Using the Uniform Transfers to Minors Act for Minor Investors in EB-5 Investment Funds
This article is co-authored by Daniel B. Lundy, Esq., of Klasko Immigration Law Partners, LLP. His Firm’s blog is available here.
The USCIS stated in a stakeholder call on July 28, 2016 that minors can be primary applicants on I-526 petitions for visas under the EB-5 Program, but bear the burden of proving by a preponderance of the evidence that they have entered into a valid investment contract that is not voidable.
This acknowledgement by USCIS provides an opportunity for EB-5 sponsors to adopt a policy of accepting minor investors in EB-5 investment funds in a manner that can be proven to create a valid investment contract that is not voidable by the investor. The General Principles of the Civil Law of the Peoples Republic of China (“PRC“) provide one potential means of entering into a valid contract under PRC law. However, some EB-5 sponsors are reluctant to rely upon laws of the PRC as the basis for admission of minor investors, in part because of the uncertainty of what evidence would be necessary to prove that a contract is valid under the laws of the PRC to the satisfaction of the USCIS. For EB-5 sponsors seeking to rely on laws of the United States, the Uniform Transfers to Minors Act (“UTMA“) may provide the best means of establishing the validity of an investment contract with a minor investor.
UTMA has been adopted by nearly every state, and establishes a legal method to make a gift to a minor by using the required designation of ownership.
UTMA was drafted by the National Conference of Commissioners on Uniform State Laws in 1986, as an expansion and replacement for the Uniform Gifts to Minors Act (“UGMA“). UTMA has subsequently been adopted by every state except South Carolina, which still follows the Uniform Gifts to Minors Act. UTMA has also been adopted by the District of Columbia and U.S. Virgin Islands, but not by Puerto Rico. Under UTMA, any form of property, including securities, may be indefeasibly transferred to a minor by any transferor, simply by using the following designation of ownership: “_______________ [name of custodian], as custodian for ____________________ (name of minor) under the [name of Enacting State] Uniform Transfers to Minors Act.”
This designation in essence creates a statutory form of trust or guardianship that continues until the minor reaches the age of 21, but unlike a trust, a custodianship is not a separate legal entity or taxpayer. UTMA provides that the custodial property is indefeasibly vested in the minor, not the custodian, and thus any income received is attributable to and reportable by the minor, whether or not actually distributed to the minor. UTMA further provides that, upon the minor reaching the age of 21, the minor will automatically assume full control over the custodial property. UTMA thus establishes a legal method for the indefeasible transfer of any form of property by a custodian to a minor investor under the laws of the state having jurisdiction over the transfer.
UTMA can be used to purchase an EB-5 investment security by designating a minor’s parent or guardian as the custodian on behalf of the minor investor in the subscription documents prior to issuance of the security.
UTMA allows any form of property to be designated as custodial property held on behalf of a minor. In the case of an EB-5 investment, the custodial property should be the limited partnership interest or limited liability company interest that the parent or guardian desires to hold as custodian on behalf of the minor. For this purpose, Section 9 of UTMA provides that an uncertificated security may be registered in the name of the person making the gift (or certain other designated persons) followed in substance by the words: “as custodian for _________________ (name of minor) under the [Name of Enacting State] Uniform Transfers to Minors Act.”
Section 9 of UTMA also provides that if the security is “certificated,” meaning it is evidenced by a certificate of limited partnership interest or membership interest, the certificate itself must be held by an adult other than the person making the gift. This provision was intended to refer to negotiable stock certificates that allow the bearer of the certificate to claim ownership of the security, which is clearly not intended to be the case with respect to EB-5 investments. However, to avoid any question of the validity of the method of creating the custodial property, it would be preferable for EB-5 funds not to issue certificates of membership or limited partnership interests and instead register the names of limited partners or members on their books and records, so that the EB-5 security may be considered an “uncertificated security” under UTMA.
A gift of securities under UTMA does not require that the custodian receive an EB-5 security in his or her own name and then transfer the security to the minor investor.
