REAL ACCREDITED INVESTORS

ONLY, NEED APPLY!

By Joseph P. Whalen1 (Tuesday, March 7, 2017)

When EB-5 and the Regional Center Program were still rather new,

numerous unqualified individuals scrimped, borrowed, and mortgaged

everything they had in order to raise investment funds. Many of those

individuals failed to raise enough money to meet the bare minimum required

amount of $500,000.00 in capital. Instead, they signed and submitted

“Promissory Notes”, most of which turned out not to be worth the paper on which they were

written. The Promissory Note fiasco was a major contributing factor to the chaos that ensued

throughout the mid to late 1990s and brought the investment visa program to a halt once

again.2 It took nearly a decade to breathe life back into the immigrant investor visa which

found that new life primarily through the revitalized EB-5 Regional Center Program.

While the curse of the Promissory Note may have passed, there seems to be a new scourge

afoot. The investment of “Loan Proceeds” has shown the same signs of fatigue that were

present in the Promissory Note debacle. USCIS and AAO have adopted the Promissory Note

conditions presented in the EB-5 Precedent Decisions of 1998, and applied them to Loan

Proceeds today. In Matter of Hsiung, 22 I&N Dec. 201 (BIA 1998) AAO held, in pertinent part:

(1) A promissory note secured by assets owned by a petitioner can constitute capital under 8 C.F.R.

§ 204.6(e) if: the assets are specifically identified as securing the note; the security interests in the

note are perfected in the jurisdiction in which the assets are located; and the assets are fully amenable

to seizure by a U.S. note holder.

(2) When determining the fair market value of a promissory note being used as capital under 8

C.F.R. § 204.6(e), factors such as the fair market value of the assets securing the note, the extent to

which the assets are amenable to seizure, and the present value of the note should be considered.

1 E-mail: joseph.whalen774@gmail.com 2 https://www.slideshare.net/BigJoe5/mainland-china-immigrant-investor-backlog-is-history-repeating-itself

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(3) Whether a petitioner uses a promissory note as capital under 8 C.F.R. § 204.6(e) or as evidence

of a commitment to invest cash, he must show that he has placed his assets at risk. In establishing

that a sufficient amount of his assets are at risk, a petitioner must demonstrate, among other things,

that the assets securing the note are his, that the security interests are perfected, that the assets are

amenable to seizure, and that the assets have an adequate fair market value.

Additionally, Matter of Izummi, 22 I&N Dec. 169 (BIA 1998) held in pertinent part:

(10) Under 8 C.F.R. § 204.6(e), all capital must be valued at fair market value in United States

dollars, including promissory notes used as capital. In determining the fair market value of a

promissory note, it is necessary to consider, among other things, present value.

Collectively, the above principles relating to the “ownership” of the capital, morph into an

issue concerning the investor’s “ownership” of the “collateral” or “assets” used in order to

secure the loan(s) in question. This situation creates a high evidentiary bar. In my

opinionated opinion, USCIS (IPO) and AAO have made their collective position on the use of

Loan Proceeds for an EB-5 investment, pretty clear. They do not like it. When EB-5

investment funds are the proceeds from a loan to the investor, restrictions will always apply.

Since the regulations call for the alien to invest their own lawful capital and prohibit the use

of “[a]ssets acquired, directly or indirectly, by unlawful means (such as criminal

activities)…”; see 8 CFR §204.6(e). Legacy INS and USCIS have consistently interpreted the

statute to require that the capital invested has to be the lawful property of the investor; and

this is reflected in the regulations and precedents. Lastly, it is explained in a straightforward

manner as an affirmative ownership requirement of loan collateral.

Why would it be so vitally important that EB-5 investors use their own capital for the

investment? Could it be so that the investor is not subject to improper influence from

unsavory characters such as international criminal organizations? Yes, in part. If proceeds

from unsecured (or signature) loans were accepted by USCIS then that would open a door

for criminals to perhaps launder profits from criminal enterprises. It is also highly unlikely

that any reputable financial institution would make an unsecured signature loan of a half-

million for the purpose of making an at-risk investment.

