Direct EB-5 Due Diligence: Buyer Beware (and Immigration Attorneys Be Cautious)

Authored by Joseph Barnett and Bernard Wolfsdorf, on behalf of AILA EB-5 Committee

There has been a lot of recent interest from prospective immigrant investors in direct EB-5, including “pooled direct” investments.  This is partially because the more popular EB-5 Regional Center program is waiting for reauthorization, and the (likely temporary) minimum investment requirement presently at $500,000 for job creation in a Targeted Employment Area (“TEA”).[1]  As a result, the AILA EB-5 Committee would like to share their thoughts on specific issues related to the representation of direct EB-5 clients, as a high percentage of direct EB-5 cases appear to run into difficulties.

1. Limited Scope of Representation.  As lawyers, we can rely on outside professionals (such as accountants and business advisors) to provide advice in areas we are not competent to handle. Being a good immigration lawyer and advising clients regarding investor visas does not require that every lawyer handling these cases must be competent in the tax, business, and accounting work that is a critical part of the EB-5 framework. It is correct to state that EB-5 requires a team including the immigration lawyers, corporate lawyers, franchise lawyers, securities lawyer, business plan writer, accountant, banker, and the list goes on depending on the complexity of the deal. To reduce risk, the specific role of the immigration attorney must be clearly defined in the client representation agreement.  EB-5 lawyers should review these agreements carefully to ensure clients are clear as to what the lawyer will not handle as part of the EB-5 representation and process.  Working with entrepreneurs on direct investment projects can be challenging because foreign entrepreneurs typically do not have a full team of professionals in place, and they often want to avoid spending money on additional professional services because in the home country, one lawyer may handle everything.  There are many pitfalls, and it is important to make sure, for example, that the investor communicates to their CPA that the EB-5 funds are an equity investment and not a loan to the business. Many CPA may describe it as a loan to optimize tax advantages, but the well-intended error can lead to problematic EB-5 investment issues.  It’s also advisable to not take on a matter when there will be more than one owner of the business unless the client commits to hiring a business attorney as well, or you may find yourself being dragged into matters unrelated to your representation.
2. Investment Advice. Be careful about providing your opinion to a client on the economic merits of an investment or offering advice on whether the project represents a “good financial investment.”  Don’t give investment advice unless qualified because the legal services agreement may not save you!  Understandably, immigration attorneys may be concerned that by declining to advise on project selection, a potential client may move on to another attorney who does not have the same level of reluctance.  However, the risk and costs associated with being dragged into court as a defendant for recommending an EB-5 project were to fail (or worse in the event of fraud) will by far exceed the attorneys’ fees. It may be noted that several attorneys have been sued based on their recommendation of a list of projects, even where clients have been encouraged to perform their own due diligence. Most immigrant investors understand the complexity surrounding EB-5 project selection and are more than willing to engage a due diligence expert or financial advisor before making an investment decision.  Unless the attorney is also a licensed investment adviser[2] or registered broker-dealer, the attorney should stick to offering advice only on the immigration-compliance aspects of an EB-5 project. Moreover, the attorney be may vulnerable to a charge of operating as an unlicensed investment advisor. EB-5 lawyers should recommend that the client engage the services of a licensed financial advisor to advise on the financial and investment aspects of a particular EB-5 project.  If lawyers decide to do EB-5 work, they should develop a referral network of qualified professionals and utilize them to reduce the risk related to negligent referral claims.  This is true for both direct EB-5 and Regional Center clients. 
3. Credible Business Plan.  For direct EB-5 cases, submitting a “credible” business plan to demonstrate future job creation is essential for eligibility.  While it is important to review a business plan to ensure compliance with Matter of Ho, avoid the risks involved in drafting the business plan that must be included in support of the EB-5 petition. Unless you have a special business expertise and are insured for this non-legal task, do not help draft this key document.  Most entrepreneurs would benefit from hiring a professional business plan writer to ensure the business plan is a polished professional presentation, adding to the credibility of the case and ensuring EB-5 compliance.
