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It first appeared in the Investment Law Blog on February 21, Here we conclude that a redeployment by the NCE that meets the guidelines described in this White Paper would reflect industry best practices for compliance with USCIS policy, securities laws and fiduciary duties of the general partner or manager of the NCE.
The EB-5 Program limits the number of visas that are issued each fiscal year to alien investors and their spouse and qualifying children to a maximum of approximately 10, Until fiscal yearthe annual worldwide quota was not reached.
As a result, for EB-5 Investors born in Mainland China unless they will be accompanied in the immigration process by a spouse born other than in Mainland Chinadelays in the processing for immigrant visa or adjustment of status application will occur.
Even for those investors not from Mainland China, it is possible that their investment capital will need to be redeployed before they satisfy the Sustainment Period, especially since loans can be repaid after the required jobs have been created, even before the loan maturity date, necessitating a redeployment strategy even for such non-Mainland China investors.
Taken together, the law regulations and precedent decisions prevents the redeployment of invested funds into any investment vehicle that provides guaranteed returns and no chance for gain or loss, including accounts or securities with federal government guarantees.
USCIS amended its Policy Manual on June 14, to clarify various policy issues regarding the requirement of an investor to sustain the investment.
The three major clarifications are as follows: After the Sustainment Period concludes, even though the I petition to remove conditions has not been adjudicated, investor capital can be returned.
For Chinese nationals, this could mean a Sustainment Period of up to 10 to 12 years from the date of initial filing of the I petition. The term seems to be used most broadly in labor law. It includes both interstate and foreign commerce and is not limited to transportation across State lines, or to activity of a commercial character.
Specifically the USCIS gives one example of an NCE that makes an initial investment in a construction loan for a multi-family property, and states that the NCE may make reinvestments in one or more similar loans. According to USCIS policies, even in the case where the job creation requirements were not met by the original investment, as long as the investor has obtained conditional resident status, a redeployment that was deemed to be a material change would not adversely affect the investor.
Since the Policy Manual makes it clear that once the job requirement has been satisfied, that condition should no longer apply to the redeployment requirements, a loan or redeployment of capital to completed projects or established businesses that do not involve the creation of new jobs should be permissible.
That would seem to permit reinvestments in existing, cash flowing businesses, which would reduce the risks of reinvestment to the investors, as compared to a reinvestment into another development deal. Finally, USCIS has helpfully clarified that redeployment does not engender a material change as long as the redeployment occurs after the necessary job creation in the original JCE has occurred.
Even if redeployment occurs before job creation, there is no material change if it occurs after the investor has commenced the Sustainment Period. The only time that material change should be an issue on redeployment is if it occurs before job creation and before the investor has commenced the Sustainment Period.
Securities Law Requirements and Fiduciary Duties in Connection with Redeployment Any reinvestment by an NCE must also meet federal and state securities law requirements, and the manager or general partner of the NCE must satisfy its fiduciary requirements to the investors when making a reinvestment decision on behalf of the NCE.
This is in large part due to the fact that it is prudent for NCEs to retain some flexibility in order to comply with changes in USCIS policies regarding what is necessary to comply with EB-5 program requirements.
Where these disclosures are made, the NCE should reinvest in accordance with the disclosure in the offering documents, unless there is a strong reason not to do so, in which event, the NCE may be required to obtain the consent of the investors before making a different reinvestment decision.
However, where there is no disclosure as to what the NCE would reinvest in following the original investment, the general partner or manager of the NCE faces several issues under federal and state securities laws, as well as general standards of fiduciary duty in connection with a reinvestment decision.
These issues are summarized below. Since most NCEs do not specifically identify the type of reinvestment that will be made upon a reinvestment of proceeds from the original investment, there is an issue regarding whether or not further consent of investors is required for the reinvestment under federal or state securities laws.
If the governing documents of an NCE permit reinvestment in another qualifying investment selected by the manager or general partner, and the offering documents specifically disclose that investors will not have the right to consent to the reinvestment, this should be sufficient for securities law purposes.
However, investors may still claim that the level of disclosure regarding the reinvestment was not sufficient, or that the manager or general partner did not fully disclose conflicts of interest in connection with the reinvestment decision.
Although it is theoretically possible to seek consent of investors to the reinvestment selected by the NCE manager or general partner to avoid this risk, as a practical matter, obtaining affirmative consent usually by majority vote of investors may be difficult or time consuming. There is some question whether making a one-time reinvestment decision for an NCE would constitute the conduct of an investment advisory business, but there is no specific authority under federal or state securities laws that definitely answers this question.
This means that the general partner or manager of an NCE will be undertaking an additional risk by making a reinvestment decision on behalf of an NCE. This requires that the general partner or manager reasonably consider several reinvestment options available at the time of the reinvestment, taking into account the above-referenced factors.
Such decisions may involve conflicts of interest on the part of the general partner or manager to the extent that the general partner or manager would obtain higher compensation for itself, the regional center and potentially migration agents and brokers by investing in riskier products that may produce a higher rate of return to these third parties, but not to the investors in the NCE.
However, such decisions may involve conflicts of interest on the part of the general partner or manager, and there is always the risk that investors will claim that the general partner or manager violated its fiduciary duty in selecting the reinvestment made for the NCE.
Investment Transparency in Connection with Reinvestment Another key element for the protection of the Investors in an NCE is safeguarding funds and providing transparency of fund administration to investors.
This is important in connection with the initial investment decision, and equally important in connection with a reinvestment due to the timing differences in payments that will be made by the NCE during the reinvestment period as investors become eligible for return of their capital on different dates.
Suggested Guidelines for Reinvestment Based on the new Policy Manual policy provisions, and in consideration of immigration laws, securities laws, and applicable fiduciary duties, we recommend that every redeployment by an NCE following repayment of the initial investment should meet the following guidelines: This communication could take into account the following factors:Get the latest news and analysis in the stock market today, including national and world stock market news, business news, financial news and more.
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