Regulatory Wild West for Foreign Finders: Part 2

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Part 1 of this entry introduces the hypothetical foreign broker from Qatar, Petra Ventures, which finds GCC investors for private U.S. ventures.  Petra of course prefers to avoid registering as a broker with the securities laws of both its domestic and foreign jurisdiction, considering that registration is both costly and time-intensive.  Assuming Petra confirms that the GCC’s regulatory regime offers a shelter from registration for foreign finders, it must still make certain of its legal standing as an unregistered entity brokering private deals partly in the U.S.

The SEC requires brokers that transact in private securities on behalf of others to register,[i] and it includes domestic private placement agents and finders into this scheme.[ii]  Commission Staff guidance defines a finder as any person who finds investors for, makes referrals to, or splits commissions with registered brokers, investment companies, or other securities issuers and intermediaries—including for private venture capital placements.[iii]

The Commission offers two registration exemptions for the activities of parties to private trades.

Regulation S Exemption

Via the Regulation S Exemption, the Commission exempts issuers, distributors, and any of their respective affiliates who offer and sale outside the United States from the registration requirements.[iv]  Offers occur outside the United States if:

(1) The offer or sale is made in an offshore transaction;

(2) The issuer, distributor, or any of their affiliates make no directed selling efforts in the United States; and

(3) The purchaser of the securities (other than a distributor) certifies that it is not a U.S. citizen, and is not acquiring the securities for the account or benefit of any U.S. person.  Moreover, the purchaser must agree to wait one year before reselling such securities back into the U.S.

Unfortunately, Regulation S states that nothing in its Rules obviates the need for any issuer or any other person to comply with the broker registration requirements of the Exchange Act when applicable.  Though at first glance it seems the Commission carved out shelter for foreign brokers by exempting affiliates of an issuer or distributor.  However, the Commission shuts the door to this potential brokers exemption by explicitly mentioning just paragraphs later that broker registration requirements remain largely in tactPetra’s ability to rely on the Regulation S exemption is at best tenuous, and it must still search elsewhere for an appropriate regulatory shelter from registration.            

Foreign Broker Exemption

The SEC generally uses a territorial approach in applying registration requirements to the international operations of foreign brokers. Under this approach, all brokers physically operating within the United States that solicit securities transactions must register with the SEC, even if their activities are directed only to foreign investors outside of the United States.  Additionally, foreign brokers that operate from outside of the United States who solicit U.S. investors through using the instrumentalities of interstate commerce must register.[v]

However, the Commission does provide a narrow exemption for foreign brokers who 1) operate outside the U.S., and 2) solicit exclusively to foreign entities.  The Commission defines a foreign broker as any non U.S.-resident person whose securities activities, if conducted in the United States, would be described by the definition of “broker” in the Exchange Act.[vi]  The Commission includes brokers temporarily present in the U.S. as well as brokers that are U.S. citizens residing abroad, into its definition of a foreign broker.[vii]  Petra falls within the Commission’s definition of a foreign broker, as long as Petra maintains a substantial business presence abroad and only solicits only to foreign investors.

This Foreign Broker exemption states that a foreign broker can help U.S. investors purchase any security from foreign issuer, as long as the foreign broker transacts alongside a registered broker intermediary.[viii] Though a step in the right direction, the Foreign Broker exemption hardly fits Petra like a glove.  Petra connects foreign investors to U.S issuers, rather than bring U.S. investors to foreign issuers. The language in the exemption suggests that the Commission intended to focus this exemption on transactions that bring U.S. money to foreign entities, and not the other way around.  The Commission’s requirement that foreign brokers work in tandem with a U.S. registered broker as an intermediary supports this interpretation.  Though both Regulation S and the Foreign Broker exemption address brokering activities within the penumbra of Petra’s business model, neither affords Petra unambiguous shelter from registration.

Persuasive secondary sources shed some light on the ambiguity of Petra’s registration requirements, stating that the SEC has not indicated that it requires registration for brokers purchasing securities in the United States and selling them to foreign investors abroad. [ix]   Although the SEC could require such registration in the future, the SEC’s primary concern is the protection of American investors, not foreign.