Unsecured loans would likely come from private individuals rather than a bank or credit

union. Unsecured loans would most likely come from family or close friends but then the

“source of funds” issue shifts to that individual. As bad as the preceding may be, there is

something even worse. Unexplained cash would be the worst thing that could be offered as

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EB-5 investment capital. Nobody at USCIS/IPO or AAO is stupid enough to be fooled by trying

to disguise magically appearing cash as proceeds from an unsecured signature loan any more

than they would be fooled by calling it a gift. The primary (and critical) consideration for the

IPO Adjudications Officer (or AAO) is the origin of the cash used for making the loan or

bestowing the gift. All of that means that the evidence that is needed in order to explain the

source of funds must relate to the individual making the loan or gift. Placing any artificial

layers or shell companies between the EB-5 investors and source of the money has never

been acceptable. There have been numerous attempts to artificially make the paper and/or

electronic trail from funding source to NCE confusing and dizzyingly complex. They failed.

USCIS, Regional Centers, and project developers tend to prefer “accredited investors” for

various reasons (more about this follows at the end of this article). Why would they have

that preference? Think about what would happen if an unqualified EB-5 investor3 was

permitted to use loan proceeds whether secured or unsecured; and then the venture fails.

Aside from the possibility probability of a lawsuit, the unqualified investor could wind up

almost penniless, deeply in debt, and kicked out of the country. If that alien were truly an

“accredited investor” instead, then he or she would probably have a house or someplace they

could call home back in their country of origin, more money in the bank, and other sources

of income abroad, perhaps from other investments. Truly experienced investors know how

to perform due diligence and understand the risks of investing.

Beyond the worst case scenario of total project failure across-the-board, please consider

the possibility of profitability but failure to meet the immigration requirements. Truly

experienced investors also know that there are no guarantees of success in any aspect of an

investment. A truly qualified accredited investor would be less likely to sue in the absence of

good cause; and simply failing in the immigration aspect of the investment is not a good cause

by itself. Additionally, a lawsuit would fail and merely be a waste of time, effort, and money.

Real accredited investors could easily go back abroad or stay and try another EB-5

investment. So, if an individual does not truly have capital which they can afford to place at

risk, and can afford to lose, then EB-5 is not the right choice for him or her.

3 Matter of W-X-, ID# 48594 (AAO Jan. 13, 2017), an I-526 AAO Dismissal.

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Being desperate is definitely not an EB-5 requirement. Being desperate is instead a sign

that EB-5 is the wrong choice. Besides being vulnerable to a criminal, and besides being

unable to afford losing the invested funds, desperate people make some lousy business

decisions. Desperate people are great targets for con artists—easy marks. Fraudsters love

desperate people, especially if they are located abroad. Think about some of the NCEs

mentioned in various AAO EB-5-related appeal dismissals that have been posted. Regardless

of whether it is an I-526 or I-924 (or maybe an I-829—but they usually do not get that far in

the process), the reader can often discern the basic premise of the NCE (but not always).

Here are several examples of some bad ideas, unsuitable for EB-5 purposes:

Overcapitalization of Anything—too much money for the needs of the

business leads to money being set aside in a bank account; these excess funds

are not being placed at risk, are not being used for job creating activities, in

fact, they might disappear out of accounts thus showing that minimum

investment has not really been made at all. That would be fraud.