A custodian may make a transfer of the EB-5 investment to the minor using funds provided by the custodian to purchase the investment on behalf of the minor. When the custodian purchases an EB-5 investment under UTMA, the custodian would never become the legal owner of the EB-5 investment. Rather, the minor would be the legal owner of the custodial property from the date that the EB-5 investment is issued pursuant to the subscription agreement for the investment using the custodial designation required by UTMA. This allows a custodian to purchase a security that is originally issued to and owned by the minor under UTMA, rather than being issued to the custodian and then transferred to the minor.
For the purposes of qualifying as an EB-5 investment, this point is critical. An EB-5 petitioner must show that the investment was made on his or her behalf, from his or her own funds. If the EB-5 petitioner’s parents purchased the shares of an EB-5 company, and then gifted the shares to the petitioner, the petitioner would not be able to show that he or she invested his or her own funds on his or her behalf, and would not qualify for an EB-5 visa. Because UTMA allows title to the shares to be vested directly in the name of the minor investor, and not the custodian, transfers under the UTMA avoid this issue.
UTMA provides that the governing jurisdiction can be the state where the transferor, the custodian or the minor resides, or the state where the custodial property is located.
For EB-5 investments, it is frequently the case that neither the parent nor the minor investor is a resident of any state at the time an investment contract is entered with an EB-5 fund. In that event, the UTMA designation should use the law of the state where the custodial property is located. UTMA does not provide any guidance on where an unissued limited partnership interest or membership interest in an EB-5 fund would be located for this purpose, but other laws would generally consider the location to be either the principal place of business of the limited partnership or limited liability company issuing the interest or the state where the limited partnership or limited liability company was organized. Thus, for a gift of a membership interest in a New York limited liability company with a principal place of business in New York, the designation on the subscription agreement would read: “_______________ [name of custodian], as custodian for ____________________ (name of minor) under the New York Uniform Transfers to Minors Act.”
If there is a difference between the state where an entity was formed and the state of its principal place of business, based upon principals of securities law, the principal place of business of the issuing entity would be the location of the securities, so that state’s UTMA would be included in the custodial designation. Thus, for an EB-5 fund formed in Delaware with a principal office in California, the designation on the subscription agreement would read: “_______________ [name of custodian], as custodian for ____________________ (name of minor) under the California Uniform Transfers to Minors Act.”
Fortunately, if the state identified in the designation is determined to be incorrect, Section 21 of UTMA includes a savings clause, stating in essence that a state which has adopted UTMA will enforce a transfer under UTMA even if another state is identified in the designation. Thus, if the California UTMA is identified in the designation, but it is later determined that Delaware was the correct location, then Delaware should enforce the gift created by the UTMA designation, even though Delaware was not identified in the designation.
UTMA avoids the problem that a minor has a right to void a contract made by the minor, and a certification by the custodian can provide further evidence that the custodian is the party that entered into the investment contract on behalf of the minor.
Most state laws in the United States provide some restriction on a minor entering into an enforceable contract, and most states provide that some contracts entered into by a minor are voidable by the minor. However, a contract made by a custodian who is an adult under UTMA would not be voidable, because that contract was not made by a minor, but by the adult custodian on behalf of the minor. Moreover, there is nothing in UTMA that provides a minor with a right to void or to rescind a gift made to the minor under UTMA. Therefore, there would be no basis for the minor to seek rescission or redemption of the investment made by a custodian on behalf of the minor. It should be pointed out here that UTMA and its predecessor, UGMA, have been used to make valid gifts of securities to minors for several decades, and there is a significant history of case law that has developed over this time period upholding the enforceability of gifts under these laws.
In order to further evidence that the custodian is the party that made the investment decision and made the gift to the child for purposes of an EB-5 investment, it would be prudent to include a certification by the custodian, stating that the custodian selected the investment, provided the funds to be contributed for the investment, entered into the subscription agreement, affirms all of the investment representations made in the subscription agreement, and will exercise the rights of the investor until the investor reaches the age of majority, at which point control will automatically vest with the investor.
From an immigration perspective, a void or voidable contract undermines the validity of the investment for EB-5 purposes. An immigration petition, including an EB-5 petition, must be approvable at the time of filing. As a result, even though it is entirely possible for an investor who files an EB-5 petition when he or she is under 21 to be over 21 by the time USCIS processes the petition (based on current processing times), having the investor reaffirm the contract upon reaching majority cannot make the petition approvable at the time it was filed, even though such a reaffirmation might suffice under contract law to make the investment contract binding.
