On November 29th, 1990, the President signed into law “The Immigration Act of 1990″. One of the more creative and novel provisions of the act, is “The Immigrant Visa Preference Category” set aside for alien investors in new commercial enterprises.
As of October 1st, 1991, persons could apply for permanent residence where it is shown that they have already established or have been actively involved in the process of investing a specific amount of capital in a new business enterprise. The purpose of these provisions is the granting of lawful permanent residence to individuals who will make an investment which will benefit the U.S. economy and create full time employment for at least ten (10) U.S. citizens, lawful permanent residents or other immigrants lawfully authorized to be employed, exclusive of the alien and his or her spouse, sons and daughters. Also not included in the establishing job creation for ten (10) employees are part time workers.
Ten thousand immigrant visas are available annually to individuals who have made an active investment of at least one million dollars ($1,000,000.00) or five hundred thousand dollars ($500,000.00) in a targeted employment area in a new enterprise. Targeted employment areas can include: rural areas (which are areas outside of the Metropolitan Statistical Area or out of boundaries of a city or town with twenty thousand (20,000) or more people (or areas experiencing high unemployment, of at least 150% percent of the national average. High unemployment areas with a metropolitan area are usually designated by the State Government of any U.S. in accordance with regulations.
In general the regulations define an investment to mean a contribution to “capital” means cash, equipment, or other tangible property, cash equivalent and indebtedness and secured by assets owned by the alien entrepreneur, provided that the alien entrepreneur is primarily and personally liable and that the assets of the new commercial enterprise are not used to secure any indebtedness.
It is extremely important to understand that evidence must be submitted to show that a petitioner is actively in the process of investing the required amount of capital in a new commercial enterprise. The regulations prescribe that the petition must be accompanied by evidence that the petition has placed the required amount of capital at risk. The petitioner is also required to provide evidence to establish that the capital was obtained by lawful means. Review of current decisions by the Immigration Service make it clear that it is extremely concerned with the fact that the capital has been placed at risk and that the applicant has proven the clear evidence that the capital was obtained by lawful means.
It is also necessary to submit a comprehensive business plan which describes how the money will be utilized, how the money was placed at risk, how individuals will be employed and the goals and future projections for the business. One also must show that the business has rented space and that other steps have been taken which are usual and appropriate for the establishment of a new business enterprise.
In order to obtain Immigrant Investor Status, a petition, Form I-526 must be submitted to U.S. Citizenship and Immigration Services Dallas Lockbox facility. This petition may takes up to twelve (12) months or longer for the Immigration Service to review. Immigration Services has a reputation for thoroughly scrutinizing applications and for questioning each and every detail pertaining to the requirements that must be met in order to be an immigrant investor. As such, before the application is submitted, it must be complete and answer all questions that can be anticipated by the Immigration Service.
Once the petition is approved, the applicant can file an application for permanent residence. Applications for permanent residence can be submitted either at U.S. Citizenship and Immigration Services or at the American Consul.
Conditional Grant of Permanent Residence Through Immigrant Investors:
An application for permanent residence can be submitted by a qualified immigrant investor. However, the granting of permanent residence is considered to be “conditional” for a period of two (2) years. As such, once permanent residence in granted, it is valid, initially, for only two (2) years. In order to remove the conditional aspect of the residence status, the alien investor must submit to the Immigration Service, during the ninety (90) day period prior to the end of the two (2) year period, a petition requesting the removal of such conditional residence. This petition would include an attestation to the fact that the enterprise continues to exist, that the requisite capital has been invested which requests the removal of the condition. If the business does not any longer exist, the conditional nature of the residence can still be removed as long as it is shown that after the residence was granted, the business continued to employ ten (10) individuals until such a time as factors intervened which required the dissolution of the business enterprise.
The definition of an investment is far from clear in the published rules, regulations and case law pertaining to the EB-5 Investor visa. There appears to be a great divergence between the nature of transactions that are legitimate in the real world and those that are acceptable in the context of an Investor visa petition.
