by Robert C. Divine ©, IIUSA Vice President – Baker, Donelson, Bearman, Caldwell, & Berkowitz, P.C.
Below are my summaries of the 2012 EB-5 AAO decisions recently posted by USCIS, which can be a accessed from www.uscis.gov > Administrative Decisions and choosing the “Folders” for B7 and K1. A few issues of potentially broad implications are shown in italic type, and two potentially urgent issues (validity of state TEA determinations and counting of indirect construction jobs) are underlined.
Regional Center Applications
Aug062012_01K1610.pdf: Regional center denial affirmed (filed prior to I-924 existence). The applicant in North Carolina suggested but according to the AAO did not prove that it was a non-profit state or county economic development entity operating on behalf of the government. The entity failed to show that any of $4.3 million available to the county for economic development was actually available to the regional center applicant for its operating purposes. The applicant submitted some examples of projects already completed outside the proposed regional center area as “exemplars” of projects it would pursue, submitted a copy of the RIMS II methodology handbook, and requested an array of 10 or 12 two- or three-digit NAICS codes, but the AAO dismissed those as not relevant, not a good faith effort at providing “verifiable detail” about job creation, and as having been injected into the application after the date of filing [Note: USCIS normally is forgiving on this point in I-924 applications but brings out that argument as an alternative in case other real reasons for denial might not stick in court.] The applicant seems to have been laying the foundation for a lawsuit challenging USCIS regulations, which require “verifiable detail” in regional center applications, in light of the subsequently enacted appropriations language requiring only “general predictions.” The AAO stood its ground on the regulations, and it will be interesting to see if the applicant has litigated.
Dec042012_01K1610.pdf: In a similar application in Indiana, an economic development entity requested 12 industries without specific business plans. The AAO analyzed the most specific plan submitted, for a hotel project, and found it lacking in detail and subject to inconsistencies in projecting job creation. It found more vagueness and job creation inconsistencies concerning two bridge construction projects. In discussing the hotel project and a prediction that “construction of the hotel will yield 520 direct and indirect jobs,” the AAO makes a startling statement that “As the business plan does not include any timelines establishing that the construction jobs will last at least two years, the applicant cannot include those jobs.” This conclusion, as to the indirect construction jobs, is contrary to the USCIS memo of December 11, 2009, the USCIS Adjudicator’s Field Manual in which it is embodied, and many recent regional center and I-526 approvals, and would undermine quite a few pending projects in the market. We can only hope that the AAO accidentally overlooked the separate treatment of indirect jobs in that broader discussion, perhaps because the applicant’s analysis did not distinguish between the two.
Jan052012_01B7203.pdf: motion to reopen or reconsider was untimely.
Jan092012_01B7203.pdf: I-526 denial affirmed. Non-TEA, non-RC. The AAO held that: (1) a pattern of receiving large, inadequately explained gifts for investment purposes by the petitioner and a convoluted business history and path of funds for the investment; (2) a promise to refund the investment if the I-829 is denied is unacceptable [this corresponds to an oblique reference in the USCIS December 11, 2012 memo], and because such a promise must be premised on reserving the funds to honor such promise, it cannot be corrected after the date of filing; and (3) the choice to hold the funds in escrow might mean that the project gets finished without use of the EB-5 funds, eliminating the necessary nexus for approval [no mention of any bridge financing arrangements].
Jan102012_01B7203.pdf: motion to reopen or reconsider was untimely.
Apr092012_01B7203.pdf: I-526 denial affirmed. Non-TEA, non-RC. The investor made inconsistent claims that she (a) loaned the money to five different companies outside China that repaid her by paying the proceeds to the NCE and (b) provided the funds to a friend who arranged the loans to the five entities. The loans were made a year before the funds were provided to the friend, and there were discrepancies about the amounts that an attorney’s letter could not resolve. Interestingly, the general strategy of moving the funds from her company was not specifically criticized. Only inconsistencies and gaps in documentation were the basis for denial. The project also lacked timeline with milestones to support the projection of job creation.
