plans are not debt arrangements may also be made based on a interpretation of the regulations. It might be argued that the because these investment plans have some equity characteristics, they are not "debt arrangements" but rather "debt/equity arrangements" and therefore not prohibited under the regulations reference to "any debt arrangement." This argument fails on two accounts. The regulations specifically prohibit "convertible debt," which is a type of debt/equity arrangement. In addition, we read "any debt arrangement" to mean any arrangement that includes debt features because the wording of the regulation evidences an intent to be expansive in coverage. Moreover, as indicated above, the courts often classify arrangements having some equity characteristics as debt.

Second, it might be argued that because the alien's sell option doe snot entitle him or her to the return of his or her full contribution, it is an equity investment. It could be argued that the party of the alien's "investment" that is not returned is equity. However, because of the way in which the buy and sell options are structured this is a weak argument. If the alien exercises the sell option or the partnership exercises its buy option, the portion of the alien's money that is not returned remains with the partnership, but the alien relinquishes his or her complete interest in the partnership. That is, he or she retains no interest, debt or equity. Thus this portion of the alien's contribution is more in the nature of a payment, fee or penalty for withdrawal rather than an equity investment, and any loss incurred is contractual in nature and not dependent on the profitability of the business.

Finally, it might be argued that if neither the alien nor the partnership exercises their options, then the investment is an equity investment, and the alien becomes an equity holder. Even assuming that this were true, this would only indicate that the investment is convertible debt and not equity. The regulations specifically prohibit the use of convertible debt. See 8 C.F.R. § 204.6(e).

The alien's capital is not placed at risk.

All of the above-listed seven characteristics of the example investment individually go to reduce the risk to the alien's capital. Whether or not each characteristic standing alone is consistent with current law, when all or some of them are used together, they all but eliminate the required risk by substantially limiting the amount of the alien's cash that is available to the employment-creating business and by guaranteeing the alien a return on his or her investment and the return of some or all of his or her capital contribution. For this reason, such plan does not comport with existing law.

Under the plan detailed above, one of the principal mechanisms by which the alien's capital is shielded from the risk associated with the new commercial enterprise is by placing the aline's cash contribution in a bank account as reserves to be kept available to repurchase the alien's share in the future. The sole risk of loss an alien faces if his or her capital is "parked" in a bank account is that the bank will become insolvent. This risk, however, exists independent of the activities of the new commercial enterprise. If the alien placed his or her money directly into a U.S. bank account, the alien obviously would not qualify for an EB-5 visa, despite the risk of bank failure. The fact a limited partnership is created to place the alien's money in a bank account doe snot turn the deposit into an EB-5 qualified investment.[5] Arguably, there is also some risk that the partnership itself will fail and the alien will lose his or her cash to the creditors of the partnership. However, this risk is minimal in an investment plan in which the partnership does little more than act as a repository of the alien's cash and promissory note. The alien's "investment" is not put at risk as capital in a new, job-creating enterprise or enterprises. The risk involve din handling money to a partnership that in turn places the money into a bank account is clearly not the type of risk Congress intended -- that the alien's capital be used by the new commercial enterprise to create directly or indirectly full-time U.S. jobs -- nor the type of risk required by the regulations.

Another means by which the investment plan impermissibly prevents placing the alien's money at risk in the job-creating commercial enterprise is to insulate the alien from los due to a business downturn through use of a promissory note. The terms of the promissory note and the investment agreement will ordinarily function to avoid the actual investment of cash in the job-creating enterprise. In the plan detailed above, the promissory note is structured so that the alien only makes small annual payments on the note for a period of five or six years and then a large "balloon" payment at the end of the term. Along with this arrangement is a clause that in the event of the insolvency of the partnership or the failure of the partnership to make guaranteed interest payments, the alien's promissory note is automatically forgiven, thus shielding the amount of "capital" represented by the promissory note (over 75% of the alien's claimed capital contribution under the plan) from the risk of failure of the new enterprise and protecting it from the creditors of the new enterprise. As indicated above, a prior Service policy memorandum has stated that the use of promissory notes with a substantial balloon payment due after the date of removal of the condition on the alien's permanent residence "does not by itself mean that a petition should be denied." Memorandum of October 20, 1997. In the plan under review it is not the existence of the promissory note and balloon payment by itself that runs afoul of the regulations, but rather the terms of the promissory note combined with other terms in the investment plan which together impermissibly shield the alien's capital from risk.

Finally, the investment plan detailed here also provides an option for the alien to withdraw his or her capital investment before or at the time the alien makes the balloon payment. The amount of the balloon payment cannot be deemed to meet the "at risk" requirement of the regulations because the amount of the balloon payment is not available to the job- creating business during the payment period of the promissory note and the alien can ensure that it never becomes available. The practice of permitting the sell option to be exercised prior to the alien's making the final payment on the promissory note was expressly rejected in Service internal policy memoranda issued on October 1, 1996, and in December 16, 1996, and October 20, 1997. With regard to the particular petition detailed above, it should be noted that the terms of the agreement do not comply with the policies set forth in these memoranda, even assuming that the terms of the investment agreement (which permits the sell option to be exercised on the same date as the balloon payment comes due) are binding and the terms of the partnership agreement are not. Specifically, under the language of the investment agreement, although the final payment on the promissory is due on the same date that the alien may exercise his or her sell option, the agreement nevertheless permits the alien to exercise his or her sell option prior to actually making the final payment.[6]

An agreement that uses promissory notes combined with buy-and sell- back options impermissibly avoids risk in contravention of current regulatory requirements because it greatly reduces the possibility that the aline's funds will be made available to job-creating or job-preserving U.S. businesses. Moreover, the fact that such a plan allows the commercial enterprise to retain some of the contributed capital after the alien sells or the partnership buys the alien's interest merely highlights the fact that any "risk" incurred by the alien is contractual in nature and is therefore unrelated to the activities of the business.

