You have probably heard that the EB-5 quota for China is expected to retrogress in 2013. But what does that mean? Let me break it down for you.

Two-Step Process To explain retrogression, I need to back up a little and explain how the U.S. greencard process works. There are two main ways that a foreigner can obtain a greencard in the United States: through a family relationship or through an employment relationship. The application process is a two-step process: first you have to establish that you are eligible for a greencard under the prescribed categories. For example, if your brother is a U.S. citizen (“USC”). He can sponsor your greencard by filing a Form I-130. If your employer is sponsoring you for an employment greencard, they would file an I-140. And, if you are applying for an EB-5 (which is also an employment based visa) you would file an I-526.

This first-step is not subject to any quotas since it is only about the “basis” of the greencard. So in the examples above, the USCIS is looking to see if there is a valid sibling relationship in the I-130; if there is or will be a valid employment relationship in the I-140; and if there is a valid investment that can create the requisite 10 jobs in the I-526. Once the immigrant petition (I-130, I-140 or I-526) is approved, the second step of the greencard process kicks in. By law, the United States has allocated a set number of immigrant visas (i.e. greencards) for each immigration category. The employment categories (EB-1, EB-2, EB-3, EB-4 and EB-5s) are allocated 140,000 visas a year, of which EB-5s gets 10,000. Any of the 10,000 that was not used up in a given year are handed over to the EB-1 category. And until now, there has never been a year when all 10,000 of the allocated visa numbers were used by EB-5 immigrants. Cut-Off Dates However, once a certain visa category is oversubscribed, new rules such as “per country” ceilings and “cut-off dates” enter the picture. Let’s use the sibling case as an example. There is an annual quota of 65,000 visas allocated for adult siblings of USCs. This quota has been consistently oversubscribed for many, many years so the average wait time is over 10 years. This wait time is measured based on the “Priority Date” of your immigration petition filing. So if your USC brother files an I-130 proving his sibling relationship to you, you will receive a “Priority Date” from the USCIS, which is basically when they received the I-130. That I-130 will be approved in about 6 months time. And once you have an approved I-130 in hand, you can then actually apply for a greencard at a U.S. Consulate office IF there are enough visa numbers for that particular visa category for that year. In other words, you have to wait in line for your turn. How do you know it is your turn? The Department of State published a “visa bulletin” every month listing what “Priority Date” petitions they have started processing for visas. These dates are the “cut-off” dates. Here’s an example of the January 2013 Visa Bulletin for family-based visas: F4 is the category for siblings of adult USCs. And we can see that as of January 2013, they are processing approved immigration petitions for siblings with a Priority Date of April 8, 2001 for everyone except those people from China, India, Mexico and the Philippines. These countries are called out because once categories are oversubscribed, any visas for any given country is capped at 7% of that total visa category number. (More on that later.) Now compare the above with the chart below – also from the January 2013 Visa Bulletin, but for employment-based visas: Do you see all those “C”s? That is short for “current” – which means, as soon as you have an approved immigration petition in hand, you can apply for a greencard because your visa number is “current” (i.e. there is no backlog). As you can see, EB-5s (the last row) are current. So if you file for an I-526 and that I-526 is approved, you can take that approval notice and apply for a greencard at your local U.S. Consulate (or, if you are in the United States and in valid status on another type of visa, file an I-485 and “adjust” your status). The Chinese Quota Retrogression Ok, that was just the background. Now, because of the popularity of the EB-5 visa, the Department of State recently announced that in 2013, we might actually hit the 10,000 visa ceiling. (Note that this does not mean 10,000 I-526s are being filed: the I-526 is only being filed by the immigrant investor who is making the investment. Once that I-526 is approved, the investor + his or her spouse and the investor’s unmarried children under the age of 21 will be eligible to apply for a greencard – so one I-526 will usually result in more than one EB-5 visa being issued.) And, once the ceiling is hit, there will be people who have an approved I-526 in hand who will then have to wait for their “Priority Date” to become “current” before they can actually apply for a greencard. This waiting in line is what is referred to as “retrogression”. This will, however, at least in the foreseeable future, only impact people from China. This is because, once the quota ceiling is reached, the per country quota of 7% kicks in. So, once the quota is reached, only 700 (7% of 10,000) people per country will be able to get an EB-5 in that year. Let’s say, hypothetically, that 500 people from South Korea and 100 people from Venezuela and 60 people from the United Kingdom and 10,000 people from mainland China apply for EB-5 visas in FY2014. So we are 660 people over the 10,000 quota. However, since each country has a 700 visa quota, everyone from countries other than China will be ok. But of the 10,000 Chinese people, 660 of them with later Priority Dates will spill over to the following year. (Obviously China will not be capped at 700 if there are visas left over after everyone from other countries get their number.) I hope this helps to clarify the possible China Quota Retrogression you have been hearing about. This has a number of implications if you are Chinese and have a child that is aging out soon, or hope to invest in a direct EB-5 project. This also has implications at the I-829 stage when it is time to remove conditions. I plan to address these issues one by one in future posts.