4. Executing the Business Plan. It is critical to inform a client that preparing the business plan and executing it are two separate tasks – make sure the immigrant investor understands other areas of state and federal law (human resources, tax, zoning and entitlements, etc.) must be complied with to operate a lawful U.S. business.  Many have experience in their home country where business practices are looser.  Moreover, USCIS will normally issue a Request for Evidence on a direct EB-5 case at the I-526 adjudication stage merely to determine if the business plan is being executed and jobs are actually being created.   Many new businesses fail, and if the business suffers a serious downturn, the immigration process could be adversely affected. 
5. Compliant Business Structuring. In a direct EB-5 case, the new commercial enterprise (“NCE”) is specifically defined in the regulations and generally can be a holding company and its wholly owned subsidiary.  “Employee” is also specifically defined in the regulations as a W-2 worker of the NCE.  That means a “direct” employee must be employed by the NCE.  The corporate structure must be examined to make sure it is compliant.  If there are many entities in the project structure, the investor’s equity investment and the employee’s employer must be the same entity or a holding company and its wholly owned subsidiary.  In other words, “direct employees” in the regional center model (anyone working directly at the Job Creating Entity (“JCE’) and “direct employees” in a non-regional center model are NOT the same.  The Matter of Ho business plan must make it clear who is the legal employer of the employees.  Additionally, for E-2s converting to EB-5, retained earnings do not qualify as investment; instead, the EB-5 investor would have to receive a distribution (and incur tax liability for it) and then re-invest the funds to be included as part of the EB-5 investment.
6. Purchasing an Existing Business. Be careful when a client wishes to purchase an existing business, as buying a business from someone generally does not create a qualifying EB-5 investment, where the funds go to the seller, not to the NCE.  USCIS also has unclear, challenging standards in situations involving “the purchase of an existing business and simultaneous or subsequent restructuring or reorganization such that a new commercial enterprise results.”  USCIS relies on Matter of Soffici, 22 I&N Dec. 158 (AAO 1998) to deny such cases attempting to meet this requirement.   It’s critical to distinguish between what the AAO found non-compliant in that case and what the investor has done prior to filing the Form I-526.  Be on the lookout for investors who call after they’ve already invested $1,000,000 in a business with ten employees.  Many investors call after they have invested $1,000,000in a business with ten employees, only to be told that it does not qualify as an EB-5 investment.
7. Position Creation. The immigrant investor must  meet the job creation requirement by showing that at least ten full-time (minimum 35 hours a week) positions for qualifying employees have been created or will be created within a reasonable time.  Note that the requirement relates to the position, not the employee.  Submitting ten I-9s will not, by itself, demonstrate compliance with the job creation requirement because I-9s do not demonstrate how many hours an employee works.  Each employee should be matched up to a specific position listed in the business plan.  If there’s job sharing of a position, it’s advisable to properly document the title, duties, weekly hours, and what employees are sharing the position.  Also be ready to advise the immigrant investor on how layoffs, unfilled positions, or even issues like maternity leave may impact their EB-5 case.  For “pooled direct” cases, include requirements for the operator to have rolling audits for job creation to ensure it is legitimate and qualifying.
8. I-9s Compliance and E-Verify. It is critical that the NCE’s on-boarding of employees be done lawfully and in compliance with I-9 rules.  Counsel clients to enroll in E-Verify for clear evidence that the employees qualify as “U.S. workers.” Qualified employees include US citizens and permanent resident, refugees, asylees, or persons granted cancellation of removal. Foreign nationals residing in the U.S. as nonimmigrants, Dreamers and many other categories authorized to be employed do not qualify under EB-5, and USCIS may require evidence of citizenship status, which puts the NCE in a tricky situation because they must otherwise avoid citizenship discrimination in the I-9 process.  Requiring certain citizenship documents at the time of the I-9 process that complies with EB-5 requirements may also constitute “document abuse” under the anti-discrimination provisions of the Immigration Reform and Control Act (IRCA).   Advise clients to keep copies of documents establishing employment eligibility and to do an I-9 audit prior to submission of an I-829.  