It is important to note that the impermissible insulation from risk discussed here is substantially different from that discussed in our legal opinion of September 10, 1993. In that opinion our office indicated that an alien may enter into an agreement with a third party to guarantee that the aline receives a return on his or her investment. In contrast to arrangements described above, a third party guarantee does not prevent the alien's capital from being placed at risk for the purpose of generating a return on risk capital used by the new commercial enterprise. For a third- party guarantee to be permissible, the alien would have to place his or her money into the new commercial enterprise for the use of the business. Similarly, where the new commercial enterprise functions as a conduit for investment into job-creating U.S. businesses, the alien's funds must be made available for the use of those job-creating U.S. businesses. That capital would be at risk of loss and could be used by the enterprise. The third party guarantee protects the alien from risk, but does not prevent capital from being placed at risk in the new enterprise. Moreover, in our legal opinion of June 27, 1995, we specifically held that an agreement that the new commercial enterprise buy back the alien's investment after the two-year conditional residence period but prior to the final payment to a third party lender who provided the alien's capital was impermissible because it shielded the alien from the risk of loss. Such an agreement impermissibly shifted the risk of loss to the third party lender. Plans involving the provisions outlined above are similar to that which we rejected in our legal opinion, except that they do not involve a third party lender.

It can be argued he plan detailed above does in fact meet the risk requirements in the regulations. The argument would run as follows. The requirement in the regulation is that the "required amount of capital be placed at risk for the purpose of generating a return on the capital place at risk. Evidence of mere intent to invest, or of prospective investment agreements entailing no present commitment, will not suffice to show that the petition is actively in the process of investing. 8 C.F.R. § 204.6(j)(2). The regulations define "capital" to include "indebtedness secured by assets owned by the aline entrepreneur ..." (i.e. secured promissory notes). Further, the regulations state that evidence to "show actual commitment of the required amount of capital ... may include but is not limited to ... evidence of any loan or mortgage agreement, promissory note, or other evidence of borrowing ...." 8 C.F.R. § 204.6(j)(2)(v) (emphasis added). Arguably, under these rules the plans under consideration conform to the regulation in that the promissory note constitutes capital and has been provided as evidence the actual commitment of capital. However, we note that, as discussed above, the promissory note must have a fair market value sufficient to meet the alien's statutory investment requirement. If it doe not then it is not a sufficient contribution of capital. In addition, the combination of the terms of the promissory note and sell and buy options undercuts any finding that the note represents a sufficient "actual commitment" of the requisite amount of capital. By requiring an "actual" commitment, the regulations make clear that the Service is not to elevate form over substance.

The example plan permits reinvestment of the proceeds of the new commercial enterprise to be counted as part of the required amount of capital invested and therefore do not constitute an "infusion" of capital as required by the statute

Under the reviewed plan, the alien begins to receive guaranteed yearly payments on his or her investment at the same time the alien begins to make the installment payments on the promissory note. The note payments and the yearly return have roughly equal values. Therefore the alien's payment on the promissory note essentially comes from the return on his or her original cash contribution and is not an investment or infusion of new capital into the new enterprise. In fact, advertisements and internal documents form one company that organizes EB-5 investments state that the return on the investment will be directly applied to make the payment son the promissory note so that the alien doe snot have to make any further cash payments to the commercial enterprise. The company's training manual provided to "finders" of alien investors states specifically that "[t]he investor must execute a promissory note for the full amount of the investment ... After the initial payment the partnership makes guaranteed annual distributions to the limited partner which are used to offset the annual payments that the investor is required to make on the promissory note." As indicated above, the Service has denied at least one petition based on the fact that the capital being contributed was coming from the new commercial enterprise itself and the District Court upheld the Service's decision. See De Jong v. INS, Civ. No. 6:94cv850 (unpublished, E.D. tex. Jan. 16, 1997).

The promissory notes do not have sufficient fair market value to meet the alien's capital investment requirements under the statute and regulation.

As indicated above the Service's regulations require that all capital be valued at fair market value in United States dollars. See 8 C.F.R. § 204.6(e). In the plan discussed in detail above, the promissory note was contributed as $380,000 worth of capital. However, such a promissory note most certainly does not have a fair market value of $380,000 dollars, even if adequately secured by the alien's property. With respect to its value to the new commercial enterprise prior to the time the balloon payment is due the note, which is collateralized by foreign assets, is either non- negotiable, or, even if negotiable, would be subject to a heavy discount. As noted above, in a case where the new commercial enterprise is in the business of lending to job-creating U.S. businesses which is dependent on loans from a third party, such as a warehouse lender, the lender would not consider the note to have the same value as cash for purposes of determining loan amounts. Further, with respect to the final balloon payment of $290,000, the promissory notes are nearly valueless. As soon as, and perhaps before, the alien becomes liable to make the balloon payment, the alien has a right to sell his interest back to the partnership for a sum equal to or greater than the value of the balloon payment. Upon sale of the alien's interest the note is extinguished. Further, if the partnership fails to make this or any other payment to the alien, the alien's obligations under the note are extinguished. Even if the alien cannot exercise the sell option until the day the final payment is due, the alien would appear to have a clear avenue to avoid payment on the note. If the alien wishes to avoid the final payment, he or she simply needs to withhold it and then exercise the sell option. Presumably the partnership, having failed to receive the alien's final payment, would not pay the alien the sell price. Under the agreement, this sequence of events would cause the note to be cancelled automatically.