Several points, however, have remained relatively constant for years. But, recently, several new precedent decisions by USCIS have tried to explain in considerably more detail the past practices and to introduce, occasionally, some new concepts. These cases were intended to provide guidance to USCIS examiners in the field, but many experts in the field of immigration law have expressed concern that these guidelines will be applied in a rigid, unwavering manner, frustrating the ability of an investor to make a qualifying investment. Be that as it may, generally speaking, the following examples provide some guidance on USCIS policy as it exists today:
The money must belong to the investor. His or her ability to dispose of the money as s/he sees fit is essential. If the money originally came from a relative or a family trust, for example, the USCIS will be looking at whether the investor ever owned the investment funds, whether the investor was in a position to exercise dominion and control over the funds, and whether, if the funds were loaned to the investor, is personally and actually liable for their loss. Loans to the alien that do not carry specific repayment provisions generally will not be considered as part of the investment in the context of an Investor visa.
Loans by the investor to the corporation are not acceptable, because a loan has the impact of reducing or eliminating the risk to the investor. An investment occurs when the investor puts the money into the business, but not when s/ he acts solely as a bank, with full expectation of the investment being repaid by the business.
Either the investment must have occurred before or at the time of the visa application, or the alien must be “actively in the process” of investing. As to the former provision, the money must be “placed at risk for the purpose of generating a return on the capital invested.” As to the latter provision, recent case law has suggested that being “actively in the process” of investing may, at least until USCIS’s position is successfully challenged, no longer be acceptable. Previous interpretations required that the investment money could be placed in escrow, with written provisions that the money would flow into the investment once the investor had been issued the appropriate visa. In either instance, it is clear that a mere intent to invest, or of prospective investment arrangements entailing no present commitment will not suffice. An alien must show actual commitment of the required amount of capital. USCIS regulations give some assistance in demonstrating the investment, that include suggesting some or all of the following:
(i) Bank statement(s) showing amount(s) deposited in United States business account(s) for the enterprise.
(ii) Evidence of assets which have been purchased for use in the US enterprise, including invoices, sales receipts, and purchase contracts containing sufficient information to identify such assets, their purchase costs, date of purchase and purchasing entity. Note carefully the degree of detail provided here. USCIS is well aware that a purchase might be made by one enterprise, not the one in which the investment is placed, and the receipt or purchase agreement used to substantiate the placing of funds belonging to the investor at risk. So, the regulations have specified a rather finite level of detail to avoid any misunderstanding of the true facts.
(iii) Evidence of property transferred from abroad for use in the United States enterprise, including US Customs Service commercial entry documents, bills of lading and transit insurance policies containing ownership information and sufficient information to identify the property and to indicate the fair market value of such property. Consider, as to items that may have a value that is not evident, obtaining a formal appraisal from a recognized expert in the field.
(iv) Evidence of monies transferred or committed to be transferred to the new commercial enterprise in exchange for shares of stock (voting or nonvoting, common or preferred). Such stock may not include terms requiring the new commercial enterprise to redeem it at the holder’s request. From this regulation stems the requirement that a loan to the enterprise by the investor is not acceptable.
(v) Evidence of any loan or mortgage agreement, promissory note, security agreement, or other evidence of borrowing which is secured by assets of the petitioner, other than those of the new commercial enterprise, and for which the petitioner is personally and primarily liable. This is particularly cogent if the investor has borrowed funds and pledged his shares of the investment enterprise as security for the loan. The USCIS will want to review the loan contract to ascertain whether, in actual fact, the assets supposedly invested are pledged as security for the loan of the investor’s investment money. In such a case, of course the investor’s money is potentially less at risk because the loan balance could be satisfied from the sale of part or all of the investment enterprise. Again, we emphasize that the money must be at risk; essentially unprotected once it is placed into the business.
Loans made to the investment enterprise are not considered to be part of the investor’s money that has been placed at risk. The corporation and the individual are separate legal and actual persons. They cannot be interchanged. A loan to the investor, secured by the investor’s home or another of his business ventures is fully acceptable, subject to a determination of the promissory note’s fair U.S. market value. A loan to the investment business is not accepted, because the business is not the investor, and the investor’s personal funds are thus not at risk.
The law requires that the investment be used to create a new business, or to purchase an existing business under special circumstances that include:
The purchase of an existing business and simultaneous or subsequent restructuring or reorganization such that a new commercial enterprise results;
The expansion of an existing business through the investment of the required amount, so that a substantial change in the net worth or number of employees results from the investment of capital; a 40% or greater increase in net worth or number of employees.
There is provision for investment in a “troubled business,” one that has been in existence for at least two years, has incurred a net loss for accounting purposes during the 12- or 24-month period prior to filing the investor’s petition of at least 20% of the troubled business’s previous net worth. Successors in interest to the troubled business will be deemed to have been in existence for the same period of time as the business they succeeded.