As many of you already know, the USCIS hosts a (somewhat) quarterly public conference call to discuss EB-5 related topics with the stakeholder community. And occasionally there will be a one-off call with the USCIS Director or the staff economists. These calls are open to all and a very, very valuable communication tool for people in the EB-5 community. (Often, these calls are recorded and parsed like tea leaves by EB-5 practitioners (similar to how the banking community would try to read between the lines of Greenspan or Bernake after an FRB meeting!).) Usually, but not always, the USCIS will release presentation slides or statistics for a meeting and I often refer back to them to look up a specific item or number. I usually google until I find the right slides (which, inconveniently, are not located on a single page on the USCIS website) and today I had the brilliant idea to link all of the materials in one place so I can stop wasting time. So here they are!  Enjoy and marvel at how far and how little we’ve come in the past three years. (Some of the links connect to my Box folder and others directly to the USCIS website. Please note that the USCIS website doesn’t always work with non-Internet Explorer browers.)

September 2009 AILA & IIUSA & USCIS Meeting: Q&A;

June 2010 Meeting: Executive Summary; EB-5 Presentation Slides

October 2010 Meeting: EB-5 Presentation Slides

December 2010 Meeting: EB-5 Presentation Slides

March 2011 Meeting: EB-5 Presentation Slides

June 2011 Meeting: Q&A;; EB-5 Presentation Slides

September 2011 Meeting: EB-5 Presentation Slides

January 2012 Meeting: Executive Summary; EB-5 Presentation Slides

March 2012 Meeting: EB-5 Presentation Slides

May 2012 Meeting: Q&A;; EB-5 Statistics

June 2012 Engagement with Director Mayorkas and USCIS Economists: no materials were distributed.

July 2012 Meeting: EB-5 Statistics

October 2012 Meeting: no materials were distributed.

December 2012 Conversation with Director Mayorkas: no materials were distributed.

For the longest time, the USCIS published I-526 processing times in its Quarterly Stakeholder presentation slides.  But the last time they mentioned something in writing was in June 2011 when the slides said that the Target Processing Times for I-526s were 5 months and Actual Times were 5.5 months. Since then, the delays have been getting longer and longer, and the USCIS seems to have discontinued its usual practice of telling us in writing its Target vs. Actual processing times for EB-5 related applications. For about a year now, I’ve been telling my clients to think of it as a 9 month process and that seems to have been holding true for a lot of applicants (and some even longer).

Anyone can check processing times for immigration applications on the USCIS website. Go to the USCIS Processing Time Information page on the website (or just click here) and then click on the “Service Center Processing Dates” button for the California Service Center (CSC) – though if you are reading this blog post after the EB-5 Team moves from California to Washington D.C. sometime in the spring of 2013, this will not work.

Scroll down to I-526 and you will see that as of November 30, 2012 (which was when this page was last updated), they were processing I-526s that were filed on March 16, 2012. From this we can deduce that the USCIS is officially saying that it takes about 8.5 months for a petition to reach someone’s desk.

It was announced to the EB-5 community on Monday’s call with the USCIS Director Mayorkas that the EB-5 team will be making a move from the current California Service Center to Washington, D.C. In the long run this is supposed to help the EB-5 team become more specialized, etc., but in the short run, this can only mean one thing: DELAYS. Rather, EVEN MORE delays. With I-526 adjudications taking something like 9 months on a good day, and with I-924 Regional Center Applications taking a year or more, this was not the best news one could have hoped to hear on the call. As one of my old bosses used to say, it is what it is and we need to deal with it. I guess.

Today we have a guest post from a colleague on-the-ground in China.