Though the SEC has not provided an explicitly apt registration exemption for Petra Ventures, Petra may continue operating its current business model without registering as long as it complies with the following guidelines:

(1) Petra must conduct all brokering through Petra ME.  Petra requires further research to determine how to appropriately separate the business activities of its two branches.

(2) Petra must only solicit non-U.S. investors, including non-U.S. Citizens temporarily in the U.S., green card holders, and foreign students.

(3) Petra ME may not even hold itself out as a broker to U.S. investors, nor may it even advertise in the United States.

(4) Petra may only solicit in the GCC region to institutional investors, government authorities, investment managers, and Petra may transact with individual investors who seek out Petra without prompting.

(5) Petra must contact a lawyer familiar with Dubai Securities Law, and conduct a more thorough understanding of this foreign regulatory system.

[i] 15 U.S.C. § 78c.

[ii] Guide to Broker-Dealer Registration, Division of Trading and Markets, SEC, April 2008, available at http://www.sec.gov/divisions/marketreg/bdguide.htm#II.

[iii] Id.

[iv] Rule 903; 17 CFR §230.903.

[v] Id. at footnote 3.

[vi] Rule 15a-6(b)(3) of the Exchange Act.

[vii] Id.

[viii] 17 CFR §240.15a-6(a)(3).

[ix] “The Regulation of Investment Management and Fiduciary Services,” 1 Reg. of Invest. Mgmt. & Fiduciary Serv. § 19:7.

Disclaimer: These materials have been prepared by Amin Consulting LLC 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.

About Amin Consulting LLC: Amin Consulting is a uniquely positioned advisory and consulting Firm that, through our diverse team of Legal and Business experts, provides unique and niche services for Middle Eastern and United States based companies and investors.  Whether you are a U.S. Company expanding in the Middle East, or a High Net Worth Family from the Middle East looking to diversify or protect its assets, you have come to the right place.

Our team is compromised of professionals with decades of collective consulting, legal, and business experience–specifically between those two regions of the world.  Most of our consultants are Accredited and Licensed United States Attorneys as well as International Business Consultants.  That allows us to provide, not only expert advice, but also added value through vertical integration of these often interconnected services.

For more information or a free consultation, send us a message here!

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Changing Markets and New Opportunities in the GCC

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By: Eduardo Gonzalez

The GCC equity market experienced what many are calling a rollercoaster ride caused by recent market corrections in oil prices at the end of 2014. The recent developments, however, also resulted in more attractive valuations of well managed oil companies that have helped retain market confidence and reports indicate the 2015 market looks promising for investors. While oil will continue to account for a large portion of GCC revenues, the volatility in emerging-market currencies will create a shift in the market psychology of the region, and consequently the region will be poised to open its borders to economic competition in other non-oil sectors.

Domestic Sovereign Wealth Investment in Other Sectors: Long-term instability in the oil market will likely cause problems for the GCC’s economic outlook, but the region’s sovereign wealth funds indicate it is well prepared to compensate for the decline in oil revenues. Collectively, the region accounts for 37 percent of the world’s sovereign wealth funds, creating an opportunity for GCC investors to generate growth in sectors the GCC has not traditionally targeted. Many argue that sovereign funds will be the drivers of economic development in the region—in particular, the region’s focus on education and real estate indicates a push to leverage human capacity. Sovereign funds will play an increasingly important role in determining the regions economic trajectory, and taking into the account the surrounding area’s financial trends will ensure investors make the best possible decisions.

Increasing Foreign Investment: Continued free trade agreement (FTA) negotiations with the Association of Southeast Asian Nations (ASEAN), China, Australia, and Europe will allow the region to benefit from more open trade borders and establish strategic partnerships with regions that excel in areas the GCC is targeting. An FTA with Singapore, for example, went into effect at the start of this year that illustrates a commitment to enhancing bilateral trade between the two regions. Ongoing talks with nearby economies will streamline the trade of goods and services, and expand the GCC’s capacity for growth. In effect, the declining profitability of oil may actually accelerate economic reform that could remove restrictions on foreign investment and generate opportunities for the GCC to address its regional challenges.