Overcapitalization can happen in many different types of businesses.

o Matter of O-B-, ID# 17436 (AAO July 27, 2016)—it could not be

determined what the business was but three aliens sought to invest $1

million each but approximately half of that was set aside with no

purpose indicated.

o Silk Screening Tee-Shirts hardly requires $500,000 to get started and

is unlikely to create enough jobs. See WAC 01 284 54222, I-526 AAO

Dismissal; see Apr082009_01B7203.pdf

o Hair And Nail Salons-–they usually have part-time employees, or they

“rent” spaces/chairs to “stylists” who are either tenants or

subcontractors rather than employees, they also do not require the

minimum EB-5 capital—these were overcapitalized; see Matter of W-X-

ID# 48594 (AAO Jan. 13, 2017), an I-526 AAO Dismissal.

o Hotdog Or Other Fast Food Restaurant Franchises—these thrive on

part-time workforces and would almost always be overcapitalized;

JUN252013_01B7203.pdf

o Small Scale And Lower-Midscale Hotels And Motels—they usually

would not need ten full-time employees if they even used any full-time

employees at all. These have additional problems such as the fact that

they are often not “new construction” projects, which means they need

to meet some other requirements such as being: troubled businesses,

or expansions by 40%, or significant restructuring—it is rare to find a

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shuttered property in need of renovation and re-opening as a new

business; Holiday Inn Express featured in SRC 07 057 50507, I-526

AAO Dismissal; see Oct162008_01B7203.pdf and of course the major

precedent: Matter of Soffici, 22 I&N Dec.158 (AAO 1998).

Weak Job Creation is another major problem found in a wide variety of

businesses as shown above but there are other pitfalls. There continues to be

confusion about the conditions under which a loan to a job creating entity

(JCE) is permissible. Only a Regional Center-affiliated EB-5 investment can use

the “loan model”. If the investor is not affiliated, then (s)he can only fulfill the

job creation requirement with “direct” employees. This means that the JCE and

the new commercial enterprise (NCE) which is also required by statute; must

be one and the same business. It is not possible to make a loan to yourself and

have it count for EB-5 purposes. It simply makes no sense. The “direct”

employee demands that there be an employer-employee relationship between

the EB-5 investor and the employee who is filling a newly created job. This

further means that the EB-5 investor must have an ownership interest in the

NCE/JCE. Regional Center-affiliated investors can utilize “indirect” employees

which allows for indirect funding as well. Affiliated investors can invest their

capital into an NCE which can then loan money to a separate JCE.

Unsecured Loan go hand-in-hand with some these other problems and

exacerbate other problems.

o Matter of M-N-, ID# 12077 (AAO Nov. 9, 2016): The Chief of the

Immigrant Investor Program Office (IPO) denied the petition,

concluding that the Petitioner had not placed her own assets at risk

with her investment because she executed an unsecured loan to

obtain her investment funds. In addition to the Chief’s basis for denial,

AAO further emphasized and concluded that there was a break in the

path of funds such that the Petitioner had not traced them back to a

lawful source. Where did the money come from? Whose funds were

actually being utilized for this investment? Is the money dirty?

How can USCIS and the entire EB-5 Industry combat the various problems mentioned

above? One strategy that helps dissuade people from succumbing to these pitfalls, is to insist

on the alien being a qualified “accredited investor”. That statement begs the question, “What

is an “accredited investor”? That is one of the few that I feel comfortable answering. As

promised above, I am including significant information about this terminology. The U.S.

Securities and Exchange Commission (SEC) has provided clear information about this topic

which I have added for the convenience of the reader.

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Accredited Investors

Under the Securities Act of 1933, a company that offers or sells its securities must register the

securities with the SEC or find an exemption from the registration requirements. The Act provides

companies with a number of exemptions. For some of the exemptions, such as

rules 505 and 506 of Regulation D, a company may sell its securities to what are known as

"accredited investors." The term accredited investor is defined in Rule 501 of Regulation D.

For more information about the SEC’s registration requirements and common exemptions, read our

brochure, Small Business & the SEC. For more information about how individuals can be

accredited investors, see our Investor Bulletin on accredited investors.

The above blurb is found at: https://www.sec.gov/answers/accred.htm.