EB-5 REGULATION IN CHINA, By Steven Blayney, Esq*

And, continued from the previous post about the Top Five EB-5 Originating Countries, here are the EB-5 visa numbers from FY2001 (188 visas) to FY2012 (7,641 visa). What a difference ten years makes! (Click on the chart to make it bigger.)

The State Dept. numbers refer to people who are overseas and obtain their greencards through consular processing, while the USCIS numbers refer to people who are already in the United States on a non-immigrant visa (such as student visas or work visas) and adjust their status through an I-485 petition.

The IIUSA has compiled EB-5 Visa usage numbers released by the Department of State. (A bit of background. While the gatekeepers of the immigration process is the USCIS under the Department of Homeland Security, the actual visa issuances are under the purview of the Department of State. That is why visa numbers are issued by the DOS and not the USCIS for those of you who might be curious.) Here is a breakdown of the top five originating countries for the past five years. (Click on the chart to make it bigger.)

Chart source: IIUSA

Here’s the key to the EB-5 category breakdown:

C5: Direct EB-5 in TEAs ($500K projects)
T5: Direct EB-5 in non-TEAs ($1M projects)
I5: Regional Center EB-5s in TEAs ($500K projects)
R5: Regional Center EB-5s in non-TEAs ($1M projects)

Those of you new to the EB-5 can read about the difference between Direct EB-5s vs. RC EB-5s here. Also, please note that visa numbers are not the same as I-526 numbers. I-526 petitions are filed by the investor who is investing; so if the investor has 3 qualified dependents (i.e. spouse and unmarried children under the age of 21), that means that 4 EB-5 visas were issued for that single I-526 petition.

Some interesting facts that we learn from this chart:

1. There are in fact $1 million Regional Center projects! Obviously not many as only 5 visas were issued out of the total 4,813 EB-5s as a $1 million Regional Center project – but still, they do exist! (And recently a major Regional Center had ambitiously announced a $1 million RC EB-5 project, so we can expect these numbers to go up a bit next year.) But still, the take-away is, all things equal, people will not pay $1 million for something they can get on the market for $500K.

2. These top five originating countries accounted for 90+% of EB-5 visas issued in FY2012.

3. Mainland China accounted for 80% of EB-5 visas issued in the first three quarters of FY2012.

4. The numbers are bumping against the 10,000 yearly quota that has never been met before. (Which is leading to concerns over backlog in China’s per country quota – I’ll do a separate post on this soon.)

5. Venezuela made the list for the first time!

6. There are Iranians who prevail through the arduous OFAC (Office of Foreign Asset Control) requirements of the USCIS (even more stringent than the OFAC office itself requires!) and succeed in gaining permanent residency in the United States.

There we have it folks.

Something Old, Something New, Something Borrowed, Something Blue? (a/k/a How To Kill Deal Flow.)

1. Geographic area;
2. Organizational structure or administration;
3. Affiliated commercial enterprise investment opportunities, to include changes in the economic analysis and underlying business plan used to estimate job creation for previously approved investment opportunities and industrial clusters;
4. Affiliated commercial enterprise’s organizational structure and/or capital investment instruments or offering memoranda.

This is Part 2 of a two-part blog post addressing the intense debate which was waged on many LinkedIn groups recently. If you are relatively new to EB-5s and need to understand the exact difference between Direct EB-5s and Regional Center EB-5s, please read Part I first.

The following are my thoughts on the arguments for Direct EB-5s and against Regional Center EB-5s that were posted on the LinkedIn EB-5 groups. (Italics are from this post).

1. Argument re: Loss of Capital: “It is almost unheard of that an investor in a Direct Investment has seen a loss of capital. In cases of Regional Centers, it is quite common for investors to experience capital erosion of between 5 to 100%.”

As a starting point, I would like to point out that there is no way anyone can get accurate data to make the above claims. Because the USCIS only started systematically collecting Regional Center data at the end of FY2011, the public has no access to the I-526/I-829 approval or deny records of any Regional Center. As to investment return track record, it is anybody’s guess. So when Regional Centers boast a 100% track record, you have to kind of take them at their word.

In addition, the bulk of Regional Centers were formed beginning 2008/2009. Currently there are over 200 Regional Centers, while as of June 2010 (which is the oldest USCIS statistic I can find right now), there were 94. Considering that Regional Center investments are not returned for five to six years, even if the first round of new Regional Centers established in 2008 flooded the market with projects as soon as they were approved (which they didn’t), that was only 4 years ago, so it is pretty early to be making sweeping (“quite common”) and weirdly specific (“5 to 100%”) statements about the return of capital.