Domestic Development via Bolstering Human Capital: The GCC will experience two catalysts in 2015 that will increase growth in non-oil sectors: the first is the UAE’s and Qatar’s upgrade to emerging market status in 2014. These states will receive a great deal of attention from foreign investors—that view ‘emerging market status’ as the “Wild Wild West of investing”—and may become critical elements to the GCC’s success across different sectors in the coming years. As the region’s markets become more flexible there will be increasing opportunities for the GCC to guide investments into areas it has traditionally left out. In fact, many argue that the booming markets will be most profitable through diversified approaches. This reality highlights the second factor to watch this year: the region’s focus on increasing human capital. Dubai, for example, struggles to attract expatriates because of rising living costs, and the residential markets in both Dubai and Abu Dhabi have experienced a growing ‘supply and demand’ imbalance. This indicates a low rate of middle class nationals seeking to establish professional networks in a region experiencing infrastructure growth in all sectors. Dubai responded to this mismatch by focusing on improving the quality of education and working with foreign investors to provide first-class education systems that compete with nearby regions. Similar approaches will help the GCC retain skilled nationals and attract highly capable professional that will improve demographic imbalances across the MENA region.

The GCC is prepared to see a great deal of success in 2015, but the region will need to maneuver its efforts to work against a reliance on oil and towards development in other sectors. The GCC expects increased investment across all economic sectors as it relinquishes restrictions on foreign trade; and the region has the opportunity to strategically plan infrastructure developments to retain regional talent. The GCC has the means and resources to maintain its position as one of the most attractive regions for the tech-boom and it will do so by becoming a leader in modern standards.

Disclaimer: These materials have been prepared by Amin Consulting LLC 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.

About Amin Consulting LLC: Amin Consulting is a uniquely positioned advisory and consulting Firm that, through our diverse team of Legal and Business experts, provides unique and niche services for Middle Eastern and United States based companies and investors.  Whether you are a U.S. Company expanding in the Middle East, or a High Net Worth Family from the Middle East looking to diversify or protect its assets, you have come to the right place.

Our team is compromised of professionals with decades of collective consulting, legal, and business experience–specifically between those two regions of the world.  Most of our consultants are Accredited and Licensed United States Attorneys as well as International Business Consultants.  That allows us to provide, not only expert advice, but also added value through vertical integration of these often interconnected services.

For more information or a free consultation, send us a message here!

Doing Business in Saudi Arabia: Options and Overview for Foreign Investors and Companies

Wassem Amin SAUDI

(Note: This Article was originally published the American Bar Association, Section of International Law Quarterly Newsletter in March 2014.  For a downloadable copy of the newsletter, click here.)

By: Wassem M. Amin, Esq. MBA*

The Kingdom of Saudi Arabia is one of the fastest growing economies in the Middle East. In 2013, the government increased its budget by more than 20% than the previous year, to approximately 820 Billion Saudi Riyals ($219 Billion). Additionally, Saudi’s King Abdullah pledged more than $500 billion on social welfare and infrastructure projects over the next few years. Saudi Arabia’s increased spending is part of its policy to create economic diversification and reform, in turn decreasing their dependence on oil revenue and creating new jobs for the local population.

A large proportion of the Government’s spending, approximately 300 billion Riyals, has been allocated to capital expenditures on investment projects and social infrastructure. Ambitious plans include building 539 new schools and universities, as well as the development of several new cities in the sprawling desert kingdom.
The biggest beneficiary of this expansionary policy is the construction industry. Demand in the construction and associated sectors, such as residential and commercial real estate development, will increase exponentially, representing an excellent market opportunity for foreign investors and international corporations seeking to enter the Saudi market.

Applicability of Islamic Finance

Construction projects in Saudi Arabia are typically either public or private. The governing law which applies to all contracts, including construction, is Shari’a, or Islamic, law. General principles of Islamic Finance are applicable, such as the duty to act reasonably, in good faith, and to mitigate losses.