The full statutory amount is never committed to the new commercial enterprise

A further problem with the plan detailed above is that the full statutory amount of capital is never actually committed to the new commercial enterprise as required under current regulations. See 8 C.F.R. § 204.6(j)(2).[7] The majority of the money, $290,000, does not become available to the business until six years after the initial investment, and at that time (and perhaps before) the alien may withdraw that portion of his or her investment as soon as it is made (though the partnership has six months in which to make actual payment), if the alien does not use the above noted strategy to avoid payment altogether. In addition, under the plan used as an example here, it would appear that the majority of the cash that is put into the new enterprise is not made available to any job- creating business; there is a requirement to maintain such cash in a bank account to cover contractual buy back obligations. In cases in which an alien has already been granted condition resident status, it is important to closely scrutinize what has been done with the cash contributed. If any portion exceeding that required for normal cash reserves has not been used in the actual operations of the business, but has been held in a bank or trust account, then that portion of the cash cannot be counted towards the minimum investment amount required under the statute.

It might be argued that under current laws and regulations the existing plans are valid even if the money never reaches the target business. Because the term "capital" is defined in regulation to include promissory notes and the presentation of a promissory note is considered evidence of commitment of capital, the aliens using these plans could argue that by providing the new business with a promissory note, they have met the requirement of committing required amount of capital to the new enterprise be placed at risk. They might argue that if they can demonstrate employment creation as matter of fact, then they do not need to show that the capital was actually made available to the target business. While these arguments might be used to demonstrate minimal compliance with the letter of the regulations, it is clear that any plan that permits an alien's money to sit in an interest-bearing account until it is later returned to the alien frustrates the whole purpose of a statutory and regulatory scheme designed to grant visas to "alien entrepreneurs" who "establish a new commercial enterprise" for the purpose of generating profit on capital placed at risk. In fact, if the alien's money is not being used by the employment-creating business, that fact raises serious questions as to whether the jobs allegedly created or preserved can honestly be attributed to the alien's "investment."

The Service's authority to deny or revoke petitions

In creating the EB-5 program, Congress expanded the Service's mission to include adjudication of potentially complex business visa petitions. In implementing this legislation, the Service fashioned an essentially sound regulatory framework to address the sometimes competing aims of encouraging aliens to invest in job-creating or job-preserving businesses in this country and the need to guarantee that investments meet the statutory requirements and are not designed to circumvent the immigration laws. In the first years following the inception of the EB-5 program, however, the Service lacked sufficient empirical or theoretical knowledge of business practice to gain a full understanding of the great potential for evasion of these new statutory and regulatory requirements. Over time, however, the Service has gained a continuously greater understanding of the complex business arrangements employed by prospective immigrant investors and program sponsors.

With its increased knowledge, it is now clear to the Service that the programs discussed above violate existing law. The fact that the Service has favorably adjudicated a number of petitions involving the business plans we now find to be deficient under the current statute and regulations does not, as a matter of law, prevent the Service from denying future petitions involving such plans. See e.g. Federal Trade Comm'n v. Crowther, 403 F.2d 510, 513-14 (D.C. Cir. 1970) (an agency "is not bound to decide all future cases in the same way as it has decided a like one in the past"); National Black Media Coalition v. Federal Communications Comm'n, 775 F.2d 342, 364 (D.C. Cir.) (an agency may change its interpretation of law, "especially where the prior interpretation is based on error, no matter how longstanding"), cert. denied, 429 U.S. 890 (1976). As the Supreme Court stated in NLRB v. Weingarten, 420 U.S. 251 (1975), to hold that an agency's decisions freeze the development of important aspects of the law "would misconceive the nature of administrative decision-making. `Cumulative experience begets understanding and insight by which judgments ... are validated or qualified or invalidated. The constant process of trial and error, on a wider and fuller scale than a single adversary litigation permits, differentiates perhaps more than anything else the administrative from the judicial process'" Id. at 265-66, quoting NLRB v. Seven-Up Co., 344 U.S. 344, 349 (1953). Rather, courts have held that an agency must provide a reasoned explanation of the basis for denying an application or petition if such denial results from a change in policy. Delta Air Lines v. Civil Aeronautics Bd., 561 F.2d 293, 311 (D.C. Cir. 1970), cert. denied, 434 U.S. 1045 (1978).

Denials of new petitions

As discussed above, the actions to be taken based on this memorandum would not result from a reassessment of current Service policy, but would derive directly from existing statutory and regulatory law. For this reason, it is our opinion that no advance notice is required to adjudicate petitions in a manner consistent with this memorandum. As in all cases, of course, the Service should provide a reasoned explanation as to the basis for any such denial, a d discuss, if appropriate, why such decision might be different from that made in similar cases in the past. Further, because the substantive legal standards which apply to approvals of petition are the same as those which apply to revocation of petitions, an unsuccessful petitioner would not be able to argue successfully that the Service erroneously denied his or her petition based on the prior grant of similar petitions in the past, since such erroneously approved petitions would also be subject to revocation.[8]

Revocation of erroneously approved petitions

Similarly, the fact that the Service erroneously approved individual petitions, regardless of how many, does not now bind it, with its greater understanding of the true nature of these business plans, from instituting revocation proceedings in accordance with section 205 of the Act. Even in the absence of a specific statutory provision authorizing reconsideration of decisions (including final decisions) courts have consistently held that every agency has the "inherent power to reconsider its own decision within a reasonable period of time." Bookman v. U.S., 453 F.2d 1263, 1265-66 (Ct. Cl. (1972); see also, Dunn and Bradstreet v. U.S. Postal Service, 946 F.2d 189, 193 (2d Cir. 1991) ("[i]t is widely accepted that an agency may, on its own initiative, reconsider its interim or even its final decisions, regardless of whether the applicable statute and agency regulations expressly provide for such review.") and Belville Mining Company v. U.S., 999 F.2d 989, 100 (6th Cir. 1993).

