In Zhang v. USCIS et al.¸ No. 19-5021, the U.S. Court of Appeals for the District of Columbia Circuit rejected USCIS’ interpretation of EB-5 regulations that improperly precluded immigrant investors from using loan proceeds as a source of EB-5 investment capital, unless it could be demonstrated that the immigrant investor own the asset which secured the loan and was personally and primarily liable for the loan. The circuit court’s decision opens doors to new EB-5 investment, potentially bringing a boost in foreign direct investment through the EB-5 Program that has lagged since USCIS increased the minimum investment amount in November 2019.
USCIS’ faulty interpretation was set aside as “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” in violation of the Administrative Procedures Act, agreeing with the lower district court decision that loan proceeds qualify as cash, not indebtedness, under the EB-5 Program. The court looked at the plain meaning of the terms “cash” and “indebtedness” and confirmed that indebtedness does not include loan proceeds. The court ruled:
“Cash is fungible, and it passes from buyer to seller without imposing on the seller any of the buyer’s obligations to his own creditors. The buyer’s source of cash—whether paycheck, gift, or loan— makes no legal or practical difference. Here, when [the EB-5 investors]took out loans from their companies, they received cash proceeds. And when they invested the proceeds into the [new commercial enterprises], they gave and the enterprises received cash, plain and simple, regardless of how it was obtained.
The court went further to state:
“[W]hen the alien invests loan proceeds in an enterprise, the enterprise does not receive his indebtedness at all—much less receive it as an asset. Indebtedness thus does not include loan proceeds. Instead, an investment of indebtedness is more naturally understood as a promise to give the enterprise something of value.”
It remains to be seen whether USCIS will appeal the D.C. Circuit’s decision, or how/when USCIS will change its adjudication standards or its online Policy Manual. Nevertheless, this gives immigrant investors some level of confidence that such an investment complies with EB-5 law and regulation and will allow a path to a green card. For example, a loan from a closed-owned corporation to its shareholder without security, or a loan from a parent to a child without providing any collateral (and avoiding possible gift taxes), now appear to be acceptable financing sources. Of course, it is still critically important to document that the proceeds lent to the immigrant investor and subsequently invested as EB-5 capital derived from lawful source and transferred lawfully, and the court recognized that “security arrangements might help confirm the loans are legitimate.”
Congratulations to Ira Kurzban and John Pratt for this great EB-5 litigation victory.
If you have any questions on this key victory or would like to use loan proceeds to fund your EB-5 investment, please contact a Wolfsdorf Rosenthal LLP attorney.
Disclaimer/Reminder: This does not constitute direct legal advice and is for informational purposes only. The information provided should never replace informed counsel when specific immigration-related guidance is needed.