A Critical Analysis of DHS Secretary Johnson’s EB-5 Proposals

Much of the focus of publicity and advocacy relating to EB-5 has been with the U.S. Senate. The Administration had been largely silent on EB-5 at least in the public context. That changed on April 27, 2015 when DHS Secretary Johnson issued a letter to Senate Judiciary Committee Chairman Charles E. Grassley and Ranking Member Patrick J. Leahy. This letter sets out the Administration’s agenda on EB-5.

Not surprisingly, DHS advocates for expanded authority to monitor and to sanction regional centers and regional center and project principals for reasons of alleged criminal activity, national security concerns or fraud-related concerns.

Much of what the Administration is proposing would not likely be opposed by most in the EB-5 industry and might actually be wholeheartedly endorsed. It is in the interest of regional centers, developers and investors to have USCIS monitor regional centers and projects with the goal of weeding out and sanctioning bad actors and preventing fraudulent programs from ever being the recipient of EB-5 investor funds. For example, many or most would agree that regional center or project principals who commit criminal violations, fraud-related violations or security-related violations, or who have such a history, should be barred from the program. Many or most would agree that USCIS should have sufficient funding to underwrite audit and site visits, even if that were to require the DHS-proposed $20,000 per year fee to be charged to regional centers. While somewhat more controversial, the DHS proposal to require that all regional center principals be U.S. citizens or permanent residents has support among many in the EB-5 community.

The biggest concern with this series of proposals is if USCIS is authorized to act without due process. Any standards developed for regional centers or regional center principals, any standards developed for termination of regional centers, any standards developed for sanctions against regional centers or principals should be clearly articulated and should provide the affected parties the ability to rebut the allegations with a review mechanism in the event that the rebuttal is unsuccessful. Allowing DHS to take such actions on a discretionary, non-reviewable basis would be a denial of due process with a serious impact on individuals and companies who may have invested millions of dollars in creating and operating a regional center. Termination of a regional center can also very seriously impact investors in projects in that regional center. Based on such unreviewable action, such investors may lose their ability to remove conditions in the absence of an approved regional center.

The same caution applies to DHS’ proposal to expand its authority to deny or revoke an I-526 or an I-829 petition due to fraud, misrepresentation, criminal misuse or threats to national security. One might agree that DHS should have authority in all of those instances, but only with articulable legal standards, due process and rights of review.

Secretary Johnson urges that USCIS should be authorized to require regional centers to certify continued compliance with U.S. securities laws and to disclose pending litigation, details of how investor funds were utilized in the project, details of the direct and indirect jobs created and the progress towards completion of the investment project. He advocates that these annual reports should be publicly disclosed.

Many in the EB-5 community – myself included – consider the I-924A annual reporting to be seriously deficient. Generally, I am in favor of enhanced annual reporting proposed by Secretary Johnson. I am specifically in favor of public disclosure of non-protected and non-confidential information to enable investors to make more educated decisions. My main hesitation is with the suggested “accounting of the direct and indirect jobs created” since it is very difficult to calculate indirect and induced job creation in the middle of a project. For example, direct construction jobs cannot even be counted until a project has completed two years of construction. Revenues may be insignificant until a project reaches stabilized occupancy. Many other examples could be cited.

Secretary Johnson proposed “improving the integrity of TEAs”. This could be the most controversial of his proposals. Although he provides no specifics, he proposes “limiting TEAs to a specified number of contiguous census tracts.” As with all of these proposals, the devil is in the details. Simply picking an arbitrary number of contiguous census tracts is poor public policy. Significant studies are required to determine appropriate standards to utilize if the definition of TEA is to be changed. Rather than choosing an arbitrary number of census tracts, it would make more sense to tie TEAs to commuting distances, supply chains, possibly MSAs and CMSAs or possibly other concepts used by government agencies such as the U.S Department of Labor.

Secretary Johnson proposes that the minimum investment amount be increased, noting that there has been no increase since the inception of the program 25 years ago. He adds that, even if Congress does not do this, USCIS might exercise its existing authority to increase the minimum investment amounts. While some might balk at an increase, most would consider an increase of the minimum investment amount to be inevitable.

Secretary Johnson also requests Congressional authority to require regional centers to file “investment proposals” (presumably exemplar petitions) in advance of individual investor filings. I have previously advocated that such a change is meritorious, so that investors know that they are investing in an approved project. However, such Congressional authorization would have to be accompanied by a Congressionally-imposed time limit for USCIS to adjudicate the exemplar petition. Otherwise, it would simply add a year or more to an already unrealistically long process that puts the entire EB-5 program in jeopardy. Creating a process that simply adds time to the existing process would make the process nonviable for many, if not most, project developers.

The remainder of Secretary Johnson’s proposals relate to limitations on contact by USCIS officials with the public. While I am in favor of limitations on any activities that could create a perception of favoritism or impropriety, I do think it is important that groups such as IIUSA and the American Immigration Lawyers Association, which represent large numbers of stakeholders, should be in a position to advocate their positions to USCIS in forms that are subject to full public disclosure. The present stakeholders meeting format provides no opportunity for discussing, airing and debating complex legal issues that can only be the subject of fruitful discussion in smaller group settings. In addition, with the stakes as high as they are both for investors and the public, USCIS should create a more formal system for issuing advisory opinions, so that stakeholders can obtain necessary information to plan transactions going forward without having to resort to Congressional assistance.

In conclusion, Secretary Johnson’s letter contains a number of proposals that could improve the EB-5 program. It also contains a number of controversial proposals that should be subject to serious discussion and debate. What is not debatable is that it provides perhaps the best vision to date of the thinking of the Administration regarding the future of the EB-5 program.

Source : Klaskolaw