In consideration of the past decade’s concerns with illicit drug distribution, along with the massive profits allegedly gained, the Government instituted rules that place a burden upon the potential investor to show where the funds invested originated. Depending upon the Immigration Service’s view of the entire submission, this burden may be either very simple or very complex to sustain. That is a determination made by an individual USCIS Examiner during the process of deciding the case.
The crucial point to keep in mind is that bald, unsupported statements by the investor usually will not be accepted. Each element of the investment funds must be documented as to its source. The starting point, naturally, is to demonstrate that the investor has the means to begin the process of investing. A carefully prepared financial statement, showing who prepared it and under what conditions, is a good beginning. Undated, unauthenticated spreadsheet printouts would most likely not be accepted. The next question to be answered is where the money originated. Perhaps some examples will help to illustrate what may be required.
•An investor’s father gives him the money, abroad. It is fairly clear that the father would be asked to show how he came to have the money. Alleging that he made the money in the stock market is not enough. Starting as far back as is practical, provide all of father’s stock trade confirmations. Some will be profitable, some less so. But, the statements will enable a ready analysis of how the money accumulated. Then, it will be necessary to demonstrate that a real gift was made to his son, not merely a transfer of father’s money to a son who can or should not exercise his individual and personal control over it. In more direct terms, the investor cannot be merely a pawn of somebody else who really owns the investment money. A U.S. Gift tax return, reports of the gift to government agencies in the home country, legalized and recorded contracts and agreements (where appropriate) will all tend to show that the “gift” is not merely a sham to provide the alien with funds that in reality he does not and will not control.
While a husband and wife, having a joint bank account, may treat the funds as belonging entirely to each of them, this is not the case when a joint account is maintained with somebody else, such as a father or mother. In this latter case, there must be documentation to show how much of the joint account is in fact owned by the father and how much by the son. It would be wise not to use such a joint bank account for the purpose of claiming that the money in the account belongs only to one individual.
A prospective investor claims to have earned and saved $700,000 in his lifetime, and says he sold his home for $300,000; all to make up a $1 million investment. The USCIS will probably examine the claim very carefully. They will be impressed, however, with letters and payroll records from the individual’s prior employer(s), stating how long the individual worked for them and how much he earned. Obviously, to save considerable funds requires considerable income. Too, a copy of the transaction in which the home was sold would further enhance the quality of the investor’s case.
An alien borrows $1 million from a well-known financial institution or bank, on his own signature. The loan agreement and promissory note are sufficient, although it may be asked why a bank would loan such a large amount to this individual. It still may become necessary to expand upon the investor’s creditworthiness to convince the adjudicator that the transaction is not merely an accommodation devised to hide the true state of events.
Promissory notes can form part of the investment capital, but each loan to the investor must be secured by the investor’s personal assets, the security interest in favor of the lender must be perfected to the extent provided for by the jurisdiction in which the asset is located, and the asset must be fully amenable to seizure by a U.S. note holder. Only in that way are the loan proceeds deemed to be “at risk.”
In the transaction above, the bank is willing to loan the money but requires a security interest in (a) the alien’s private home (which is lawful and proper), or (b) in the business into which the money will be invested (which is not permissible because the investor’s personal funds are not thereby placed at risk.).
Any capital invested must be valued at “fair market value in the U.S.” Cash is, of course, does not often present an issue of valuation. But, loans—evidenced by promissory notes—that produce cash and are secured by the borrower’s assets may raise a different aspect. There, USCIS will look to whether the promissory note has a fair U.S. value equivalent to its face value. This depends in part upon the value of the assets securing the note, something that could require an independent appraisal.
To show that the petitioner has invested capital obtained through lawful means, evidence should contain, as applicable:
Foreign business registration records;
Corporate, partnership or personal tax returns including income, franchise, property, or any other tax returns of any kind filed within the past five years, in or out of the U.S.;
Evidence identifying any other source(s) of capital; or
Certified copies of any judgments or evidence of all pending governmental civil or criminal actions, governmental administrative proceedings, and any private civil actions (pending or otherwise) involving monetary judgments against the petitioner from any court in or outside the United States within the past fifteen years.
Merely establishing and capitalizing a new commercial enterprise and signing a commercial lease are not sufficient to show that an immigrant-investor petitioner has placed his capital at risk. The petitioner must present, instead, evidence that he has actually undertaken meaningful concrete business activity. This could be quite difficult when the potential investor is abroad, which leads to the conclusion that a test of reasonability will ultimately be applied. Has the investor done as much as he can to bring the investment enterprise to viability; concrete steps rather than mere plans?
