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Indebtedness As Capital For An EB-5 Investment

by Joseph Whalen

People are always asking me if an alien can get a loan and invest the proceeds from that loan into a project and have that count for EB-5 purposes. My initial reaction is extremely practical. I first ask, who in their right mind would make a "loan" of $500,000.00 or a full one-million dollars to be used as an "at risk" investment? I then tell them that it would be easier for someone to give the money as an outright "gift" to the intending EB-5 immigrant. The persistent folks will always have "solutions". I then have to remind them of the fundamentals of EB-5.

The investment has to be a real investment and not some bogus arrangement merely contrived in order to obtain an immigrant visa. With that main point laid out on the table, I point out that USCIS is geared towards detecting and fighting against fraud. Therefore, anything that looks fake will be attacked as fake even if it is not truly "legally and technically" fake. The reliance on a presumption accorded by law or merely meeting the bare minimum presentation of initial evidence or a prima facie showing leaves open the potential for legitimate challenges to the proof offered in support of the petition. See Matter of Brantigan, 11 I&N Dec. 493 (BIA 1966). This "legitimate challenge" is often overstated by zealots as a required "burden shifting". It is not. There is no burden shifting requirement when the initial evidentiary showing is not met in the first place. A prima facie showing is a presumption which may be challenged it is not necessarily a showing of full eligibility and it never was.

Corroborating evidence and substantiation through the production of probative and credible evidence, viable and reasonable explanations, and valid legal arguments laid out in a brief may be demanded when valid concerns are raised by USCIS. In the paper-based and faceless adjudications performed at USCIS Service Centers, these inquisitorial adjudications are akin to the "arguments on briefs" approach relied upon in the courts when rendering summary judgments. Unsubstantiated assertions, improbable inferences, and unsupported speculation are not competent summary judgment evidence. See Forsyth v. Barr, 19 F.3d 1527, 1533 (5th Cir.), cert. denied, 513 U.S. 871 (1994).

The following excerpt is a handy summation of how a court would handle a case that could be decided without the need for a hearing or trial. An appeal of a decision reached through summary judgment is always reviewed de novo. AAO always retains the plenary power to review any decision under the de novo standard and likens its relationship to USCIS Field Offices (especially Service Centers) as being similar to the relationship between a Court of Appeals over a District Court.

Summary Judgment Standard[1]

In deciding a summary judgment motion, the court, or judge, reviews the pleadings, any depositions, any answers to interrogatories, any admissions on file, and any affidavits. Summary judgment should be granted only when there is no genuine issue as to any material fact. A material fact is a fact that could affect the outcome of the case. An issue of fact is genuine if the evidence would justify a verdict for the party opposing the summary judgment motion. All inferences drawn from the evidence presented and all ambiguities must be resolved in favor of the party who opposes the summary judgment motion. [Emphasis added.]

AAO often cites to the various above principles in its current decisions such as a relatively recent H1-B petition appeal for example as follows.

"Going on record without supporting documentary evidence is not sufficient for purposes of meeting the burden of proof in these proceedings. Matter of Soffici, 22 I&N Dec. 158, 165 (Comm. 1998) (citing Matter of Treasure Craft of California, 14 I&N Dec. 190 (Reg. Comm. 1972))."[2]

Specifically in the EB-5 context, and in recognition of Congressional intent as it relates to the qualifying requirements for a valid capital investment, INS explained in the first final rule to address it, published in 1991, as follows.

"... To qualify as capital, indebtedness must be secured by assets owned by the alien entrepreneur, provided that the alien entrepreneur is personally and primarily liable and that the assets of the new commercial enterprise upon which the petition is based are not used to secure any of the [indebtedness][3] . This requirement is designed to ensure that, by investing capital, the alien entrepreneur has placed funds or other capital assets directly at risk." 56 FR at 60902 (November 29, 1991)

Under the holdings in Izummi, INS [now USCIS] put the EB-5 community on notice of many strict requirements when it come to what will count as an investment. That decision addressed redemption agreements, reserve funds, and promissory notes among other things but many of the same concepts will leak into the "loan proceeds as an investment" approach.

