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The COVID-19 pandemic has led to an unprecedented level of market volatility in 2020, and the EB-5 industry was in no way immune to the effects. Many business plans and yearly projections for EB-5 projects were completely useless in the midst of the pandemic, and much of the damage has yet to be uncovered as of December 2020. One thing that is certain is that there will be many more changes to come as the government scrambles to create new regulations and public health mandates to respond to the pandemic.
For those involved in the EB-5 Immigrant Investor Program, the instability of the economy and varying business sectors can be extremely concerning. Investors who are involved in EB-5 projects in struggling industries are the most heavily impacted.
The State of the Market for EB-5 Distressed Projects
Many EB-5 projects in the recreational and entertainment industry were already failing to meet their projections prior to the pandemic. Now, those projects are struggling to meet the expectations outlined in the original offering materials. Also, the total number of distressed EB-5 projects has increased, especially in hospitality and real estate market sectors.
Financial Market Strain Can Have Devastating Outcomes
Just like any other businesses affected by the pandemic, EB-5 projects are subject to supply chain disruptions, layoffs, temporary restrictions on operations, and potentially even temporary closures. The reluctance of financial markets to issue bonds and the lack of government funding is making it difficult for these projects to acquire the necessary funding they need to operate. The COVID-19 pandemic and its devastating effects were completely unpredictable, which resulted in many EB-5 projects and investors being insufficiently prepared to handle the sudden changes.
These distressed projects that are seeking EB-5 funding are also much more difficult to sell to investors. Because many of them are subject to temporary suspensions of operations and halted construction, they are no longer able to fulfill the job creation requirement. When an EB-5 project fails to fulfill the necessary requirements, it puts the investor’s EB-5 eligibility at risk and could potentially jeopardize their future immigration goals.
EB-5 Distressed Business Investors Need to Remain Well Informed
Experienced new commercial enterprise (NCE) operators should continue to reassess the impacts of the pandemic and evaluate whether or not it is best to continue an EB-5 offering. Investors should know that every NCE has a fiduciary duty to preserve an EB-5 investor’s investment capital along with their EB-5 visa eligibility. While this does not guarantee success (and, indeed, guaranteeing success violates EB-5 rules), operators must do their best to find solutions to the factors causing distress and offer the investor the best chance at a successful EB-5 investment. However, it is still the investor’s responsibility to remain informed about the current state of their EB-5 project. The best source of information for investors to stay updated with their project’s status is the security disclosure updates that they receive from the NCE’s operator.
EB-5 Distressed Business Investors Must Continually Reassess Risk
Although the COVID-19 pandemic has resulted in an unprecedented amount of market volatility and an increase in the number of distressed businesses, not all investments have been rendered hopeless. Even if an investor’s EB-5 investment is in a distressed business, they may still be able to successfully complete their EB-5 journey. However, it is crucial that they continually re-evaluate the level of financial and immigration risk involved with their project.
All EB-5 investors should be receiving essential updates for securities disclosures from the NCE and EB-5 operators. These disclosures are necessary for investors to be able to accurately analyze the current state of their project and their EB-5 eligibility. Continually reviewing these documents and any new changes will help investors determine the best course of action to ensure they can achieve all their immigration and business goals.
Specifically, investors should be receiving disclosures that address the COVID-19 pandemic and how their project has been affected. EB-5 projects that predate the pandemic should be working to create updated securities disclosures that outline the ways the project has been impacted and what changes will be made to adapt to the new circumstances. It’s important that investors are aware of what should be included in these disclosures, when they should be receiving them, and what rights they have after receiving them.
Troubled Business Investment Offerings Prepared Before the Outbreak
The United States Securities and Exchange Commission (SEC) is a governing body that works to protect investors in the United States. This body legally requires all EB5 investment offerings to present risk disclosures during the signing of the EB-5 investment agreement. The disclosures should include general risks and cautionary language that discusses the uncertainties involved with the specific EB-5 project and its industry. Investors should also see references to safe harbors made available to NCEs under the Private Securities Litigation Reform Act of 1995 (PSLRA). And, while it is unlikely that the disclosures will mention COVID-19 directly, there should be disclosures addressing risks associated with public health crises and pandemics. It is not necessarily a red flag if the disclosure does not directly mention COVID-19 (after all, it may have been drafted prior to the outbreak), but it does require proper fiduciary handling.