Generally, money that should be at risk in the investment may not sit in a bank account, unused. While it is always acceptable to provide for working capital, USCIS will carefully weigh whether the enterprise’s cash position is out of balance within the context of the enterprise’s business. Of course, a business that will have substantial costs for product development, for example, and is projected to lose money for several years, would be allowed to reserve funds to overcome the projected operating loss. However, the projections must be exceptionally well documented in an authoritative business plan.
In the past there have been a number of organizations that formed limited partnerships with alien investors, with the goal of reducing the initial amount of investment and reducing the risk to the investor. Virtually all of these plans have been excluded from consideration by a precedent decision issued by the USCIS in July 1998. Without an exhaustive discussion, if a promissory note is used to form a portion of the investment, it must be fully payable within two years after the alien investor is granted a visa. There can be no redemption agreement with the new enterprise prior to the alien’s having completed payment on the note. And, the alien may not even enter into a redemption agreement prior to the end of the two-year period of conditional residence. A redemption agreement constitutes a debt arrangement and is prohibited.
It is not acceptable that the alien receive guaranteed payments from the new commercial enterprise while s/he owes money to it. Funds placed “in reserve” are not deemed to be at risk.
Even at the inception, USCIS will look toward evidence that the petitioner has at least reached the start-up phase; conducting business and financial analyses; engaged in discussions with equipment suppliers, potential customers, service providers, and utilities. These contacts must be carefully documented, and the written evidence must include sufficient detail to demonstrate that the investment enterprise is acting in a manner similar to a totally U.S. business venture. This is not to say that every business will support an approval of a visa petition at the start-up phase. That decision is dependent upon the quality, not the quantity, of the evidence in showing that the investor is fully committed, legally and factually, to a bona fide plan to use his money to generate profit from a business enterprise in the U.S. Note that a non-profit business or a merely passive investment (such as real estate that requires no full time employees) does not constitute an investment.
In cases where the business has not reached reasonable maturity, a carefully crafted, comprehensive business plan may prove helpful, if the plan contains sufficient details to allow the USCIS to find that the investor is taking reasonable steps to reach his goal of founding and continuing an operating business. We emphasize that a mere spreadsheet with linear or logarithmic increases in each operating factor will not suffice. If in two years a business with two employees is planned to have ten, there must be a reasonable, factual basis for the projection. Simply throwing out estimates without basis is no longer acceptable to USCIS.
A comprehensive business plan would include items such as:
A description of the business, its products and/or services, and its objectives
A market analysis, including the names of competing businesses and their relative strengths and weaknesses;
A comparison of the competition’s products and pricing structures;
A description of the target market/prospective customers of the new enterprise.
A list of permits and licenses both obtained and required;
If applicable, the plan should describe the manufacturing or production process, the materials required, and the supply sources needed to fabricate the product;
A list of contract(s) executed for the supply of materials and/or the distribution of products, providing the essential terms of the contract(s);
A discussion of the marketing strategy of the business, including pricing, advertising and servicing the customers;
A description of the business’ staffing requirements with a timetable for hiring, along with job descriptions for each position.
Sales, cost and income projections, with explanation of the bases for them.
The Immigration Service notes that, over and above the items mentioned, the business plan must be credible!
A new business must show that it has created at least ten full-time positions for U.S. workers. Excluded from this count is the investor, his spouse, his sons and daughters, and any nonimmigrant workers. To qualify the ten qualifying workers must be U.S. citizens or permanent residents. Two half-time, permanent employees can be combined to equal one full-time worker, as could four quarter-time workers.
A pre-existing business must provide documentation to show that the new investor has maintained the previous level of employment or has added ten new, full-time positions. Merely presenting USCIS Forms I-9 is not sufficient, since the I-9 evidences only that the employer has verified the eligibility of an individual to be employed. The I-9 does not evidence actual employment!
Caution must be exercised in documenting planned positions. The critical issue is whether there is a reasonable basis shown to convince the USCIS that the employment projections will be met. Job descriptions, projected salaries, positioning within the overall structure of the organization, and realistic time tables will all inter-relate to determine whether the projection will or will not be accepted.
This article is provided for informational purposes only, and should not be construed as advice on any particular case. If you have questions about the immigrant investor visa, please contact Managing Partner Michael Wildes at michael@wildeslaw.com.