(10) Under 8 C.F.R. 204.6(e), all capital must be valued at fair market value in United States dollars[4] , including promissory notes used as capital. In determining the fair market value of a promissory note, it is necessary to consider, among other things, present value. At pp. 169-170

Matter of Izummi, 22 I&N Dec. 169 (AAO 1998).

The concept of loans in EB-5 was specifically addressed in yet another Precedent Decision. Soffici involved a situation where the alien transferred his EB-5 investment funds directly from his corporate account rather than his personal account however I would take this as a cautionary tales despite the slightly different context. I would urge folks to strive to meet these challenges up front for their own protection.

Matter of Soffici, 22 I&N Dec. 158 (AAO 1998) held, in pertinent parts:

  1. A petitioner under 203(b)(5) of the Immigration and Nationality Act cannot establish the requisite investment of capital if he lends the money to his new commercial enterprise.
  2. Loans obtained by a corporation, secured by assets of the corporation, do not constitute capital invested by a petitioner. Not only is such a loan prohibited by 8 C.F.R. 204.6(e), but the petitioner and the corporation are not the same legal entity.
  3. A petitioner's personal guarantee on a business's debt does not transform the business's debt into the petitioner's personal debt.
  4. A petitioner must present clear documentary evidence of the source of the funds that he invests. He must show that the funds are his own and that they were obtained through lawful means.
The concept of loans in EB-5 should take into account certain concepts from another Precedent Decision, which was addressing promissory notes but they can easily be applied to loans when the proceeds will be used as the EB-5 capital investment.

Matter of Hsiung, 22 I&N Dec. 201 (AAO 1998) held, in pertinent parts:

  1. A promissory note secured by assets owned by a petitioner can constitute capital under 8 C.F.R. 204.6(e) if: the assets are specifically identified as securing the note; the security interests in the note are perfected in the jurisdiction in which the assets are located; and the assets are fully amenable to seizure by a U.S. note holder.
  2. When determining the fair market value of a promissory note being used as capital under 8 C.F.R. 204.6(e), factors such as the fair market value of the assets securing the note, the extent to which the assets are amenable to seizure, and the present value of the note should be considered.
  3. Whether a petitioner uses a promissory note as capital under 8 C.F.R. 204.6(e) or as evidence of a commitment to invest cash, he must show that he has placed his assets at risk. In establishing that a sufficient amount of his assets are at risk, a petitioner must demonstrate, among other things, that the assets securing the note are his, that the security interests are perfected, that the assets are amenable to seizure, and that the assets have an adequate fair market value.
Lastly, while Matter of Ho is most often cited for its in-depth discussion of what constitutes a proper business plan, it is also of use to this discussion. Portions of the Holding from Ho specifically address the requirement that the alien is using his or her own money and that it is legally his or her own capital to invest.

Matter of Ho, 22 I&N Dec. 206 (BIA 1998) held, in pertinent parts:

  1. The petitioner must establish that he has placed his own capital at risk, that is to say, he must show that he was the legal owner of the invested capital. Bank statements and other financial documents do not meet this requirement if the documents show someone else as the legal owner of the capital.
  2. The petitioner must also establish that he acquired the legal ownership of the invested capital through lawful means. Mere assertions about the petitioner's financial situation or work history, without supporting documentary evidence, are not sufficient to meet this requirement.
I am not saying that no loan arrangement can work, I am saying that it has to be EB-5 compliant just like every other aspect of the EB-5 project, applications, petitions, and all supporting evidence relating to investment structures, exit strategies, and partnerships etcetera. That's my two-cents, for now.
2Petition for a Nonimmigrant Worker
3 Word was misspelled in original, corrected herein.
3 Bold added for emphasis from this point forward within quoted text.

About The Author

Joseph P. Whalen is not an attorney. He is a former government employee who is familiar with the INA. His education is in Anthroplogy with a concentration in Archaeology and has both a BA (from SUNY Buffalo) and an MA (from San Francisco State University) in Anthroplogogy. He previously worked as an Archaeologist for the U.S. Forest Service before becoming an Adjudicator with INS which became USCIS.

The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.