Over the past few years, the skyrocketing popularity of the EB-5 Immigrant Investor Visa program has fueled record demand from foreign investors. The EB-5 Immigrant Visa allows foreign investors and their immediate family members to obtain permanent residency, providing an eventual path for citizenship, in exchange for a $500,000 to $1,000,000 investment in a job-creating enterprise. The overwhelming majority of EB-5 foreign investors, over 80%, have come from China. Allotted a maximum quota of 10,000 visas per year, the EB-5 Immigrant Visa is further subject to a numerical per country limit in the event that quota is met. Known as “retrogression,” this limitation essentially works by creating a backlog in visa availability for immigrant investors from oversubscribed countries.
The U.S. Department of State cautioned in a December 2012 bulletin that projected demand of EB-5 Visas in that fiscal year may subject Chinese immigrant investors to retrogression. Although that never came to fruition (not due to demand, but primarily caused by slow processing times), the Department of State renewed its caution alert again in December 2013. Although the 10,000 visa-quota has never been met since the inception of the EB-5 Program, based on new statistics recently released by the United States Citizenship and Immigration Service (“USCIS”), it is now evident that the demand will surpass the available quota inevitably, perhaps as soon as this Fiscal Year 2015. This no longer makes the likelihood of Chinese quota retrogression a question of “if,” but rather “when.”
The implications of Chinese quota retrogression are far-reaching and affect not only potential Chinese investors but the entire EB-5 industry, including Regional Centers, project developers, agents, and professional service providers such as attorneys. This article will begin with a brief overview of the EB-5 program and how visa retrogression works. It will then assess the potential ramifications of Chinese EB-5 visa retrogression for investors and the EB-5 industry. Finally, it will propose solutions to alleviate the potential impact of Chinese quota retrogression on project developers and Regional Centers.
In 1990, the U.S. Congress created the employment-based fifth preference (“EB-5”) immigrant visa category for immigrants who invest in and manage U.S. commercial enterprises that benefit the U.S. economy and create jobs. Allotted 10,000 immigrant visas annually, the EB-5 immigrant visa was designed to attract foreign direct investment into projects that would directly impact the economy, i.e., not merely passive investments.
Immigrant investors can apply for an EB-5 visa through two primary routes. The first route is through a direct investment into a qualifying “new commercial enterprise.” The second is through the Regional Center Pilot Program. The Regional Center Pilot Program allows USCIS to designate private or public entities as so-called Regional Centers to function as conduits or administrators of large or medium-scale projects funded, at least in part, by EB-5 investors. Regardless of which route is selected, the EB-5 Investor Visa allows foreign investors to obtain permanent residency in the United States conditioned upon an investment of a minimum of $1,000,000 (or $500,000 in a high unemployment or rural area) in a project which creates and sustains at least 10 full-time jobs for U.S. workers.
How Does Visa Retrogression Work?
Congress sets limits on the number of immigrant visas that can be issued each year. In order to adjust status to that of legal permanent resident, an immigrant visa must be available to the applicant both at the time of filing and at the time of adjudication. Visa retrogression occurs when more people apply for a visa in a particular category or country than there are visas available for that month. Retrogression typically occurs toward the end of the fiscal year as visa issuance approaches the annual category, or per-country limitations. When an applicant files an immigrant petition, he or she is given a “priority date.” The priority date is the date when the immigrant petition is properly filed with USCIS. If, at the time of adjudication, an applicant’s priority date no longer meets the cut-off date published by the Department of State, due to retrogression, his or her case must be held in abeyance until a visa once again becomes available.
The EB-5 Program is allotted 10,000 annual immigrant visas. However, that number is misleading because the quota counts an investor as well as his beneficiaries, i.e.,if an average investor is married and has two children, the total number of visas counted towards the quota will be four. In reality, the average number of actual EB-5 principal investors is around 3,000, substantially lower than the available quota.
Once that annual quota is met, the per country limitations on EB-5 visas will be imposed, creating a waitlist for applicants from oversubscribed countries. Since Chinese applicants account for the substantial majority of EB-5 visas, they will be the ones directly impacted. This backlog would essentially delay an investor’s ability to obtain an immigrant visa by a year or more, in addition to normal USCIS processing times for an I-526 (the Immigrant Investor Petition). Therefore, if, for example, an I-526 petition normally takes 6-9 months, a backlog due to visa retrogression would extend processing times to an average of two years, if not more.
What is the Likelihood of a Chinese Visa Retrogression?
In FY2013, 8,567 EB-5 visas were issued. In the first two months of FY2014, over 6,700 EB-5 petitions are already pending with USCIS. Absent Congressional action, the prospect of EB-5 petitions exceeding the annual 10,000 allotment is inevitable. Once that quota is met, the per country limits will result in visa retrogression for Chinese investors, delaying their ability to obtain an immigrant visa by at least a year or more, in addition to the time it takes to process the I-526.