In the private sector, within the construction sector specifically, the Islamic Finance principle that applies is the “istisna’a” contract, which is a contract for the sale of an asset that is yet to be constructed or manufactured. Using this structure, the party providing capital, the financier, enters into a contract with the purchaser of the building to be constructed. Usually the financier, whether a bank or investor, will then enter into a back-to-back construction contract with a general contractor for the project. The financier realizes a profit from the spread between the cost of the construction contract and the price of the purchase contract.

Public Works Contracts

However, in the public sector, specific regulations and a complex legal framework govern bidding for public works, as well the interpretation and enforcement of underlying contracts. While still generally subject to Islamic Law principles, public works contracts are considered administrative contracts and are subject to the Government Bids and Procurement Law, implemented with associated regulations.

Establishing a Foreign Presence in Saudi Arabia

Recent amendments in the law and a shift in policy by the government to attract foreign direct investment have made it easier than ever for a foreign company or investor to establish business operations in Saudi Arabia. Although there are a variety of business organizations in Saudi Arabia, the most commonly used by foreign companies in undertaking construction projects are Limited Liability Companies (LLCs). That is due to the relative ease of incorporating an LLC (as opposed to, for example, a Joint Stock Company), minimal capitalization requirements, and the requirement of less corporate governance formalities.

The actual procedure of establishing an LLC in Saudi Arabia is typically a two-step process: (1) First, the foreign partner applies to the Saudi Arabian General Investment Authority (SAGIA) for a foreign investment license; (2) Second, once SAGIA issues the license, the partners in the proposed LLC apply to the Ministry of Commerce and Industry in order to incorporate the company. Once approved, the Ministry will certify the formation documents of the LLC and issue a commercial registration certificate–which permits the LLC to begin operating in the Kingdom legally.

Saudi Arabia’s Foreign Investment Regulations give foreign investors a variety of options in determining how to conduct business operations in the Kingdom. However, regardless of the option chosen, if a physical commercial presence is established, foreign investors must first obtain a foreign capital investment license from the Saudi Arabian General Investment Authority (SAGIA). The following section gives an overview of the other options that may be feasible

Overview of Saudi Arabian Business Entities and Markets

Investments in Saudi Arabia may be through the formation of a new business entity or through the acquisition of assets or equity in an existing company. Commercial enterprises by foreign companies may be structured as any of the following: (1) joint ventures, (2) wholly owned subsidiaries, (3) local branches of a foreign company; or (4) representative or agent offices.

The principal body of law governing commercial enterprises in Saudi Arabia is the Companies Regulation, which is enforced and regulated by the Ministry of Commerce and Industry. In some circumstances, an enterprise may be subject to the rules and regulations of additional regulatory bodies such as the Saudi Arabian Stock Exchange (Tadawul), the Saudi Arabian Monetary Agency (SAMA), or the Capital Market Authority (CMA).

In terms of the legal type of entity established, foreign investors have several options to consider–depending largely on the scope and type of the proposed enterprise as well as the investor’s exit strategy. The types of entities are: (1) Joint Stock Company; (2) Limited Liability Company; (3) Joint Venture; (4) Branches of foreign companies; and (5) Technical and Scientific offices of foreign companies.

Joint Stock Company (JSC): JSCs are the most analogous entity to a C-Corporation in the United States. They may be wholly foreign owned and are typically established with the intent towards a future public offering and listing on the Saudi Stock Exchange (Tadawul). A minimum of 5 shareholders and 3 directors on the board of directors is required. The minimum initial capitalization required is 2 Million Saudi Riyals (SR), which rises up to SR10 Million if the JSC will issue publicly traded shares.

Limited Liability Company (LLC): As with JSCs, Saudi law permits an LLC to be wholly foreign owned and managed. LLCs must have at least 2, but not more than 50, member-investors. Each member owns a pro-rata equity share equal to the uniform nominal value. Liability of individual members, under most circumstances, is limited to the member’s paid-in capital. Minimum initial capitalization for an LLC with any foreign members is typically SR500,000. However, for certain industries, such as agricultural or industrial projects, the minimum capital may be much higher. Unlike JSCs, LLCs do not issue shares and cannot be publicly traded on the Saudi Arabian Stock Exchange.

