RCBJ Perspectives: Litigation Success Story – After Years of Fighting, “At-Risk” Finally Means At Risk

Originally published in the Fall 2020 IIUSA Regional Center Business Journal (RCBJ)

By Daniel B. Lundy, Partner, Klasko Immigration Law Partners 

EB-5 regulations require an EB-5 investor to make an investment that is “at risk.” The concept of “at risk” is not unique to EB-5 and has been part of the requirements for an E-2 Treaty Investor non-immigrant visa for decades. Nevertheless, in interpreting the term “at risk” in the EB-5 context, USCIS added a new twist. USCIS has interpreted the term to exclude any investment agreement that constitutes a “debt arrangement.” In construing what constitutes a “debt arrangement,” USCIS has rejected any agreement that provides an EB-5 investor with a right to redeem his or her investment at any time, even after the period of conditional residence is over, despite the fact that both the regulations and USCIS policy allow an investor to get his or her investment back after this “sustainment period.” According to USCIS, any agreement that allows the investor a right to demand his or her money back or sell his or her shares back to the company, no matter whether it is contingent on any event or condition, and regardless of whether there is a promise to repay the investor, is an impermissible “debt arrangement.” Under the regulations, a “debt arrangement” does not constitute an “investment,” so USCIS has routinely denied I-526 petitions where the investor has any such purported right of redemption.

Many EB-5 stakeholders have argued that this policy makes no sense. An investor may have a right to request his or her money back at some point in the future without undermining the “at risk” nature of the investment, and without turning an equity investment into a loan or “debt arrangement”. Fortunately, in Mirror Lake Village, LLC et al. v. Wolf (No. 19-5025), the U.S. Court of Appeals for the District of Columbia Circuit recently agreed. Notably, this appellate court victory is important for EB-5 because prior litigation victories related to the issue of redemptions were only district court cases, and USCIS has previously taken the position that it is not bound by such decisions it disagrees with.

The NCE’s Operating Agreement

This case involves an investment agreement that provides the investors with a one-time right to sell all of their membership interests in the NCE back to the company for the purchase price after the conditional basis of their residence is removed, or to sell back 20% of their membership interests per year, at fair market value, beginning from a point two years after removal of the conditions on their residence. Both of these options were explicitly contingent on the NCE having “sufficient Available Cash flow” to purchase the interests at the time the option is triggered. Available Cash Flow was defined in the NCE’s Operating Agreement as the “total cash available to the Company from all sources less the Company’s total cash uses before payment of debt service,” and excluding member capital contributions. Thus, the investors could not be repaid unless the NCE had enough money to continue operations and pay the purchase price to the investors. If the company failed, or was only marginally successful, there would not be sufficient Available Cash flow, and the investors’ right to have the NCE repurchase their interests would be meaningless. The investors’ investments were therefore subject to business fortunes, and there was no guarantee that they would be repaid or make a profit.

Procedural History

USCIS denied the petitions, finding that because the investors had a put option, which was a redemption agreement, the investment was a “debt arrangement” and therefore not “at risk” in accordance with 8 C.F.R. § 204.6(j)(2) . Through NOIDs, the denial, and subsequent denial of investor motions to reopen, USCIS used these terms essentially interchangeably, basing its decisions on selected sentences from Matter of Izummi. In their NOID responses and Motions to Reopen, the investors pointed out that their money was at risk because the put option is expressly contingent on there being sufficient Available Cash flow to repurchase their interests. Notwithstanding this, USCIS found that this was a redemption agreement because there was a chance the business would be successful, and the put option was “clearly written as an exit strategy for the investor to compel [the NCE] to purchase” their interests. The investors also argued that the investment had all the hallmarks of equity, and not debt (including a lack of an unconditional promise to repay the money), all to no avail.



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