Vintage Jose: EB-5 Article from 11/20/98

PLEASE NOTE: THE INFORMATION CONTAINED IN THIS ARTICLE IS BASED UPON THE LAW, TERMINOLOGY, AND EB-5 SITUATION AS OF 1998.  IT IS NOT CURRENT INFORMATION AND SHOULD NOT BE RELIED UPON FOR VISA STRUCTURING PURPOSES!!

11/20/98

an examination of the EB-5 Immigrant Investor Visa Category and
Implications of Recent INS decisionmaking

by Jose E. Latour

While most immigration attorneys handling business visa cases have
at least dabbled in EB-5 petitions, the reality is that such filings
are still few and far between. This article will explore the
feasibility of the EB-5 NOT from a technical/legal standpoint, but
from the standpoint of the immigrant investors concerns. The purpose,
then, is to assist a potential EB-5 investor in deciding whether this
mechanism is indeed in his or her interest.

I will not delve into detail as far as the EB-5 requirements- you can
search [deleted] for this information. The basics are that in
order to qualify for permanent residency in the U.S. for the investor,
spouse, and unmarried children under 21, the investor must:

• invest at $1 million U.S. (or $500,000 in certain high
  unemployment zones)
• create at least 10 full time positions for U.S. workers (not
  including the investor or relatives)
• play an active role in the enterprise (which can be just about
  any legal business)
• prove two years down the road, to get the final approval, that
  the requirements were indeed met

A little history: when the Immigration Act of 1990 was passed, many
of us hailed the new EB-5 as a potential landmark in U.S. immigration
history. By combining a substantial investment with PROVEN job
generation, two social purposes were met: the very tangible creation
of jobs, as well as the more esoteric but potentially farther reaching
stimulus to bring foreign dollars to the U.S. (As long time
immigration watchers know, there are two seasons for U.S. immigration:
high demand and higher demand. When the global economy is strong, the
appeal of a fresh start in the U.S. is attractive. When the global
economy is unstable — as it is at the time of this writing — the U.S.
is usually the safest place to be. Nowadays, not even Japan offers
economic peace of mind to outside investors.) Naysayers complained
that Congress had "sold out" and was "selling" U.S. residency to the
rich. However, with an annual cap of 10,000 visas, that would mean
an average of 200 new millionaire families in each state, a hardly
threatening proposition by anyone's standards. Even those opposed
admitted that their opposition was philosophical…

So the law passed, and as I've written in prior www.usvisanews.com
articles, those of us whose practice focused on business immigration
scrambled for those "few" 10,000 visas. The expectations of an
important new immigration mechanism, however, were quickly shattered
by INS rulemaking. In their admittedly important effort to insure
that investment funds were not drug profits, the INS rules created
an unparalleled level of disclosure…exactly what an intelligent,
offshore-investing international investor DOES not want to hear.
To the INS, disclosure meant absolute disclosure, and the nuances
and reality of international tax treatment never entered anyone's
mind. Accordingly, an investor had to make a choice: disclose ALL
offshore accounts and interests and risk a multijurisdictional tax
nightmare despite the finest in tax planning, or forget the EB-5
altogether. As you can imagine, a collective "cry heard 'round
world" was bellowed from Price Waterhouse offices all over the
planet, and clients were sternly advised: if your immigration
lawyer releases all this information that is none of the U.S.
Government's damn business, you risk accusation of tax avoidance
in [insert just about any tax jurisdiction, offshore or otherwise,
here.]

And so the potential EB-5 investors scattered like flies, leaving
a few hundred diehards per year to apply. (At the time of this
writing, I don't know the most recent figures on EB-5 applications:
however, they continue to be a tiny fraction of the 10,000 allowed
annually.) I moaned and groaned about the problem, but Congress
had moved on to other issues. I suggested alternative ways of
verifying that the funds were not linked to criminal activity
(Interpol and FBI searches paid for by the EB5 applicant), but no
one really cared. Instead, business immigration attorneys did what
they always do when a perfectly viable immigration mechanism is
rendered impotent by poorly thought out government intervention:
they looked for alternatives.

The alternatives included — and include — the L-1 (since many of
these investors have active companies overseas) and the E-1 or E-2
(since many of them come from countries with U.S. bilateral treaties
of commerce and trade.) But these options were merely non-immigrant
visa mechanisms, and many of these investors wanted permanent
residency. So the "creative lawyering" began. Using a foundation
based upon the Immigrant Investor Pilot Program — where certain
regional investment projects could preregister for interested EB-5
investors — a hybrid investment vehicle was incarnated, in various
forms, by "investment companies" pooling funds. Those of with
established investor visa practices were essentially assaulted with
propaganda from these enterprises. Here is the general way they
were SUPPOSED to work:

1. the investor placed an amount — sometimes less than $100,000 —
   into a guaranteed escrow account
2. the investment company leveraged the invested pool created by
   investors and obtained additional debentures, bonds, whatever,
   making up the balance of the requisite investment.
3. the initial EB-5 would be approved for the investor and family
4. after the removal of conditions two years later, the EB-5
   investment could be liquidated and the money "invested"
   returned, less fees, commissions, etc.

I'm no psychic and I am often accused of trying unusual structures
in visa cases, but I felt very uncomfortable with the concept.
Reasons:

1. the total "at risk" investment statutorily required was never
   met…the $1 (or half a) million never was invested.
2. if there was a "money back guarantee", how could the
   investment be "at risk"?!
3. if the qualifying investment amount was "mortgaged", how could
   that meet the limits defined in the final EB-5 regs on point
   and….
4. the EB-5 requires an "active" investor; how could these
   programs, "hands off" by design, be active within the meaning
   of the law?