UTMA provides the custodian the right to manage the EB-5 investment until the minor reaches the age of 21.
Section 12 of UTMA specifies that the custodian shall have control over and manage the custodial property on behalf of the minor. Therefore, the custodian has the legal right under UTMA to exercise the management rights of the minor investor with respect to the EB-5 investment, until such time as the minor investor reaches the age of 21. Thus, the UTMA designation provides a legal means for exercise of the management rights of a limited partner or member, as required for investments made under the EB-5 program.
A gift of an EB-5 investment under UTMA may provide the best means for proving that an investment by a minor is valid, as required by USCIS.
As described above, UTMA provides a simple means of establishing the ownership of a minor in an EB-5 investment. UTMA has been adopted by almost all of the states, and it has a long history of use in the United States as a valid means of indefeasibly vesting ownership of securities in a minor. It can be used by persons outside the United States, using the jurisdiction where the custodial property is located, and there is a savings clause that allows the ownership to be enforced if the state identified in the UTMA designation is not accurate when originally made. It avoids the problem of a minor being unable to enter into a valid contract, or the voidability of a contract made by a minor, because the contract is made by an adult acting as the custodian on behalf of the minor. It also avoids the problem of the EB-5 investment being issued first in the name of an adult and then transferred to the minor. It also provides a valid means for the custodian to exercise the management rights of the minor investor with respect to the EB-5 investment. For all of these reasons, the use of the UTMA designation may be the best means for minors to invest in EB-5 investments for the purpose of filing I-526 petitions under the EB-5 program. Before using the UTMA, each EB-5 securities issuer should review the law of the applicable state, because there may be variations in the UTMA law adopted by each state.
A word of caution about accepting minors as EB-5 investors.
Please keep in mind that the trend towards minors as EB-5 investors is relatively new, and USCIS has not formed a clear policy on the issue yet. There may be some controversy over the idea if and when the media, members of Congress, or other groups begin to see large numbers of minor investors begin immigrating to the U.S. under the EB-5 program. As such, it is advisable to exercise caution, and regional centers or EB-5 issuers may wish to develop internal policies and procedures as to when, whether, and under what conditions they will accept minor investors.
Daniel B. Lundy is a Partner and a member of the EB-5 practice of Klasko Immigration Law Partners, LLC. Mr. Lundy leads the Regional Center/Developer and EB-5 Compliance practice areas, and represents developers and others who seek to use foreign investment funds under the EB-5 program to fund their projects, either through the formation of a Regional Center or by joining with an existing Regional Center. Mr. Lundy works with various securities lawyers, economists, business plan writers and other professionals in the preparation and filing of Regional Center designation and Regional Center amendment applications. Mr. Lundy is experienced in reviewing Regional Center and project business plans, economic reports, securities offering documents, and corporate documents for compliance with the EB-5 program requirements, and in consulting and advising clients on the specific immigration requirements of the EB-5 program. Mr. Lundy has also successfully represented numerous immigrant investors in their EB-5 petitions and applications. For the last two years, he has been named as one of the top 25 immigration lawyers in the country by EB5 Investors magazine.
Catherine DeBono Holmes is the chair of JMBM’s Investment Capital Law Group, and she has practiced law at JMBM for nearly 35 years. She has also worked as a senior member of the JMBM Global Hospitality Group and JMBM Chinese Investment Group. Within the Investment Capital Law Group, she helps real estate developers and business owners, brokers, investment advisers and investment managers raise and manage investment capital from U.S. and non-U.S. investors. In the last five years, she has represented over 100 real estate developers obtain financing through the EB-5 immigrant investor visa program for the development of hotels, multi-family and mixed use developments throughout the U.S. She has also acted as lead counsel on numerous hotel and mixed-use developments and transactions in the U.S., Europe, China, South America and Asia Pacific regions, as well as hotel management and franchise agreements and public-private hotel developments. She has also represented private investment fund managers, registered securities broker-dealers and investment advisers on securities offerings, business transactions and regulatory compliance issues. For the last two years, she has been named as one of the top 25 securities lawyers in the country by EB5 Investors magazine. Contact Cathy at CHolmes@jmbm.com or 310.201.3553.