As for Direct Investments never losing capital, that again, is a statistic nobody keeps. But that statement doesn’t sound too accurate as it implies new businesses never fail or lose money. I wouldn’t be surprised, however, that EB-5 Direct investments as a group have better success rates than generally established new businesses, as the owners probably manage them very conservatively, so as not to lose the opportunity to get the conditions removed on their greencards. (Assuming it is the investor owner that is managing the company. There seems to be a slow but steady emergence of “institutionalized Direct EB5s” (I made up that term) where entities are acting as intermediaries, similar to regional centers, and connecting investors with Direct EB-5 opportunities. Or, the investor may simply be taking a minority stake in a company managed by someone else.)

2. Argument re: Dividends: “Most regional centers do not pay out dividends. and those that do pay dividends are usually in the low single digits in RC’s, while investors usually get double digit returns for Direct Investments. This means that at the very least, investors in direct investments get between 2 to 8 times higher profits when compared to Regional Centers.”

It is true that Regional Centers pay little, if any, distributions to its members. (I assume that the writer meant distribution as regional centers are not corporations.) And in the case of loan products, the interest rates are very low as well. (To understand the difference between equity based and loan based EB-5 projects, see here.) Whether investors who invest in direct projects “usually” get double digit returns, is up for debate.

3. Argument re: Exit Strategies: “It is quite easy to sell a business on the open market or even take it public. It is quite hard to sell shares in a regional center, and most regional centers require the investors to use their affiliates to sell their shares, which means an added cost of 3-10% when exiting.”

Off the bat, let me just say taking a business public is a very rare and expensive endeavor. (You don’t have to be a former securities lawyer like me to know that.) Whether an investor can sell their EB-5 business quite easily depends on how well the business is doing and what the market conditions are at that point in time.

I agree it is quite hard to sell a regional center interest (not shares, again, because regional centers are not corporations and what the investor is obtaining through the investment is interest in a fund (either a limited partnership or limited liability company). Regional center interests are restricted securities, meaning that there are heavy transfer restrictions. In addition, there is no market for these securities because, in a way, the main “return” on the investments come in the form of a greencard. Regional Centers EB-5s have evolved from the equity model to the loan model to address this issue. (Again, see link in #2 above for a discussion on the difference between the two.)

4. Argument re: Loss of Certification: “It is quite common for regional centers to lose certification, and quite unusual for direct investments to lose certification.”

As of today, there is only one regional center that has lost its certification. (Which is not to say, more will not in the future if managed badly.) Direct investments are not certified in any form by the USCIS. You either create the jobs or you don’t. Mismanagement of the business will result in the investor not obtaining the permanent greencard.

5. Argument re: Fraud: “Many cases have surfaced where regional centers were found to have defrauded investors. As a matter of fact, the NYTimes.com article below clearly says EB-5 programs are rife with fraud and corruption. http://www.nytimes.com/2012/04/16/opinion/reform-the-eb-5-program.html”

There is no doubt that the EB-5 program needs better supervision. At the very least, it needs some sort of an EDGAR-like system where potential foreign investors can gain access to relevant data points. And I am sure there are misstatements galore and even instances of fraud involved. But to say that because there is fraud in regional center projects, all people working in regional center projects must be frauds (which is the gist of the accusations hurled around on LinkedIn) is like saying there are securities fraud on the stock market so anyone involved in public companies are guilty of fraud.

(I must admit that I’m a bit disappointed in my beloved New York Times publishing such a lazy opinion piece. The opinion piece that makes claims that the EB-5 program is “rife with fraud and corruption” without any supporting evidence (although I am the first to admit that there is no place to obtain such evidence; but the writer could at least have made the effort to have one egregious case study of an individual investor or bad-behaving regional center!) with a poorly crafted conclusion to just “fix it”.)

For the interest of full disclosure, I would like to state that I have a regional center application pending (in the USCIS’s RFE blackhole) while I earn a living filing petitions for immigrant investors  that want to obtain a greencard through Regional Center EB-5 investments. I also work with businesses that are interested in establishing regional centers or working with existing regional centers. That said, I also assist investors with their Direct EB-5 petitions who want to run their own business (or invest in a Direct EB-5 by taking an equity stake in somebody else’s business). In fact, I am going to a construction site next week to take pictures of a restaurant that is being built that my client is investing in. (I could have asked for the pictures to be send via email, but I wanted to see it for myself and also talk to the owners who are receiving the investment.) I’m also going to Korea at the end of this month on be
half of a client who is receiving Direct EB-5 investments so that I can meet his investors and explain the EB-5 process.