In revoking the petitions under consideration here, however, the Service need not rely solely on this inherent power because Congress has specifically granted the Attorney General (and the Service by delegation) broad authority to revoke approval of "any petition," "at any time, for what [s]he deems good and sufficient cause." Section 205 of the Act. The regulations implementing section 205 of the Act provide Service officers with great discretion to revoke the approval of a visa petition. Section 205.2(a) of the Service's regulations states that

[a]ny Service officer authorized to approve a petition under section 204 of the Act may revoke the approval of that petition upon notice to the petitioner on any ground other than those specified in section 205.1 when the necessity for the revocation comes to the attention of the Service.[9]

Should the Service decide to revoke the approval of the petitions at issue here, it would be on the ground that, although the petitions were approved, the petitioners had not in fact established eligibility under the controlling statute and regulations. It is axiomatic that there is "good and sufficient cause" to revoke an approved petition when it is discovered, upon further and closer review, that the approval was not in accordance with existing statutory and regulatory requirements governing adjudication of the petition. In fact, the BIA has ruled that

the realization by the district director that he erred in approving the petition, however arrived at, may be good and sufficient cause for revoking his approval, providing the district director's revised opinion is supported by the record.

Matter of Ho, 19 I&N Dec. 582, 590 (BIA 1988); see also Matter of Li, 20 I&N Dec. 700 (BIA 1993) (determining that ineligibility as a matter of law is good and sufficient cause). The authority to revoke visa petitions is enhanced by the preliminary nature of the grant of a petition. An alien cannot claim to have relied on it as a final determination that he or she is admissible or would be admitted. As the Ninth Circuit has held, "a visa petition is not the same thing as a visa. An approved petition is only a preliminary step in the visa application process." Tongatapu Woodcraft Hawaii v. Feldman, 736 F.2d 1305, 1308 (9th Cir. 1984). Based on the above, it is clear that the Service has the authority to review visa petitions and revoke approval when it has been improperly granted.

Termination of conditional permanent residence

The Act and regulations also specifically provide a procedure for correcting an erroneously approved immigrant investor petition even after the alien has been granted his or her immigrant visa. Under section 216A(b) of the Act the Service may terminate an alien's conditional permanent resident status at any time it determines that the requirements of section 203(b)(5) of the Act have not been met. Section 216A(b)(1) of the Act.

Because an alien who has been granted conditional residence presumably will have made an "investment" of some kind in a U.S. business and will have moved his or her residence to the United States, such an alien might argue that it would be arbitrary and capricious action for the Service to terminate his or her conditional residence since the alien acted in reliance on the Service's approval of the petition. The alien might argue further that the Service would therefore be estopped from terminating conditional residence. However, as in the case of revocation of a visa petition, the Service has inherent and statutory authority to reconsider its decision and terminate conditional residence. Such a reliance or estoppel argument, however, would be weak for a number of reasons. First, while there is some authority for the proposition that an agency cannot reconsider a decision when it knows that the affected party will act in reliance on the decision, see e.g. McAllister v. United States, 3 Cl. Ct. 394, 398 (1983), it is clear that "reliance on [an] erroneous ... determination is no bar to reconsideration, based on ... inherent agency authority." Belville Mining Company v. U.S., 999 F.2d at 999. Second, in enacting section 216A of the Act, Congress has specifically granted the Service the continuous authority to reconsider whether an alien granted conditional residence is in compliance with the terms of the section 203(b)(5) of the Act. Third, the grant of resident status is by the terms of the statute "conditional." Therefore, the alien cannot argue that he or she took any action in reliance on the expectation that the Service would remove the condition and make his or status permanent. Finally, as a general rule, the doctrine of estoppel cannot be used against the government. As the Supreme Court indicated in Office of Personnel Management v. Richmond, 496 U.SD. 414 (1990), the Courts of Appeals have searched "for an appropriate case in which to apply estoppel against the Government, yet [the Supreme Court] has reversed every finding of estoppel [it has] reviewed." Id. at 422.

Proceedings after removal of conditions

Moreover, the Act and regulations provide a procedure for the rescission of such permanent resident status after removal of conditions if the initial grant was based on an erroneously approved immigrant investor petition. See section 246 and 8 C.F.R. part 246. Alternatively, the Service may place an alien whose status was erroneously adjusted, or who was erroneously admitted as a lawful permanent resident, in removal proceedings.

While this memorandum merely directs that the Service reconsider or adjudicate petitions in light of existing statutory and regulatory law, an alien might argue that, b following this memorandum, the Service would in fact be engaging in prospective, legislative rule making that would require prior public notice and comment under the Administrative Procedures Act (APA). 5 U.S.C. § 553(b), (e). See, e.g., Patel v. INS, 638 F.2d 1199 (Board of Immigration Appeal's imposition of a "judicially-created" job creation requirement under the old investor exemption to the labor certification requirement in former section 212(a)(14) of the Act rather than waiting for the Service to finalize its proposed rule was an impermissible circumvention of the APA); and Ruangswang v. INS, 591 F.2d 39 (1978). However, even if we were to concede that the Service is adopting a rule by correcting the erroneous decisions of its adjudicators, such a rule would be an interpretive rule, and thus fall within the exception to the APA's notice and comment requirements. 5 U.S.C. §552(b)(A). Here the Service is only applying the plain language of a properly issued regulation, or, at most, interpreting language already in such a regulation. "The agency is not adding or amending language to the regulation, hence it is not subject to notice and comment procedures." Beazer East Co. v. EPA, 963 F.2d 603, 606 (3rd Cir. 1992).[10]

