EB-5 Source of Funds Now Accepts Unsecured Loans
USCIS Breakthrough Ruling
It was released that USCIS’ EB-5 program is now accepting unsecured loans as a valid source of funds. EB-5 source of funds now accepting unsecured loans is a monumental shift in USCIS adjudication attitude. Previously all loans must have been sourced or with the investors own equity. This limited the arrangements to being utilized with home mortages, home equity lines of credit, auto loans, 401k loans or something similar. Now, theoretically, the industry is opened up to all kinds of lending but it brings about a whole new line of questioning as well. The lender will infact need to show their clean source of funds in order to qualify. This article is being updated momentarily…
What Is The Law Of Zhang?
The recent decision by Zhang (Zhang v. USCIS Civil Action No. 2015-0995 (DDC 2018)) has the potential to greatly assist investors in financing investments that may qualify for immigration benefits under the EB-5 program. Understand the case here:
Prior to Zhang, USCIS imposed requirements on loans that an investor could use to create the funds (assets) that would be used for investment in EB-5. USCIS treated the proceeds of the loan as contributed “indebtedness,” which, under the regulations, required the debtor to be the primary debtor of the debt and to guarantee the debt with assets of at least equal value to the debt.
USCIS Regulatory Basis
In Zhang, Ira Kurzban successfully argued that loan proceeds were simply cash and not “contribution indebtedness.” In assessing the cash, the USCIS lacked the regulatory basis for imposing any conditions on how the money was obtained (qualities of the loan transaction), and demanded that the money came from legal sources. USCIS could not require, for example, that the loan transaction be a secured loan, nor could it require the investor to be the principal debtor.
Furthermore, the court has led the USCIS to ask (for its regular practice) to create requirements that go beyond what is contained in the appropriate rules (under the Administrative Procedure Act). This case opens up jurisprudence for a large number of USCIS practices for similar challenges.
Legally Obtained Capital And Job Creation
Fortunately, the court ruled, not only from a legal point of view, but also from a political perspective. In the original USCIS requirement, it was basically imposing a standard where only the value of an investor’s asset could be used to finance the investment. The court basically said correctly, “who cares,” as long as capital has been legally obtained and jobs are created in the United States economy, why would it matter if the source were debt or assets.
The USCIS should not worry too much about it. The policy is still solid. If the investor borrows the money from a friend and then fails to pay, this is a problem between the investor and his lender. Under the long-standing EB-5 rules, the EB-5 investor would not have the right to repay the investment (to repay the loan); nor should the investor use the EB-5 investment as a form of collateral for the loan (as this may have unpleasant consequences for immigration if collateral is confiscated). Regardless of what happens with the loan that produced the cash loan resources, the NCE still has the money, so the United States economy has obtained the intended benefit for which our country is providing legal permanent residence.
EB-5 Just Found Itself a New Pool of Potential Investors
The ability to accrue $500,000 for EB-5 investment just got a whole lot easier for some investors. Many younger professionals who are doing well but just don’t have that kind of cash sitting around previously might have asked friends or family for temporary assistance. This would have allowed the EB-5 investor to file an I-526 petition and get their long EB-5 immigration process started. Family is family, but $500,000 is $500,000… While some family members are willing to participate and financially sponsor your new happiness in the United States under the form of a gift, other family members would be much more inclined to give a loan. Now they can…
Potential Club Investing in EB-5
Loans can come in many different shapes and sizes. Loans are most commonly known for having simple terms such as “principal plus interest”, but there are a lot of potential terms and opportunities that get woven in if the borrower (and Lender) are willing to be more creative. EB-5 can utilize this new precedent for unsecured lending to bring about “club style” investing where investors could theoretically borrow money from other sources and share participating interest in the EB-5 investment. This is particularly useful if the EB-5 investor is making an equity investment that has potential for sizable financial returns. This would also be useful if you see the EB-5 minimum investment increase to $1 million or more. It effectively would lower the cost of placing an EB-5 investment simply by adding the potential for financing the investment through alternative sources.
More to come on this topic.
For Your Reference
- Article: EB-5 Funds Obtained From Unsecured Loans Now Legal Under Zhang By Matt Gordon.
- Case: Zhang v USCIS Civil Action No. 2015-0995 (D.D.C. 2018)