Apr172012_01B7203.pdf, Apr172012_03B7203.pdf, Apr172012_07B7203.pdf, Apr172012_09B7203.pdf: I-526 denial or revocations (some of both) affirmed. Pages 7 and 10-15 of one of the 17-page decisions are missing, but the other decisions appear to be essentially the same decisions with tiny variations, so the summaries are merged. The investors in one of many joint ventures, organized by a company called Caervision to put TV screens with content into medical offices, was found to have made misrepresentations [giving rise to permanent ground of inadmissibility] about the NCE’s lease of space. Some related entity was alleged to have leased 11,000 square feet of space in Johnstown, Pennsylvania to house the various joint ventures who would sub-lease their respective space. The AAO concluded that only 375 square feet of space had been leased and not even fully furnished, and upon site inspection no meaningful work had gone on, and I-9 documentation about allegedly existing but apparently shared workers had been “altered” to make it appear that certain employees were working for several project entities at the same time. The parties to the joint venture seem to have been confused with a related corporation, and the tax filings allocate all losses to the joint venture partner, not the investor; thus the at-risk problem. The investor appears to have claimed regional center affiliation purely by means of location without reference to any agreement with the regional center, so USCIS would consider only direct job creation. USCIS rejected a TEA letter that at time of I-526 filing had been over 1.5 years old based on over 2-year old data. Large and small discrepancies in expenses and financial statements were highlighted. Apparently on appeal the investor claimed that the business plan had changed to a call center for which only vague plans were laid out, which AAO found to be a material change and generally inadequate requiring denial/revocation. One case (Apr172012_06B7203.pdf) added source of funds problem summarized by AAO as follows: “The record does not trace the funds transferred by the petitioner’s ‘close friends’ back to her Chinese Citibank debit account. Moreover, the notations for some of the transfers raise concerns about whether these funds were intended for the petitioner’s investment.”
Apr172012_04B7203.pdf: I-526 denial affirmed. Non-TEA, non-RC. The investor owned Pau Holdings, LLC, which owned 75% of Pearl Imaging, LLC, which was to operate medical diagnostic imaging facilities without regional center affiliation. The AAO confirmed that the holding company needed to own 100% of the job creating enterprise (without an RC), and the claimed purchase of the remaining 25% after filing was deemed material and too late. The investor failed to show that she had committed the requisite funds to the enterprise, under a factually complex analysis. The AAO held that signing a lease for space with personal funds to back it up does not constitute capital at risk, because the enterprise might generate ongoing income sufficient to make the lease payments. It appeared also that the investor may have purchased the assets of an ongoing business, so that the jobs involved might not be new.
Jul102012_01B7203.pdf: I-526 denial affirmed. Non-TEA, non-RC. The investor proved that $5,000 cash was her personal funds, but as to $1 million+ in inventory transferred from her business in Mexico, the AAO found that she needed to have personally purchased the inventory from her company or otherwise liquidated it before transfer [focusing on a point seemingly missed in one of the cases summarized above], that the self-valuation of equipment was not reliable, that the identities of the transferring and transferee parties were not sufficiently documented, that no transit broker was identified, and that the only premises decipherable for the NCE were her personal apartment not apparently big enough to house the inventory.
Jul162012_01B7203.pdf: I-526 denial affirmed. Non-TEA, non-RC. The investor established perhaps five new employees so far for an existing business purchased, and a 4-page business plan submitted on RFE response was devoid of competitive market assessment to justify projections of future hiring. The AAO refused to consider a new business plan submitted on appeal. The AAO questioned source of funds based on sale of stock that had without explanation increased in value from 3,000 RMB to 150 million RMB in 17 months.
