Now that the USCIS has issued guidance requiring redeployment of capital proceeds received by a new commercial enterprise (“NCE”) from repayment of its initial investment in a job-creating entity (“JCE”) for EB-5 investors who have not completed their “sustainment period,” every General Partner or Manager of an NCE will need to consider their fiduciary duties to the NCE’s EB-5 investors in making a reinvestment decision on behalf of the NCE. Each NCE will have its own particular facts and circumstances that will need to be analyzed to determine which reinvestment option is most appropriate, but there are general principles of fiduciary duty that will apply to every General Partner or Manager of an NCE. The purpose of this article is to highlight some of the most important issues that will arise in making a reinvestment decision, and to describe how the General Partner’s or Manager’s fiduciary duties should influence their decision-making.
The basic duty of a General Partner or Manager of an NCE is to make investment decisions that are in the best interests of the EB-5 investors in the NCE. EB-5 investors have two primary goals in making an EB-5 investment: (1) to obtain a permanent visa and (2) to obtain repayment of their investment, to the extent possible, after they become eligible to receive a return of their capital under USCIS policies. Therefore, the General Partner or Manager must determine whether these two goals will be met with respect to every reinvestment decision made on behalf of the NCE. In particular, we suggest that the following issues must be considered in making any reinvestment decision:
- Does the proposed reinvestment meet the current USCIS standards of “at risk”? The principal duty of the General Partner or Manager is to make decisions that will further the primary goal of the EB-5 investors to qualify for permanent visas. That means that the reinvestment option selected for the NCE must be one that will satisfy USCIS requirements. According to the latest updated Policy Manual, if an NCE receives a repayment of capital from the JCE before one or more of its EB-5 investors has been in the U.S. for a period of at least two years from the date of entry or visa status adjustment as a conditional permanent resident (the “sustainment period”), the NCE is required to redeploy the capital in a manner that keeps the EB-5 investors’ capital “at risk” until such time as each EB-5 investor has completed his or her sustainment period. The Policy Manual further states that the reinvestment must be made in a manner related to “engagement in commerce” that is “within the scope of the new commercial enterprise’s business.” The Policy Manual gives two examples to illustrate the meaning of these terms, one of which states that an NCE that makes an initial investment in a construction loan for a multi-family property may make reinvestments in one or more similar loans, and the other of which states that an NCE may invest in new-issue municipal bonds for infrastructure if those investments are within the scope of the NCE’s business. Although both examples raise many questions, they seem to require that the NCE make a reinvestment that is similar in some respect to the investment or investments described in the NCE’s governing documents. The General Partner or Manager must therefore analyze whether the proposed reinvestment is within the scope of the NCE’s business, by reviewing the NCE’s partnership agreement or operating agreement. Because this is fundamentally an immigration policy question, the General Partner or Manager should obtain the advice of immigration counsel to review this issue before making any reinvestment decision.
- Is there a designated reinvestment provided for in the NCE’s partnership agreement or operating agreement? If the NCE’s partnership agreement or operating agreement provides for a specific reinvestment to be made following the repayment of the original investment in the JCE, then the General Partner or Manager has a duty to select a reinvestment that is consistent with the terms of the existing documents, unless there is a strong reason why that cannot be done. For example, if an NCE’s partnership agreement states that the NCE will invest in another project being developed by the same developer, but the developer is not then developing a project, then the General Partner will not have the ability to make the reinvestment in accordance with the terms of the partnership agreement. A more nuanced question would arise if the developer is developing a project, but the General Partner determines that the investment has greater risks than originally contemplated, or there is already financing in place that would put the EB-5 financing at greater risk than the original investment, or some similar issue. In such a circumstance, the General Partner of the NCE may determine that its fiduciary duty requires it to offer another reinvestment alternative to the EB-5 investors that would better protect their investment.
- Have several reinvestment alternatives been considered to determine which alternative is most appropriate for the EB-5 investors, in light of all relevant facts and circumstances? In many cases, there will be several reinvestment alternatives available to an NCE, unless the NCE has already designated a specific reinvestment in its original offering documents. Where there is no designated reinvestment, the General Partner or Manager has a duty to review the possible alternatives that could be selected and to determine their relative risks and benefits to the EB-5 investors. It is not enough, for example, to simply reinvest in a project with the same developer, without determining whether there may be other reinvestment alternatives that provide more liquidity, or greater safety of capital investment, to the EB-5 investors. The decision cannot be made on the basis of the General Partner’s or Manager’s own interests — it must be made with a view towards protecting the interests of the EB-5 investors.