Full and Fair Disclosure According to the SEC
The SEC has strict guidelines regarding “full and fair disclosures.” The Securities Exchange Act of 1934 prohibits the disclosure of untrue statements of material fact, as well as the omission of material facts that are necessary to prevent previous statements from becoming misleading. While there is no exact test for materiality under SEC law, precedent for assessing a violation is determining whether there exists a substantial likelihood for a reasonable investor to consider a misstatement or omission a decisive factor when choosing to buy or sell a security.
It is recommended that the issuer always disclose supplemental offering documents anytime there is a question of whether a material fact could influence an investor. The SEC has a fairly wide interpretation of materiality, so it is always best to provide supplemental offering documents to avoid potentially violating Exchange Act laws. If something is interpreted as a material change by USCIS adjudicators, it could affect an investor’s EB-5 eligibility, so investors should make sure to keep USCIS updated on any potential material changes and provide any additional information to ensure they are still compliant with EB-5 requirements.
How Disclosures for Material Changes Can Affect USCIS Decisions
For the most part, USCIS is fairly flexible when it comes to discrepancies between original project documents and final outcomes. However, there are still some changes seen as material in the eyes of USCIS. If these are not properly addressed, it could put an EB-5 investment at risk.
Material Change Defined by USCIS
USCIS defines material change as any change that pertains to the consequential aspects of an EB-5 project. These are changes that can delay the adjudication process and even affect an adjudicator’s final decision. While a material change does not always result in a denial, it could still create delays in the adjudication process. Below are some examples of material changes:
- Significant updates to offering documents and other project documentation
- Changes to regional center sponsorships, especially if due to regional center terminations
- Major changes to the business plan or scope of the project, which could also affect the project’s ability to meet the job creation requirement
- Changes to the investment structure or the sourcing of investment funds
If it is determined by USCIS that a material change has taken place during the two-year investment period, the EB-5 investor must refile their I-526 petition and include all necessary updated information on the project’s new circumstances. Some project changes that have resulted from the COVID-19 pandemic could lead to such a situation.
Clues to Material Changes in Post-COVID-19 Disclosures
Disclosures provided post-COVID-19 should specifically mention the COVID-19 pandemic and address the following topics:
- Which projections and assumptions are no longer accurate after the pandemic
- Which project outcomes the pandemic has caused or may cause to differ materially
- Additional risks the COVID-19 pandemic has caused, as well as which traditional risks have increased due the pandemic
- Operational changes that will be taking place for the project to adapt to the new circumstances and have the best chance at success
- How the pandemic has affected the project’s ability to create and allocate jobs, and any other changes that USCIS may deem material
In addition to all these topics, disclosures should clearly explain the investor’s rights and discuss which changes would require the consent of the investor.
Next Steps After Reviewing an Updated Disclosure
After receiving and reviewing updated security disclosures, EB-5 investors should consult their immigration attorney to determine their next steps. An experienced immigration attorney can help find solutions to an investor’s situation, as well as create an exit strategy that still allows the investor to protect their investment capital and immigration eligibility. Working closely with experienced EB-5 industry professionals can also be extremely helpful for investors when determining what material changes need to be addressed with USCIS.
EB-5 investors should keep in mind that the EB-5 program was meant to stimulate the U.S. economy during times of crises. EB5 investments are used to create jobs and assist struggling businesses, which is exactly what is needed in the United States following the COVID-19 pandemic. It is still possible for EB-5 projects to succeed despite the obstacles that the pandemic has created. With proper due diligence and the assistance of EB-5 professionals, EB-5 applicants can still enjoy successful EB-5 investments during these unfortunate times.
