As we head into the summer, there is no certainty that we will see changes to the EB-5 Program. Lawmakers may simply not act, which may result in EB-5 being included in Continuing Resolutions alongside other immigration programs that are temporary, at least in the near future. We also don’t know the fate of the EB-5 rulemaking process underway at the Department of Homeland Security (DHS). The EB-5 ecosystem is in limbo.
That said, regional centers and developers can’t be ignoring that change to fundamental aspects of EB-5 could happen quickly. In this environment, regional centers and other recipients of EB-5 capital have to gear up for changes to deals that could take effect midstream, while offerings are on the market.
Now is a good time for regional centers and issuers to develop plans for accommodating potential changes to deals that are on the market or being launched this summer. Having a solid plan of action before the law changes is sensible.
The proposed changes to the law present a different level of risk to each deal, so there is no “one size fits all” advice. But here is a brief overview of potential changes, and five tips for regional centers and issuers to consider.
TEAs and Minimum Investment Amounts are on the Table with Lawmakers and DHS
There may be a tectonic shift in how Targeted Employment Areas (TEAs) are defined, changing the prospects of a project to offer immigration benefits to investors. We could see some projects on the market that had a valid TEA designation, only to learn that the rules are changing right in the middle of an offering.
We could also see a spike in the minimum investment amount, without absolute clarity regarding how the law will be applied. The minimum investment amount for investors in TEAs could be $1 million or higher, despite speculation in the industry that the amount may be raised to $800,000.
These developments could come about with a 30-day window of notice through publication of a final regulation in the Federal Register by DHS, unless lawmakers act before regulations are finalized.
Changes to TEA definitions and to minimum investment amounts may necessitate substantial revisions to transactional documents in an EB-5 financing.
What should regional centers and issuers be thinking about now?
Five Tips for Regional Centers and Issuers Taking Deals to Market Now
Here are five tips to consider now and when changes are announced and take effect:
- With any changes to TEA designations that could impact a deal and immigration benefits, regional centers and EB-5 investment issuers or sponsors should consult qualified securities counsel on how to communicate those changes and their impact to existing investors.
- Regional centers and issuers should ensure that transactional documents contain legally sufficient disclosures and mechanisms to accommodate changes to minimum investment amounts.
- When we have concrete notice of upcoming changes to the law, don’t fail to notify prospective investors properly of material changes to your offering. Such prospective investors who have received an offer or been solicited to invest may need to be notified in writing of changes to either a TEA designation or minimum investment amount. Seek advice from securities counsel on your obligations.
- To avoid a conflict of interest, regional centers and issuers should advise investors to seek independent counsel on the impact of any legal or regulatory changes to their ability to continue to qualify for immigration benefits. Investors and regional centers may have competing objectives or divergent interests, especially if new regulations have gaps. It is a sound business practice for regional centers and issuers to provide information on the changes while expressly telling investors they should have their own independent counsel advise them on their options.
- Material changes to investment amounts could impact the entire capital structure of a deal. Bring corporate and securities counsel into the discussion as early as possible, and preferably before changes take effect, to ensure that projected changes to an EB-5 financing effort do not disrupt or disturb arrangements with equity investors, lenders or other parties in a deal.
Regular and clear communication with investors is always important, but even more critical when changes to the law occur.
With modifications to the EB-5 Program a real possibility in 2017 and SEC enforcement efforts continuing to focus on the EB-5 industry, it is critical to manage investor expectations properly. Taking steps early on to ensure that risk factors are properly spelled out to investors is important. But regional centers and issuers should also audit current offerings now to ensure that transactional documents can be amended to continue a financing where possible, even if there are substantial changes to the law.
- Mintz Levin Cohn Ferris Glovsky and Popeo PC
- UNITED STATES SECURITIES AND EXCHANGE COMMISSION
- Douglas Hauer
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