In the long-term, the delay and complications of EB-5 processing will result in Chinese investors looking to other countries that actively compete for foreign investors, including Australia, Canada, and the United Kingdom. Retrogression adds further strains on the EB-5 program which has already been plagued by extraordinarily slow processing times and delays by USCIS. Faced with the prospect of waiting two or more years before being able to immigrate to the United States, a Chinese investor may decide to immigrate elsewhere. Other countries will surely capitalize on visa retrogression to draw away potential investors.
In addition, the Chinese retrogression creates a significant conflict of interest between project developers, Chinese investors and immigration agents. It also raises new ethical issues for an attorney representing the project developer or the Chinese investor.
From an investor’s perspective, an investor with children who are reaching the age of 21 may have incentives to delay the approval of the I-526 as long as possible. Under the Child Status Protection Act (“CSPA”), commonly known as the “age-out provisions,” a child can immigrate as a beneficiary of a parent’s immigration application until he or she turns 21. The CSPA freezes the age of children who are derivative beneficiaries of an I-526 petition while the petition is pending, but not once the petition is approved and awaiting the quota to become available for an immigrant visa. This benefits a Chinese investor whose children are close to aging out. Thus, it will be their benefit to delay the I-526 approval as long as possible.
From a Regional Center or project developer’s perspective, job creation projections and capital redemption timelines will be directly impacted by retrogression. Capital redemption, or the investor’s exit strategy, is, essentially, the time period before which the investor can have his capital returned. A protracted visa immigrant visa availability will tie up the investment money for a longer period of time. Although that may seem like a benefit to the project developer, most current EB-5 investments provide for an exit strategy in which the developer sells or refinances the business, using the proceeds to repay investors. A delay in visa availability will delay the developer’s ability to do so–since an investor cannot redeem capital before the approval of an I-829, which is the petition to remove conditions on investor’s permanent resident card.
Another potential implication is whether such a delay would impact the developer’s ability to access investor funds. In a typical investment through a Regional Center, the investor’s capital is held in an escrow account until the approval of the I-526, at which point the funds are released to the developer. Previously, an I-526 approval typically meant that the investor would be able to immigrate to the United States (or adjust their status) shortly thereafter because an immigrant visa was always available. However, visa retrogression will delay that process by a significant period of time. An investor, therefore, may dictate that the funds be held in escrow until a visa becomes available, not simply until the I-526 is approved. Without alternate financing, this delay could essentially result in an inability to proceed with a project’s development and, ultimate failure.
From an attorney’s perspective, counsel for a Regional Center must recognize the additional securities disclosures that may result from visa retrogression. Specifically, new risk factors for offering documents or Private Placement Memoranda would need to be disclosed. Similarly, counsel for an investor would need to highlight the possible implications to their client.
Solutions and Proposals
However, the growth in EB-5 financing market has the creation of spurred specialized loan companies that address this very issue. There are now several companies that provide specialized EB-5 bridge loans which allow a developer access to all or some of its anticipated capital.
Bridge or interim financing provides the opportunity for EB-5 project developers to take out short term financing to help construct and develop the project, then the EB-5 capital, as it is received, may replace that short term financing yet still receive credit for job creation by USCIS.
Moreover, in its latest Policy Memorandum, USCIS has specifically indicated that such financial arrangements are allowed in the EB-5 context. In a May 20, 2013 Adjudications Policy Memorandum, USCIS stated, in pertinent part:
It is acceptable for the developer or the principal of the new commercial enterprise, either directly or through a separate job-creating entity, to utilize interim, temporary or bridge financing – in the form of either debt or equity – prior to receipt of EB-5 capital. If the project commences based on the bridge financing prior to the receipt of the EB-5 capital and subsequently replaces it with EB-5 capital, the new commercial enterprise still gets credit for the job creation [arguably the main requirement of the EB-5 program] under the regulations….Developers should not be precluded from using EB-5 capital as an alternative source to replace temporary financing simply because it was not contemplated prior to obtaining the bridge or temporary financing.
Tapping Alternative Markets
Prudent project developers and Regional Centers should hedge the risk of any impact a shortage in Chinese investors may cause. Since over 80% of EB-5 investors are from China, even a small decrease in the number of investors may have an significant impact. Creating an alternative pipeline of EB-5 investors from different regions is the key to ensuring continued and sustained growth in the EB-5 Program.
 Wassem M. Amin, Esq., MBA is an Associate Attorney at Dhar Law LLP in Boston, MA and is the Vice Chairman of the Middle East Division of the American Bar Association. Wassem has extensive experience in the Middle East region, having worked as a consultant in the area for over 9 years. Wassem currently concentrates his practice on Corporate Law, Business Immigration and International Business Transactions. He has advised countless Eb-5 Investors and assisted developers in structuring USCIS-compliant EB-5 Regional Centers as well as sourcing investors throughout the Middle East. For more information, please visit the About Us page or request more information on our Contact Us page.
Disclaimer: These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice. The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.