9. How Long Must the Jobs Last?
   • The statute and regulation do not provide a straight-forward answer to this common question.  USCIS’ Policy Manual states:
     • In making the determination as to whether or not the immigrant investor has created the requisite number of jobs, USCIS does not require that the jobs still be in existence at the time of the petition to remove conditions adjudication in order to be credited to the investor. Instead, the job creation requirement is met if the investor can show that at least 10 full-time jobs for qualifying employees were created by the new commercial enterprise as a result of his or her investment and such jobs were considered to be permanent jobs when created
   • It remains to be seen how closely USCIS adjudications follow this guidance, and how an adjudicator determines whether “such jobs were considered to be permanent jobs when created.” When ten, full-time positions for qualifying U.S. workers have not been sustained during the first two years of conditional permanent residency, the ultimate success in removal of conditions is often dependent on the facts and circumstances of each case.  USCIS will be on the lookout for temporary job creation to meet the EB-5 requirements followed by layoffs and a lower employee count for longer periods of time. 
10. Other Considerations: 
    • USCIS has appealed the District Court Behring v. Wolf  decision, and the lawsuit is still on-going.  Make sure there is a written warning to clients that the lower investment amount and TEA rules are not completely settled. There is some chance that a $500,000 investment may not sustain an approval if the courts ultimately uphold the November 2019 regulations increasing the minimum investment threshold. 
    • USCIS will want to see how the NCE used the specific EB-5 investment funds.  It may be advisable to separate the EB-5 investment capital from the company’s operating capital to effectively track how the funds were used.  When the operating capital and revenues are comingled with the investor’s capital, and the money is eventually taken out, it is more difficult to demonstrate how the investor’s investment was used.
    • Include evidence of non-EB-5 financing in an NCE to comply with 8 C.F.R. § 204.6(g)(1); without, this issue is normally raised in a Request for Evidence at the I-526 stage. 
    • Note the muddying in USCIS’ Policy Manual:  “Direct jobs that are intermittent, temporary, seasonal, or transient in nature do not qualify as permanent full-time jobs. However, jobs that are expected to last for at least 2 years generally are not considered intermittent, temporary, seasonal, or transient in nature.”  EB-5 investments in companies with these job arrangements will lead to extra scrutiny.    
    • Confirm that the NCE is not counting any of the EB-5 investors or immediate family members as qualifying U.S. workers for the job creation requirement.
    • Adjudication times have historically been getting longer and longer, with EB-5 I-526 petitions often taking 2-3 years to adjudicate.  Coupled with potential visa backlogs, applicants need to be cautious and calculate child age out dates whenever possible.

Conclusion: This practice advisory does not seek to cover all aspects of direct EB-5 but merely highlights some key concerns. EB-5 is a complicated arena, and attorneys handling these cases are advised to read the statute and regulations and to purchase AILA’s Immigration Options for Investors and Entrepreneurs. Co-counseling with experienced EB-5 lawyers is often advisable until one can become proficient.

Special thanks to AILA EB-5 Committee members Phuong Le, Michele Francett, and Jennifer Hermansky

[1] In June 2021, the District Court for the Northern District of California, in Behring v. Wolf, Case No. 20-cv-09263-JSC (June 22, 2021), struck down the November 2019 EB-5 regulations that increased the minimum investment amount to $900,000 for TEA and $1,800,000 for non-TEA. (back to citation)

[2] Notably, there is an exclusion to the definition of “investment adviser” under the U.S. Investment Advisers Act of 1940 for attorneys if the financial advice is “incidental to the practice of their profession.”  The SEC considers the following factors when evaluating whether advice is incidental to a profession: (i) whether the professional holds himself out as an investment adviser; (ii) whether the advice is reasonably related to the professional services provided; and (iii) whether the charge for advisory services is based on the same factors that determine the professional’s usual charge. (back to citation)