Joint Ventures – LLCs and JSCs may both be wholly owned or established with a Saudi business partner. The decision to establish a Saudi partner may be mandatory in some fields, such as establishing a branch of international law firm. However, in other cases, a foreign investor may benefit from a Saudi partner’s expertise and familiarity of the local market, customs, and traditions. The risks and benefits of doing so must be carefully analyzed after thorough due diligence is conducted.

Branches of Foreign Companies – Branch offices are set up to represent foreign companies in Saudi Arabia. Similarly to JSCs or LLCs, branch offices are allowed to engage in direct business activities. However, their scope of business is limited to that of the parent company.

Technical and Scientific Offices (TSOs) – TSOs are easily set up in Saudi Arabia and are usually established when a foreign company enters into long-term distribution or agency arrangements with local companies. However, their scope of allowed commercial activity is limited to providing technical support and assistance to local distributors, agents, and consumers. TSOs are prohibited from engaging in any direct business activities.

Other Commercial Arrangements – Distribution arrangements may be done through a joint venture with a Saudi partner or by appointing a local distributor or agent on your behalf. Other options, such as franchising or a direct international sale, may also be available, depending on the type of service or product the foreign company offers.

Saudi Arabia is a lucrative market for foreign companies and investors. At a time when the market in the United Arab Emirates is beginning to get stagnant and saturated, Saudi Arabia remains ripe with opportunities. However, the cultural, political, and legal landscape is complex and varies dramatically from that of countries such as the USA or in Europe. Unaccustomed foreign companies or investors should seek out advisory or legal firms who are proficient and have expertise in Saudi Arabia.
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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.

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 Committee as well as the Islamic Finance Committee of the American Bar Association’s International Law Section. Wassem has extensive experience in the Middle East region, having worked as a consultant in the area for over 9 years. Wassem currently focuses his practice on Business Immigration (EB-5 Regional Center and Investor Representation) and International Business Transactions. For more information, please visit the About Us page or http://www.dharlawllp.com.

Client Advisory: Canada’s Shutdown of Immigrant Investor Program Will Impact U.S. EB-5 Quota

Amin-Wassem-China-US-EB-5

By Wassem M. Amin, Esq., MBA

The Canadian Government announced on February 12, 2014 that it is shutting down the Immigrant Investor Program, effective immediately, with all pending cases being rejected.  As reported in Forbes.com, an estimated 45,000 Chinese Immigrant Investors with applications pending will be affected by this decision.  With the increased popularity of the U.S. EB-5 Immigrant Investor Program in China, it is inevitable that some of those affected applicants will choose to divert their investments here.

Assuming that even a fraction of those 45,000 investors applied through the EB-5 Program, the impact on the EB-5 Quota will be substantial.  U.S. Immigrations Laws allot 10,000 annual visas to EB-5 Immigrant Investors.  The visas are awarded on a first-come, first-serve basis.  As discussed in prior posts, forecasts indicate that this quota will be met as early as June of 2014–effectively backlogging all Chinese Immigrant Investor applicants.

However, it is critical to note that prior forecasts did not account for the potential influx of rejected Chinese Immigrant Investors from Canada.  This poses immediate consequences for EB-5 applicants from China.  An unexpected increase in Chinese applicants will result in the EB-5 quota being met earlier than the deadline previously forecasted, perhaps as early as April of 2014.  That will cause applications processed by USCIS after the deadline to be backlogged, perhaps by a year or more, in addition to current processing times for an I-526 (Immigrant Investor Application).

Potential EB-5 Applicants, particularly those from China, are advised to contact a legal professional to discuss the potential impacts this may have on their applications.

__________________________

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, having worked as a consultant in the region for over a decade.  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.

EB-5 Chinese Quota Retrogression: Analysis of Potential Impact and Recommended Solutions

Amin-Wassem-China-US-EB-5By Wassem M. Amin, Esq., MBA

(Visit our Publications Page for a FREE PDF Download of this Article)

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.

Background

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.

Potential Implications

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

Bridge Financing

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.


[1] 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.