So which is better? I will have to give the quintessential lawyer’s answer, which is: IT DEPENDS. Then what does it depend on? That will be the topic of my next few posts.

During the past few months, there has been a pretty intense debate raged on many of the LinkedIn EB-5 Groups regarding the benefits of Direct EB-5 vs. Regional Center EB-5s. The debate, unfortunately, took a pretty nasty turn as the proponent of Direct EB-5s tried to engage the Regional Center side by calling everyone names. Not the most productive way to begin a conversation. That said, the topic of discussion one of great interest to many prospective investors. So I would like to take advantage of my soap box and touch on the arguments made, point-by-point.

But first, what is the difference between a Direct EB-5 and a Regional Center EB-5?

Direct EB-5 is the default mode of investment under the immigration laws and regulations. A foreign investor will invest either $1 million (or $500,000 if the investment is located in a Targeted Employment Area (TEA)) and file an I-526 and obtain a conditional greencard. Two-and-a-half years later, she will earn a permanent greencard by showing that she created 10 qualifying U.S. jobs. A “qualifying” U.S. job means that the job is a minimum 35-hour a week full-time position and that is filled by either U.S. citizens or greencard holders who are not immediate family members (i.e. spouse, sons & daughters) of the immigrant investor. Independent contractors do not qualify.

Regional Center EB-5s are allowed under the Regional Center Pilot Program. This is the program that is extended every three years which was extended for another three years by the Senate last week. (In other words, even if the Regional Center program had not been extended, Direct EB-5s could still have been filed regardless of the extension.) The structure of Regional Center EB-5s are basically the same as Direct EB-5s: invest $1 million (or $500,000 if the Regional Center project is located in a TEA) and then each investor creates 10 qualifying jobs. (It is a common misconception that the minimum investment for Direct EB-5s are $1 million and Regional Center EB-5s are $500,000.) The difference between the two is that if an investor invests through a Regional Center and not directly, she can claim credit for the indirect job creation that the economic impact of the EB-5 project brings. This is where the economic report comes in: in a Regional Center EB-5 petition, in addition to the business plan, the investor will submit an economic report (provided to the investor by the Regional Center) that a certain number of “jobs” will be created by the economic impact of the proposed project. These jobs are the same type of jobs that President Obama or Mitt Romney is referring to when they talk about the number of “new jobs” that they are going to be creating if/when they are (re)elected. Because you are able to count these indirect jobs, obviously, the job numbers are going to be much bigger than only the direct jobs that you are counting in the Direct EB-5 context. And because the amount of capital an EB-5 project is able to raise will necessarily be capped by the number of jobs, more jobs means more investors means more investment flowing into the United States. (Example: If project A creates 20 jobs, only 2 investors can invest and at $500,000, each, only $1 million can be raised. If project B creates 200 jobs, 20 investors can invest and thus $10 million can be raised.)

I mentioned above that 2.5 years after obtaining the conditional greencard, the investor must show that 10 qualified U.S. jobs have been created. This means that the Direct EB-5 investor must prove that she has 10 or more people on her payroll. She can show this by submitting W-2 tax forms or I-9 forms, etc. The Regional Center investor, on the other hand, will be relying on the Regional Center to provide them with data they can submit to the USCIS to show that the indirect jobs were created. This is done by showing that the Regional Center project was able to achieve whatever milestones were set out in the business plan and the economic report that was previously submitted 2.5 years ago. If you said that the economic impact jobs were going to be created by reaching a certain revenue number, you need to show that you in fact reached those revenue target. If you said that these indirect jobs were going to be created by spending a certain amount of money on certain activities (like construction, for example), then you have show that you, in fact, spent the money the way you said you were going to spend it in the business plan. Then, once the USCIS can verify this, they will “deem” the indirect jobs to have been created and the investor will get credit for them.

That, in a rather large nutshell, is the difference between the Direct and Regional Center EB-5 investments. With this background in mind, let me attempt to address the Direct vs. Regional Center debate.

Click here for Part Two.