I was reassured repeatedly that they had addressed all this, that the
EB-5 petitions were being approved. After a while, I got curious,
asked for proof, and a Florida company with this program gave me proof
positive in the form of INS approval notices! Indeed, perhaps I had
been a bit literal in my reading of the regs…

Not so fast. It took a few years, but the INS finally read its own
regulations and came to the same conclusion I had: these investment
structures did not meet the capital requirements, were not at risk,
and were definitely not "active" within the meaning of the law.
(Outraged, these well financed companies are mounting an aggressive
appellate campaign, but our phones were ringing off the hook when
the denials for the removal of conditions based on the foregoing
started coming in. To their credit, some of the companies —
including the Florida based entity which has so aggressively courted
me — actually reimbursed clients fully for the two year old
investments.)

[ AN ASIDE: one of. the most perplexing angles on this was the mistaken
belief on the part of the companies "recruiting" well-known business
immigration firms that we were this natural funnel of business for
them. As I told more than one smiling salesman, our EB-5 clients are
not rich yahoos trying to find a place to park their money! As a
rule, they are sophisticated business men and women looking to U.S.
Immigration for a variety of business and personal reasons. I have
YET to have a millionaire arrive at my door with "Gee, Jose, I have
all this money and no clue what to do with it"…I admit, it would be
fun…:-) ]

So where do we stand now? Well, if you know anything about the
Immigration appeals process, you know it means years of delay and
no real reassurance of success in the end. Worse, after a petition
is denied, your status is not "stayed" pending the appeal. In other
words, you are not allowed to remain in your current category while
you pursue the appeal…it's more like "go home" and let your lawyer
worry about it. While the information I have received indicates
that these investment houses are convinced the INS will change its
tack and the appeals will be favorable, I don't believe this will be
the case. The said part is that if the INS had properly scrutinized
these cases and come to this conclusion earlier — as I did — then the
lives of hundreds of investors and their families would not be in
this situation. But the early approvals — right or wrong — fostered
a tremendous growth for these companies, as they now had "proof" —
again, in the form of actual notices of approval — that their projects
were working. Unfortunately, these folks are now caught in the
uncertainty of legal wrangling and the appeal process.

Many firms continue to offer similar investment programs and, except
for the clearly qualifying, pre-INS-approved designated Pilot Programs
where minimum investment thresholds are required, I advise all our
clients against participation. When I DO get a client waffling about
the nature of the contemplated EB5 investment — "Jose, I'm not sure if
I'll do the hotel in the Keys or the car dealership or the whatever"
— I give them the same advice: follow your heart but use your head.
Analyze the potential of the contemplated business- whether brand new
or purchase of a going concern- with your CPA sitting by your side.
Crunch the numbers and spend a few thousand bucks on a good market
survey. Then, if all of that is okay, follow your dream. If that
bed and breakfast for German tourists visiting St. Augustine is your
dream, go for it. If you think your Mom's recipe for creme cheese
flan is the greatest thing since peanut butter, market it. Just make
sure you understand the financial risks and are willing to accept them.
If so, love of your business and a sincere desire to learn and grow
with your new U.S. enterprise will be the greatest asset you bring to
the table. Enthusiasm is contagious, and you have to be excited about
far more than the prospect of U.S. residency. You have to be prepared
to labor and sweat over your new "baby", and many of the folks
considering EB-5s are well off and comfortably retired in their home
countries…are you sure you are up to building ANOTHER empire in a
new, unfamiliar business culture?

I'll be honest with you: when we get our 5 or 6 potential EB-5s per
month, I explore L-1 possibilities. If they are good, I almost always
go that route. If they are childless or "empty nesters"- kids over 21
and gone- I may recommend E-1 or E-2 since they are, for practical
purposes, "permanent" in the sense that there is no limit to the number
of years in which you can remain in the category, as long as the
business is prospering. (Besides, if they are planning to have kids,
they will probably be born in the U.S. and be U.S.citizens anyway!)

But there are a few folks- the ones with a clear business vision…
the ones for whom the risk of the investment is justified by the
potential economic rewards…the ones whose kids are teenagers and
getting close to 21- for whom the EB-5 is still the finest mechanism
around. Provided the investment is sound, makes sense, and is both
financially and operationally structured to address both the statutory
AND regulatory language of the law, we can definitely get the
approvals for the EB-5. Unfortunately, what was supposed to be a new
avenue for entrepreneurial immigrants has turned into an elite club
for those willing to jump through the unneeded hoops created by the
INS.

If you are interested in exploring the feasibility of an EB-5
immigrant visa structure for you and your family and have the means
to invest the threshold amount, please email your questions directly
to me at:

jlatour@latourlaw.com  [UPDATED]

Please slug the subject line "EB-5 INQUIRY FOR JOSE" so it does not
get filtered. (I'm not elitist in answering email…it's just that
EVERYBODY sends everything to me and not one of the 13 others they
actually need to speak to :-] )

Hope this was educational! Jose

PLEASE NOTE: THE
INFORMATION CONTAINED IN THIS ARTICLE IS BASED UPON THE LAW,
TERMINOLOGY, AND EB-5 SITUATION AS OF 1998.  IT IS NOT CURRENT INFORMATION
AND SHOULD NOT BE RELIED UPON FOR VISA STRUCTURING PURPOSES!!

Tags: EB-5 Investor Visas