Previously issued memoranda and correspondence

The Service, as part of its ongoing efforts to deal with highly complex questions posed in the administration of the EB-5 program, has issued limited guidance with respect to certain discrete issues which have arisen in the context of adjudicating petitions involving sophisticated business plans. Such limited guidance has been issued in the form of policy memoranda, correspondence, or other form of communication, parts of which may be inconsistent wit this memorandum and existing statutory and regulatory law. To the extent that these memoranda are inconsistent with the interpretation of the regulations and statute set forth in this memorandum, they are superseded by this memorandum. If the Service should encounter arguments that it is somehow bound or estopped by these previous memoranda, it must be noted that "not all agency publications are of binding force" and these internal memoranda are most likely the kind of agency publications that are not enforceable against and agency. Lyng v. Payne, 476 U.S. 926, 937 (1986).

Even if one were to accept, arguendo, that the Service is not permitted to alter prior erroneous interpretations of the statute and regulations, as we have explained, the large majority of the legal deficiencies contained in the plans analyzed in this memorandum simply have not been addressed in any prior Service statement or communication. For example, the Service has not previously analyzed whether, or to what extent, these plans are debt arrangements. Because of the complexity of the plans, adjudicators have simply failed to recognize that these plans are in fact debt arrangements, and, therefore, the Service has improperly approved many petitions that, as shown above, do involve debt arrangements. It might also be argued that the Service's prior memoranda approve certain aspects of these plans that, when taken together, make them debt arrangements. Even assuming this to be true, this does not permit, much less require, the Service to approve a petition involving a debt arrangement that is expressly and unequivocally prohibited by regulation. "It has been well established in a variety of contexts that properly promulgated, substantive agency regulations have the `force and effect of law.'" Chrysler Corporation v. Brown, 441 U.S. 281, 296 (1979), citations omitted. The Service and its adjudicators are bound by the Services regulations (see, e.g., U.S. v. Caceres, 440 U.S. 741 (1979)) and, as stated above, the Service has both inherent and clear statutory authority to reconsider and reverse decisions that contravene the regulations. It fact, the Service has a legal duty to enforce its regulations properly, and, as we have noted above, it is highly unlikely that it would even be deemed estopped from doing so.

In sum, the Service may deny or revoke the petitions, or terminate the conditional residence, of aliens whose petitions are based on plans that do not comport with the current statute and regulations without the need for additional formal rulemaking under the APA or special published notice in the Federal Register. Nevertheless, as a courtesy to the public, this office recommends that the Service publish field guidance consistent with this memorandum in the Federal Register, accompanied by a statement that such guidance supersedes any prior inconsistent guidance to the field.

Conclusions

Based on our review of the available materials, including a number of visa petitions filed with the Service, we conclude that the business plans under review fail to comport with the current statute and regulations for EB-5 visas. Accordingly, we have determined that the Service must review the files of aliens who have filed or been granted visa petitions in EB-5 cases to determine if the petitions comport with the law as discussed in this memorandum. In any case where an examiner has determined, in accordance wit normal procedures for adjudication as set forth in 8 C.F.R. part 103, that the underlying plan fails to meet the statutory or current regulatory requirements, such petition must be denied. In cases in which a visa petition has been granted and the alien is awaiting the issuance of an immigrant visa or adjustment of status, a petition based on a investment plan that does not meet the requirements of law must be revoked in accordance with 8 C.F.R. part 205. If the petitioner indicates that he or she is willing to modify the terms of the "investment" to comport with existing statutory or regulatory requirements, the petitioner should be instructed to file, as appropriate, a new or amended petition. In addition the Service should terminate the status of aliens granted conditional permanent residence based on visa petitions not in compliance with the current statute and regulation. Specifically conclude that:

1. If an examiner determines that a particular petition relies on any kind of debt arrangement as a part of the minimum "investment," the examiner must deny or revoke the petition as a matter of law because it fails to meet the requirements of current Service regulations.

2. If an examiner determines that a promissory note used to meet the statutory minimum contribution of capital does not have a fair market value equivalent to amount of the minimum capital contribution the note represents, the examiner must deny or revoke the petition as a matter of law because it fails to meet the requirements under current Service regulations.

3. If an examiner determines that an insufficient portion of the alien's capital contribution will be made available for use by actual job-creating or job-preserving U.S. businesses, the examiner must deny or revoke the petition as a matter of law because it fails to meet the requirements under current Service regulations.

4. If an examiner determines that the capital contributed by an alien has not actually been placed at risk for the purpose of generating a return on the capital placed at risk, the examiner must deny or revoke the petition as a matter of law because it fails to meet the requirements under current Service regulations.

5. If an examiner determines that any portion of the capital invested by the alien will be applied toward meeting payment obligations on a promissory note used as capital, the amount of the alien's capital contribution must be reduced by that amount. If after such reduction the alien falls below the required minimum investment amount, the petition must be denied or revoked as a matter of law because it fails to comply with the Service's current regulations.

I. Recommended procedures with respect to: (a) pending and future petitions at Service Centers and (b) revocation of petitions prior to the granting of an immigrant visa, and recommendations to the Department of State with respect to procedures to follow for pending visa applications.