Aug072012_01B7203.pdf: I-526 denial affirmed. Non-RC. Investor first claimed to have purchased the property on which the bank loan of capital was collateralized, but upon USCIS’ questioning of her income she claimed that her husband had been given the property as a bonus from an employer whose original support letter and tax filings had made no mention of the property. Also, the investor failed to document and explain how the property had quadrupled in value in two years since acquisition or how the bank had relied on an appraisal dated the day after the loan documents. Also there was a gap in records of bank transfers. In an additional finding that could have significant repercussions for other EB-5 investors, the AAO disregarded a May 18, 2010 TEA designation letter based on 2009 data in an I-526 petition filed on March 25, 2011, stating, “[t]he fact that an area was once an area of high unemployment does not mean that it still is.” [Note: Washington state TEA letters do not generally indicate a period during which it is valid. It is unclear whether a state letter explicitly providing for one-year validity would be considered valid by USCIS even after available data has been updated.]
Aug202012_01B7203.pdf: I-526 denial affirmed. Non-TEA, non-RC. Investor put $100,000 into the NCE and showed $900,000 in her personal bank account, but did not transfer the $900,000 into the NCE (an existing auto repair and body shop) or into an escrow account or sign a promissory note secured by collateral. Instead, her purchase agreement for the stock required payment by a certain date “or such later date as may be mutually agreed to in writing by all Parties.” The AAO held that the funds were not committed at risk in the NCE under these circumstances. Also the agreement seems to have been susceptible to a reading that it was to replace other capital rather than for expansion of the existing business. The AAO also found several breaks in the path of funds involving the sale of a foreign tourism business and refused to consider new wire transfer evidence submitted on appeal. Finally, the AAO found that the business did not qualify as a “troubled business” for counting preserved jobs. In doing so, the AAO might improperly have compared prior net worth figures to most current year net income figures. Footnote 2 is worthy of general awareness on troubled business determinations:
“Where an S corporation’s income is exclusively from a trade or business, USCIS considers net income to be the figure for ordinary income, shown on line 21 of page one of the petitioner’s IRS Form 1120S. Where an S corporation has income, credits, deductions or other adjustments from sources other than a trade or business, they are reported on Schedule K. If the Schedule K has relevant entries for additional income, credits, deductions or other adjustments, net income is found on line 18 of Schedule K. See Instructions for Form 1120S, at http://www.irssov/pub/irs-pdf/ill20s.pdf [accessed on February 21, 2012] (indicating that Schedule K is a summary schedule of all shareholders’ shares of the corporation’s income, deductions, credits, etc.). Because the petitioner had additional deductions shown on its Schedule K for 2007, 2008, 2009, the petitioner’s net income is found on Schedule K of its tax returns.”
Aug232012_01B7203.pdf: I-526 denial affirmed. Non-TEA, non-RC. The investor provided funds derived from these assets to multiple private currency exchange dealers, who subsequently invested the funds in the NCE. The AAO questioned the source of these funds as being sufficient in light of living expenses during the period during which they were earned, and it found insufficient evidence of the connection between her capital and the dealers’ transfers (i.e., gaps). The AAO in principle refused to consider new evidence of transfers on appeal but nevertheless reviewed the new evidence and found it lacking. The AAO found the business plan, which initially was to warehouse and distribute pianos but on RFE response was expanded to include importation and sale of eyeglass frames and rental of warehouse space, fatally vague in light of Matter of Ho.
No I-829 decisions were posted by AAO. This could be because (1) a smaller percentage of I-829 filings are denied, and (2) USCIS is not “certifying” denials to AAO and is accompanying denials with notices to appear in immigration court, thereby removing jurisdiction from AAO.
AAO continues to require verifiable detail to support regional center indirect job creation projections, detailed business plans for all projects under Matter of Ho, and seamless source and path of funds evidence. AAO’s holdings about the duration of TEA designations requires clarification with USCIS, with implications for larger projects that need to subscribe investors across the points at which new data becomes available (usually late Spring). AAO’s ruling about construction jobs probably was meant to be focused on direct jobs without awareness of USCIS’ different treatment for indirect construction jobs, but USCIS clarification would be helpful to the market.