The actual definition is found in 17 CFR §230.501 Definitions and terms used in

Regulation D. For EB-5 investor purposes (or any investment), an “accredited investor” is

clarified in this clip from the SEC (online) Investor Bulletin:

An accredited investor, in the context of a natural person, includes anyone who:

earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the

prior two years, and reasonably expects the same for the current year, OR

has a net worth over $1 million, either alone or together with a spouse (excluding the value

of the person’s primary residence).

On the income test, the person must satisfy the thresholds for the three years consistently either

alone or with a spouse, and cannot, for example, satisfy one year based on individual income and

the next two years based on joint income with a spouse. The only exception is if a person is married

within this period, in which case the person may satisfy the threshold on the basis of joint income

for the years during which the person was married and on the basis of individual income for the

other years.

In addition, entities such as banks, partnerships, corporations, nonprofits and trusts may be

accredited investors. Of the entities that would be considered accredited investors and depending on

your circumstances, the following may be relevant to you:

any trust, with total assets in excess of $5 million, not formed to specifically purchase the

subject securities, whose purchase is directed by a sophisticated person, or

any entity in which all of the equity owners are accredited investors.

In this context, a sophisticated person means the person must have, or the company or private fund

offering the securities reasonably believes that this person has, sufficient knowledge and experience

in financial and business matters to evaluate the merits and risks of the prospective investment.

The above information is found at: https://www.investor.gov/additional-resources/news-

alerts/alerts-bulletins/investor-bulletin-accredited-investors

For the purposes of this discussion, the first two bullet points above, and the final paragraph,

cover potential EB-5 investors best of all. The bullet points list high income and net worth

thresholds intended to weed out poor candidates who cannot afford the financial risk.

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Lastly, it is hoped that anyone contemplating an EB-5 investment would also be a

sophisticated person with sufficient savvy to make an informed investment decision. In

most EB-5 offerings that I have seen, questionnaires are used in order to assess potential EB-

5 investors for income, net worth, and level of sophistication about investment assessment

and due diligence. Potential EB-5 investors are usually asked to present some documentary

evidence, or at the very least, to attest to their “accredited investor” qualifications. I recently

heard one of the roles of a Regional Center described as a “Gatekeeper”. I like that

characterization of the Regional Center. It has long been my position that a Regional Center

owes something to its project partners, including the alien investors, domestic investors, and

the developers. By guarding that gate with strength and integrity, pretenders and interlopers

are kept out!

INA § 203 [8 U.S.C. § 1153] (b)(5)(A) provides that a foreign national may seek to enter

the United States for the purpose of engaging in a new commercial enterprise (NCE):

(i) in which such alien has invested (after the date of the enactment of the Immigration Act of

1990) [Pub. L. 101-649] [(after November 29, 1990)] or, is actively in the process of

investing, capital in an amount not less than the amount specified in subparagraph (C), and

(ii) which will benefit the United States economy and create full time employment for not

fewer than 10 United States citizens or aliens lawfully admitted for permanent residence

or other immigrants lawfully authorized to be employed in the United States (other than

the immigrant and the immigrant's spouse, sons, or daughters).

The actual statutory requirements for approval of an I-526 petition for EB-5 investor

classification are not complex. Stripped down to its bare essence and all that one would need

to demonstrate is that they have the money (and a pulse). Show me the money! A fool and

his money are soon parted? However, since there is also an employment creation element; if

the jobs have not yet been created at time of filing the I-526, then a plan to do so has become

necessary. Most investors submit a Business Plan. Most investments are made through a

Regional Center, so such plans are supplied by the Regional Center. Additionally, if investing

through a Regional Center, indirect jobs also count. It has become accepted that indirect jobs

are predicted through an Economic Impact Analysis, also provided by the Regional Center.

An accredited investor will use due diligence to make a better choice, I hope!4

That’s My Two-Cents, For Now! 4 Please excuse any typos or grammatical errors, I wanted to get this finished and posted quickly. Thanks!