We recommend that Service Centers (or consular officers) adjudicating EB-5 cases involving any or all of the features described above make an assessment as to whether the plan presented in fact constitutes a genuine investment and otherwise meets the requirements of the statute and current regulations. To this end, we recommend that the Office of Programs prepare a policy memorandum summarizing the criteria discussed in this memorandum for determining whether an arrangement meets current regulatory requirements. The substantive standards for approval and revocation of an EB-5 petition are the same; the basic difference between these types of actions is that, unlike at the initial petition approval stage, in a revocation proceeding, the burden is on the Service, and not on the alien.

In all cases where an examiner determines that a petition should be denied or revoked, the examiner should contact HQBEN before issuing the denial notice or the notice of intent to deny.

We note that the State Department Visa Office has informed our office that it will adhere to Service guidelines with respect to standards for the adjudication and approval of EB-5 visa applications. For this reason, the policy memorandum should also be disseminated to the appropriate State Department authorities. Specifically, this policy memorandum should contain the following instructions:

1. Service Centers should assess whether the "investment" arrangement is in fact an impermissible debt arrangement. We strongly recommend that the policy memorandum explain that the existence of guaranteed returns and a fixed buy-back amount or a buy-back at other than fair market value at the time of repurchase is a strong indication that the arrangement is in fact a debt arrangement, and therefore specifically precluded under current regulations. Examiners should be reminded that the principal characteristic of a debt arrangement is that, unlike equity, under a debt arrangement an alien is contractually assured a specific return regardless of whether the underlying business is generating a profit or loss. Moreover, the fact that the commercial enterprise may not at some point be able to meet a scheduled guaranteed payment will not change the nature of a debt agreement into an equity relationship. A creditor always faces the risk that the debtor will become insolvent.

Examiners should be reminded further that not only are debt arrangements impermissible under the current regulations, but "convertible debt" arrangements are also precluded. In this regard, examiners should be reminded that even if the alien is given a contractual right to remain in the "investment" after making a final payment on an installment agreement, such a right may in fact simply be in the nature of a convertible debt, whereby the alien may convert the debt relationship into an equity relationship with the enterprise. Moreover, if the various contracts submitted indicate that the commercial enterprise has the right to buy out the alien's ownership interest at a fixed price or at other than fair market value at the time of repurchase, such an arrangement may in fact not even rise to the level of a convertible debt, but may simply be a debt arrangement. The policy memorandum should contain a brief discussion of the need to weigh the debt characteristics of the arrangement against the equity characteristics of the arrangement. The policy memorandum should set forth the nine criteria for establishing the existence of a debt, as well as the six criteria for establishing the existence of equity.

2. Service Centers should assess whether or not any promissory note used toward meeting the statutory capital amount has a fair market value in U.S. dollars sufficient to meet, in combination with case and other capital contributed, the statutory minimum requirement. In this regard, Service Centers should provide the petitioner with the opportunity to establish the value of the note by presenting a written appraisal from one or more reliable independent sources. In all cases, however, the burden is on the petitioner to establish eligibility for petition approval and thus, the actual fair market value in U.S. dollars of the promissory note. Therefore, a mere contractual clause or other pronouncement that the parties to the promissory note have agreed that the note shall have a specified "fair market value" is insufficient to meet this requirement. Moreover, if the examiner is not satisfied that the statutory minimum requirement has bee met, he or she may ask for additional evidence. Examiners should be made aware of the effect of a balloon payment and buy/sell-back provision on the fair market value of the note. If the provisions of the plan allow the alien to extinguish the alien's obligation on the note by means other than full payment of the amount due on the note, then the value of the note will be greatly reduced to any prospective purchaser of the note. Finally, examiners should be reminded that there may, of course, be other indications that the promissory note does not have sufficient fair market value to meet the statutory and regulatory requirements.

3. Examiners must be satisfied that the investment and limited partnership agreements submitted with the petition will ensure that a sufficient portion of the alien's capital contribution will actually be made available for use by actual job-creating or job-preserving U.S. businesses. We recommend that adjudicating officers pay close attention to the details of the respective investment and, in the case of a limited partnership, the limited partnership agreement, to determine what portion of the alien's contribution actually becomes available to job-creating U.S. businesses. In this regard, adjudicators should pay close attention to any contractual clauses requiring that certain portions of any alien's investment capital be set aside in bank accounts or otherwise withheld form the operations of job-creating businesses to meet buy-back obligations. Similarly, examining officers should assess what amount, if any, of the alien's capital contribution will be applied to "administrative fees." Certain types fees, such as immigration attorney fees, that are not related to the operations of the new commercial enterprise cannot be paid out of the alien's capital contribution. For other fees, the burden is on the petitioner to establish that such fees are not unreasonable. An examining officer should be satisfied that the amount of capital that, per the investment and/or limited partnership agreement, can actually be made available to job-creating businesses (as opposed to, for example, that made available to a limited partnership organized for the purpose of investing funds in job-creating businesses) will be sufficient to ensure the requisite job creation or preservation. Further, in determining whether the proposed "investment" can reasonably be expected to create the requisite jobs, the examiner may request that the petitioner demonstrate that money invested in the particular "investment" plan has historically been made actually available for the use of the job-creating U.S. businesses. Further, in case of "regional centers," examiners should be satisfied that the "methodologies" used by the prospective investor with request to projected indirect job creation are in fact "reasonable." Thus, they may take into consideration all relevant factors affecting such projections, including the fair market value of any promissory note used as capital. The issue of whether or not the alien's capital contribution has actually been made available to the job-creating U.S. business should also be carefully scrutinized at the time the alien petitions for the removal the condition on his or her permanent resident status.

