This blog explains the significance of the firm’s victory in Mirror Lake Village, LLC v. Wolf, including a discussion of the facts of the Mirror Lake investment, the language of the court’s decision and the significance of the decision to transactions in the EB-5 context.
On August 21, 2020 Judge Merrick Garland issued an Opinion on behalf of the US Court of Appeals for the DC Circuit in the case of Mirror Lake Village, LLC v. Wolf. This case that Dan Lundy and I litigated in the District Court and ultimately the Circuit Court of Appeals is a pathbreaking decision with significant impact on EB-5 transactions and petitions for a number of reasons. These reasons include:
- It is the first federal Circuit Court of Appeals case that addresses what constitutes an “at risk” investment and a “guaranteed redemption”;
- It is the first federal court case that approves an investment with a “put option” (an option exercisable by the investor to redeem his investment at a time in the future). A number of cases had previously approved “call options” (options exercisable by the investment enterprise), but not put options;
- The decision contradicts large parts of the USCIS Policy Manual relating to redemptions, which we have long advocated are contrary to the law.
This blog will review the facts of the Mirror Lake investment, the language of the court’s decision and the significance of the decision to transactions in the EB-5 context, including a discussion of specific language in the USCIS Policy Manual that is inconsistent with the opinion of the DC Circuit Court of Appeals.
Mirror Lake is a multiple investor direct EB-5 investment. The deal documents include a put option whereby the investor has the right to request a redemption of his investment at the purchase price once the investor becomes a conditional resident. In addition, the investor has the option to sell 20% of his interest to Mirror Lake each year for 5 years commencing 2 years after obtaining conditional residence. The sale price is specified to be equal to the fair market value of the interest in Mirror Lake. However, critically, the put options were contingent on Mirror Lake having “sufficient available cash flow” to pay back the investment amounts at the time the investor triggers the option. We argued, successfully, that this contingency resulted in the redemption not being “guaranteed” since there is no guarantee that the business will be successful or even be in existence at the future date, and if it is successful, there is no guarantee that it will have available cash on a given date.
The court agreed that the requirement of an at-risk investment means that “there must be a risk of loss and a chance for gain.” In this case, there is obviously a chance for gain, since the investors would not exercise their options if the business is highly successful. The issue is whether there is a risk of loss. As the court stated: “here, there is a risk of loss if there is insufficient cash flow, and a chance for gain (the option is, after all, optional) if the business prospers.”
The government relied on its precedent decision, Matter of Izummi. Very significantly, this is the first federal court case that reigns in the expansive interpretation of Matter of Izummi that USCIS has utilized in denying many EB-5 petitions. The court limited Matter of Izummi’s prohibition of redemption agreements to investments that guarantee a return of capital, without risk. It expressly stated that Izummi does not apply to an investment, such as Mirror Lake, where there is a risk of loss if a business does not succeed. In other words, Izummi is limited by the federal court to investments where there is no contingency on the redemption. As the court stated, where the “redemption of their investments is dependent on the success of the business”, the capital is at risk.
This decision contradicts and requires a rewriting of almost the entirety of the USCIS Policy Manual language regarding redemptions and what constitutes an impermissible debt arrangement. The Court’s decision provides a basis for EB-5 deals going forward to include redemption provisions. Importantly, it provides a legal framework for projects and investors to respond to pending RFEs and NOIDs on this issue and to appeal previous denials involving “at risk” and “guaranteed redemption” issues to federal court.
The following is some of the language in the USCIS Policy Manual that we believe is incorrect and contrary to the opinion of the Court of Appeals:
- “An agreement evidencing a preconceived intent to exit the investment as soon as possible after removing conditions on permanent residence may constitute an impermissible debt arrangement.”
- “In general, the petitioner may not enter into the agreement knowing that he or she has a willing buyer at a certain time or at a certain price.”
- “Any agreement between the immigrant investor and the new commercial enterprise that provides the investor with a contractual right to repayment is an impermissible debt arrangement. In such a case, the investment funds do not constitute a qualifying contribution of capital”
- “An “option exercisable by the investor…where the investor has a right to repayment…[is an] impermissible…arrangement [which] cannot be remedied with the addition of other requirements or contingencies, such as conditioning the repurchase of the securities on the availability of funds;..or the possibility that the investor might not exercise the right.”
- “Repayment does not need to be guaranteed in order to be impermissible. It is the establishment of the investor’s right to demand a repurchase, regardless of the new commercial enterprise’s ability to fulfill the repurchase, that constitutes an impermissible debt arrangement.
- “Arrangements that grant the petitioner the option to require the new commercial enterprise to redeem all or a portion of his or her equity at a specified time or upon the occurrence of a specified event (for example, once the conditions are removed on the petitioner’s permanent resident status) and for a specified price (whether fixed or subject to a specified formula) [constitutes]…an impermissible debt arrangement.”
We have long advocated that USCIS policies on “at risk”, “guaranteed redemption” and “debt arrangements” are inconsistent with the law. We are gratified that the DC Circuit Court of Appeals agrees. We hope that this decision will be helpful to many investors and project developers whose investments and projects are being challenged on this basis, or were previously denied on this basis, as well as to future EB-5 project developers structuring investment vehicles going forward.
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