- Has the General Partner or Manager obtained the advice of a qualified independent third party in making the reinvestment decision, particularly if the General Partner or Manager has conflicts of interest in selecting the reinvestment? The General Partner or Manager of an NCE will have conflicts of interest in selecting a project in which they or one of their affiliates has a financial interest, or selecting a project that pays a higher rate of return to themselves than another alternative reinvestment that may be a safer one for the EB-5 investors. Similar conflicts of interest may have existed when the original investment was made by the NCE, but at that time, the General Partner or Manager should have provided full disclosure of the conflicts to the EB-5 investors in the offering documents, and the EB-5 investors would have then had the opportunity to make their own decision whether or not to accept the investment, knowing that those conflicts of interest existed. When a reinvestment decision is made, however, the EB-5 investors may not have the opportunity to specifically approve the reinvestment (depending upon the terms of the NCE’s partnership agreement or operating agreement), and even if they do have an approval right, if they are not provided with more than one choice — to accept the recommended reinvestment or not — they effectively have no choice but to accept the reinvestment or risk the loss of their visas. Because EB-5 investors lack the ability to adequately protect their own interests, the General Partner or Manger should obtain the advice of a qualified, independent third party who reviews all conflicts of interest and other terms of the investment, and analyzes the advantages and disadvantages of the reinvestment compared with other alternative reinvestment options. The third party should determine whether the reinvestment option selected by the General Partner or Manager is appropriate for the NCE and the EB-5 investors, in light of all relevant facts and circumstances, including both immigration-related factors and financial and risk-related factors.
- Is the level of risk of the reinvestment option selected appropriate for the amount of the return that is paid to the EB-5 investors? EB-5 investments typically pay very low rates of return to the EB-5 investors (often less than 1% per annum) because their primary goal is to invest in a project with a high likelihood of meeting the job requirements to obtain their permanent visas. After the NCE’s initial investment has met the job creation requirements, the primary goal of the EB-5 investors will be to redeploy their capital in the investment with the lowest possible risk that still meets the USCIS definition of “at risk.” Particularly if the only beneficiary of a higher-return investment is the General Partner or Manager of the NCE, it would not be appropriate to select a reinvestment with a higher risk than one that is available with a lower return and a lower risk. The General Partner or Manager has a duty to consider whether lower-risk reinvestment options are appropriate, because they likely better serve the goal of the EB-5 investors to receive a return of their capital at such time as they are eligible under USCIS policy.
- Does the reinvestment option provide a degree of liquidity that will permit EB-5 investors to be repaid their capital when they are eligible under USCIS policy? As a result of delays caused by the “retrogression” policy that impacts EB-5 investors from mainland China, an NCE may have a wide range of time periods within which its EB-5 investors will complete their “sustainment period” and become eligible for repayment. If the NCE selects a reinvestment that will not be repaid for another five years after the original investment in the JCE is repaid, there may be some EB-5 investors who become eligible for repayment sooner than the reinvestment is repaid. Conversely, there may be other EB-5 investors who are not able to complete their “sustainment period” for 10 years, in which event current USCIS policy requires that their capital remain invested for this duration. The General Partner or Manager of an NCE should consider whether there are available reinvestment alternatives that have flexible repayment or liquidity provisions, so that each EB-5 investor’s sustainment requirements can be met.
- Will the reinvestment protect the capital of all EB-5 investors in the NCE, with an equal balancing of risks from the first to the last EB-5 investor eligible to receive a return of their capital? One of the most difficult issues in selecting a reinvestment is the balancing of repayment risks among all EB-5 investors, particularly because there may be a gap of 5 to 10 years between the date that the first EB-5 investor is eligible for repayment, and the date that the last EB-5 investor is eligible for repayment. If a reinvestment is made into a single asset that sustains a loss, the first EB-5 investors may be repaid 100% of their capital, but the last EB-5 investors may receive less than 100% of their capital, or may not be repaid at all. There is no way to allocate the losses when each EB-5 investor is paid at a different time. So, one of the factors that should be considered is how the risks will be balanced among all of the EB-5 investors. There may be different ways of achieving this balancing, but USCIS policy does not appear to allow the NCE to hold reserves, which means that the NCE would not be permitted to hold repayments received from the reinvestment for the benefit of all EB-5 investors. One possibility would be to reinvest in a pool of multiple secured loans with different maturity dates and different collateral for each loan. This would not eliminate all risks of loss, but it would allow for different payment dates as loans in the pool paid off, while permitting the remaining EB-5 investors to be invested in other, fully collateralized, loans in the same pool, so that the last EB-5 investors to be eligible for repayment would not bear all of the losses of the investment.
Conclusion: The reinvestment of repayment proceeds by an NCE require careful consideration of the EB-5 investors’ goals, their sustainment periods and anticipated repayment eligibility dates, the comparative risks of available reinvestment alternatives, and the balancing of the risk of loss among all EB-5 investors. The General Partner or Manager of an NCE should seek the advice of an independent third-party expert to assist in evaluating these requirements in order to meet his or her fiduciary duties to the NCE’s EB-5 investors.
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.