4. On a similar note, examiners should be satisfied that the capital contributed will actually be placed at risk for the purpose of generating a return on the capital placed at risk. We further recommend that the policy memorandum make clear that the burden is on the petitioner to establish that any capital contributed is actually placed at risk for the purpose of generating a return on the capital placed at risk. In this regard, the existence of guaranteed returns and a fixed buy-back amount at other than fair market value is not only a strong indication that the arrangement is actually a debt arrangement, and therefore precluded under current regulations, but also may impermissibly reduce or eliminate an alien's risk of loss from the "investment."

5. Examiners must be satisfied that no portion of capital invested by the alien will be applied toward meeting payment obligations on a promissory note used as capital. Examiners should be reminded that Congress intended aliens to "infuse" capital into new commercial enterprises. The regulations specifically preclude the use of any assets of the underlying business to secure a promissory note used as capital. Similarly, an alien may not use the assets or proceeds of the new commercial enterprise to meet the statutory minimum requirements. Adjudicators should therefore examine the documents submitted in support of a petition to determine whether they permit an alien to apply interest or proceeds from any cash or other capital contribution toward making installment payments on a promissory note used to meet the minimum capital requirements. Such proceeds may not be counted in any way as part of the alien's minimum capital contribution. At the time that the alien petitions for the removal of the condition on his or her permanent resident status, the examiners should closely scrutinize the financial transaction in the investment to determine if any of the capital or proceeds of the new commercial enterprise have been used to meet the alien's required minimum investment amount.

6. Examiners must carefully review agreements that include a promissory note and buy- and sell-back agreements in light of the Service's prior policy memoranda. Specifically, these policy memoranda have consistently and clearly stated that investment plans must "specifically provide that an investor may not exercise a sell option (and the new commercial enterprise cannot exercise a buy-out option) until the promissory note is paid in full." (emphasis added). The adjudicator should closely review the terms of the agreement to ensure that the agreements legally bind the alien to fully pay off the note prior to the exercise of a sell or buy agreement. The fact that sell and buy options cannot be exercised until after the date that the promissory note is due (as opposed to actually paid) does not mean that this requirement is met; the sell and buy options must be specifically conditioned on full payment of the note. It should be noted that, under basic principles of contract law, oral agreements between the new commercial enterprise and the aliens, or written or oral assurances from the new commercial enterprise's representatives that the option will not be exercised until after payment is made are not sufficient, as they do not legally bind the alien nor in any way prevent the alien from exercising the sell option prior to making full payment on the promissory note.

II. Recommended procedures with respect to aliens who have been lawfully admitted or permanent residence under section 203(b)(5) of the Act but whose conditional basis for such status has not yet been removed.

A. In general

The status of an lien who has been granted conditional permanent resident status on the basis of an erroneously granted immigrant investor visa petition is, by statute, subject to termination at any time up to the removal of the conditions of such status. Prior to the two-year anniversary of the date of the alien's admission, the Service may initiate termination proceedings if an alien has been granted conditional resident status based on a visa petition that does not comport with the statute or regulation because it is based on an investment plan containing the provisions discussed above. In any case in which termination proceedings have not been initiated, the Service should carefully examine the alien's petition for removal of conditions (which will be filed as the alien nears the end of the two-year conditional period) to determine whether the alien has complied with the statutory and regulatory requirements, including, but not limited to, whether: (1) the alien has actually contributed "capital," as defined in the regulations; (2) if so, the alien has placed the capital "at risk" for the purpose of generating a return of such capital placed at risk; and (3) such capital was in fact made available to job-creating U.S. businesses during the two-year period of conditional residence. If it is determined that the alien failed to meet any of these requirements, or otherwise is subject to termination of his or her resident status under section 216A, the adjudicating officer must terminate the resident status in accordance with that provision and 8 C.F.R. 216.6.

B. Termination prior to the filing of the Form I-829

If in the cases under consideration here the Service decides, as a general rule, not to initiate termination proceedings prior the two year anniversary of the alien's admission, we recommend that the service, nevertheless, initiate termination proceedings prior to the second anniversary of the alien's admission as a lawful permanent resident under section 203(b)(5) of the Act in all cases where the Service becomes aware that the new commercial enterprise is no longer in existence.

C. Termination after filing of the Form I-829

We recommend that adjudicators adhere to the following procedures in adjudicating Forms I-829 involving "investment" arrangements containing any of the above discussed features. Preliminarily, we note that, unless waived by the director, an alien is required to appear for a personal interview before the conditions on his or her permanent resident status may be removed. Section 216A(c)(1)() of the Act. Further, the burden is on the alien to establish compliance with the statutory requirements for maintaining EB-5 classification. Section 216A(c)(3)(A) of the Act. Upon finding that the facts alleged in the petition are not true, the Attorney General is required to terminate the alien's conditional permanent resident status. Section 216A(c)(3)(C) of the Act. Finally, an alien whose permanent resident status is terminating may request a review of the determination in a removal proceeding. Section 216A(c)(3)(D) of the Act.

In adjudicating the petition to remove conditions, adjudicators should determine whether the alien has met current statutory and regulatory requirements, including, but not limited to, determining whether the alien in fact invested "capital" as defined in the regulations at 8 C.F.R. 204.6(e), bearing in mind that any promissory note used to met the minimum capital requirements must have a fair market value in U.S. dollars. Thus, even if a balloon payment on a promissory note will not be due until some period after the conditions would be removed, the petitioner must be able to establish the fair market value of the note at the time the conditions are removed.

In addition, adjudicators should determine whether in fact the full amount of statutory capital contributed has actually been made available to job-creating U.S. businesses. Where the new commercial enterprise is a limited partnership which serves as a conduit for investment in job-creating businesses, it is not sufficient that the alien's capital has been made available to the limited partnership; to meet the job creation requirements, such capital must have "passed through" to the actual job-creating businesses. In determining whether the funds have actually been made available to such businesses, adjudicators should take into account the fact that a business may legitimately require reasonable cash reserves.

Where, however, the business is unduly "cash heavy," this is an indication that the capital has in fact not been placed "at risk" but has instead been "parked" in violation of current regulatory requirements. In such a case, the petition to remove conditions may be denied under sections 216A(c)(3)(C) and (d)(1)(B) of the Act, i.e., on the basis that the alien failed to invest the requisite capital.

In adjudicating petitions to remove conditions in cases involving investment plans of the type discussed in this memorandum, examiners should first review the written record. If upon review of that record an examiner has doubts as to whether petition to remove the condition should be approved, or believes that permanent resident status should be terminated, the examiner should contact HQBEN prior to scheduling an interview.

III. Recommended procedures in cases where the conditions of an alien's permanent resident status have already been removed

Absent clear evidence of fraud, we recommend that the Service, at this time, not commence rescission proceedings, or issue notices to appear, in cases involving plans of the type reviewed above, where the conditions of an alien investor's permanent resident status have already been removed. This office will address this issue further at a future date.

IV. Federal Register Notice.

Although the Service is not required to do so by law, we recommend that the Service, as a courtesy to the general public, publish in the Federal Register any instructions to the field it may issue as a result of this memorandum. We recommend further that the Service hold pending cases in abeyance until such time as HQBEN publishes these instructions in the Federal Register. We also recommend that such Federal Register Notice begin with language to the following effect:

"The Immigration and Naturalization Service (the "Service") has completed the first phase of its review of the alien entrepreneur immigrant visa ("EB-5") program under section 203(b)(5) of the Immigration and Nationality Act, as amended (the "Act"). Based on this review, the Service has discovered that a number of petitions may have been approved despite certain features which, upon closer analysis, do not conform to the current statute and regulations because they involve debt arrangements, fail to meet the minimum capital contribution requirements, or fail to place the alien's capital at risk for the purpose of generating a return. The service is issuing this notice to make clear to the public that any such petition is subject to revocation pursuant to section 205 of the Act and the Service's implementing regulations at 8 C.F.R. part 205. In addition, the Service wishes to note that the conditional permanent resident status of an alien who has been granted status on the basis of such a petition is subject to termination pursuant to section 216A of the Act. Further, the Service wishes to make clear that any petition which fails to comport with existing regulations must be denied. Consistent with the above, and as a courtesy to the public, the Service is now publishing in the Federal Register the following policy memorandum which it has distributed to adjudicators and field officers. This policy memorandum provides guidance to adjudicators in applying current regulations to a variety of complex business arrangements.

This memorandum supersedes any prior memoranda or correspondence issued by the Service to the extent that such prior memoranda or correspondence are inconsistent wit it."

David A. Martin
General Counsel

FOOTNOTES:

[1] These issues are not the only issues that might give rise to problems in the plans under consideration and other plans, but those which have been clearly identified thus far as requiring immediate attention. The absence of any or all of these provisions does not, by itself, demonstrate that an EB-5 visa petition should be approved.

[2] In determining the fair market value of a promissory note, it is also necessary to take into account the present value of the note as discounted for inflation.

[3] The regulations further provide that no portion of the note may be secured by assets of the new commercial enterprise. 8 C.F.R. 204.6(e). Similarly, as noted immediately below, an alien may not apply profits or proceeds derived from the alien's capital contribution toward meeting his or her obligations on a note used toward meeting the minimum statutory capital amount.

[4] Based on conversations with the Service Centers and the State Department, it is our understanding that the vast majority of cases involving these types of plans are very similar to the plan described above. However, there are other petitions that use plans with different proportions of cash and debt, including some all cash options. In one visa petition the "subscriber" (investor) agreement offers the alien a payment and sell-back options under which the alien may make an initial cash contribution of $500,000 and exercise a sell-back option either three years or 5 years from the date of the grant of conditional residence. If the sell option is after 5 years, the price is $535,000. If it is exercised after 3 years the price is $475,000. It should be noted that while such a plan does not have all of the objectional features of the type being reviewed in this memorandum and we have not had an opportunity to review this plan fully, it appears to involve an impermissible debt arrangement.

[5] We do not exclude the possibility that a business might maintain reasonable cash reserves, but in the petition under review, the funds cannot be considered reasonable cash reserves because the purpose of the "reserves" is to fund the purchase of the alien's interest and not cover business contingencies or normal operating expenses. According to an attorney in the Department of Justice commercial litigation section our office has consulted, cash reserves of normal businesses rarely exceed 3 months operating expenses.

In the case under review, the amount of the reserves constitutes a substantial portion of all the capital invested.

[6] In this regard, the November 3, 1997, memorandum to the Service from the alien's counsel regarding the petition reviewed above appears to be inaccurate. It states that "the sell option may not be exercised until all payments required by the promissory note have been made." Id. at 5 (emphasis added). The agreement we have reviewed does not include such a requirement.

[7] Further review may reveal additional legal problems with these plans.

[8] Similarly, an alien's conditional resident status would also be subject to termination if the status was granted based on an erroneously approved petition.

[9] Section 205.1 of the Service's regulations sets out the conditions under which certain visa petitions are revoked automatically.

[10] Courts have adopted a very lenient standard of review of an administrative agency's interpretation of its own regulations. As stated in Beazer East, Inc., 963 F.2d at 605, "[w]hen we review an administrative agency's interpretations of its own regulations, we defer to the agency's construction of the language of its own regulation, `unless it is plainly erroneous or inconsistent with the regulation.'" (quoting Ford Motor Credit Co. v. Milhollin, 444 U.S. 555 (1980).