Risk Factors in Eb-5 Regional Center Private Placement Memoranda

• Jurisdiction: United States,Federal
• Author: By William Tolin Gay*
• Publication year: 2017
• Citation: Vol. 25 No. 1

Risk Factors in EB-5 Regional Center Private Placement Memoranda

By William Tolin Gay*

I. INTRODUCTION

The EB-5, or immigrant investor, visa provides a means for wealthy foreigners to invest in a new business enterprise in the United States, create jobs, and thereby obtain the right to permanent residence. For many years, most EB-5 applicants have elected to invest in existing, government-approved businesses called "Regional Centers."¹

For a number of reasons, the favored business structure for the Regional Center has been the limited partnership (LP). Use of the LP for Regional Centers has express sanction of the federal immigration authorities, provided the immigrant investors are sufficiently involved in the management of the business enterprise. Failure to become sufficiently involved in management could result in denial of the visa.

However, corporate law governing business structures is state law, and most limited partnership acts proscribe managerial activity by limited partners. The sanction for noncompliance typically includes partial or total loss of limited liability.

The Supreme Court recently addressed the applicability of the Supremacy Clause in Arizona v. United States,² specifically in the context of an individual state's attempt to address immigration issues within its borders.

Equity interests in Regional Centers are usually offered by means of private placements. The standard disclosure document for private placements is the private placement memorandum or "PPM". One section of the PPM is "Risk Factors," which discusses various possible sources and areas of risk in the private placement. This paper examines whether a PPM for a Regional Center should include a risk factor that specifically addresses the tension between federal and state law regarding managerial activities of limited partners.

II. EB-5 BACKGROUND

The EB-5 visa was created by Congress in 1990 as a vehicle for wealthy foreigners to obtain permanent residence by making a substantial investment in the U.S. The original provisions of the Immigration Act of 1990 set aside 10,000 visas per year for foreigners who invested between $500,000 and $3,000,000 in a new commercial enterprise that created at least ten fulltime employment positions for U.S. citizens or lawful permanent residents of the U.S.³ In the following year, the implementing rule provided that the minimum investment amount should be $1,000,000, with the exception of investments in "high-unemployment areas" or "targeted employment areas" ("TEA's"), which were defined as rural areas, or areas where unemployment rates were at least 150% of the national average. For these areas, the minimum investment amount was reduced to $500,000.⁴

In 1993 Congress adopted the "Immigrant Investor Pilot Program," which provided, among other things, that the immigrant investor could invest in "Regional Centers," funds that were defined by geography and scope of activity, and approved by the Immigration and Naturalization Service (the "INS," later reorganized under the Department of Homeland Security as the U.S. Citizenship and Immigration Services, or "USCIS").⁵

Investing in Regional Centers would have the obvious advantage of allowing investors to pool their resources and thereby undertake larger projects. Less obvious was the fact that it would relieve the immigrant investors of much of the responsibility of management of the enterprise. But perhaps most important was the provision that Regional Centers would be permitted to demonstrate that they had created ten jobs either directly or indirectly.⁶ Indirect job creation in this context means that the invested dollars have a multiplier effect as wages are paid, spent, taxed, and reinvested.⁷

For these reasons, TEA's and regional centers have come to dominate the EB-5 landscape; at present, approximately 90% of EB-5 investments are in Regional Centers, nearly all of which are located in TEA's.⁸ Thus, $500,000 in a Regional Center has come to be regarded as "market" for an EB-5 visa and green card.

III. USE OF LP STRUCTURE FOR REGIONAL CENTERS

The LP has become the vehicle of choice for many regional centers, particularly those that are involved in real estate development. There are a number of reasons for this, including pass-through tax treatment and the ability of the general partner both to maintain control and to receive profits that are disproportionate to its contribution of equity.⁹ (In the typical structure, the owner of the Regional Center acts a general partner, and the immigrant investors are the limited partners.)

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And there is one other reason: The regulations expressly permit it. Under federal law, a LP is a permissible corporate vehicle for a Regional Center, provided the immigrant investors are actively engaged in the management of the enterprise. As evidence of active engagement in management, a frequently cited provision reads as follows:

If the new enterprise is a partnership, either limited or general, evidence that the petitioner is engaged in either direct management or policy making activities. For purposes of this section, if the petitioner is a limited partner and the limited partnership agreement provides the petitioner with certain rights, powers, and duties normally granted to limited partners under the Uniform Limited Partnership Act, the petitioner will be considered sufficiently engaged in the management of the new commercial enterprise.¹⁰

The Uniform Limited Partnership Act (ULPA) is one of several model acts drafted by the National Conference of Commissioners on Uniform State Laws (NCCUSL), perhaps the best known of which is the Uniform Commercial Code.¹¹

While it is a well-known dictum among business lawyers that a limited partner should not become involved in the management of the partnership, and that failure to observe this could result in the loss of the limitation on liability, it is notable that this restriction does not appear in the applicable provision of the ULPA:

A debt, obligation, or other liability of a limited partnership is not the debt, obligation, or other liability of a limited partner. A limited partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for a debt, obligation, or other liability of the partnership solely by reason of being or acting as a limited partner, even if the limited partner participates in the management and control of the limited partnership. This subsection applies regardless of the dissolution of the partnership.¹²

As of this writing, NCCUSL's website shows that twenty-one states and the District of Columbia have enacted the ULPA.¹³ However, adoption of NCCUSL's model acts is never done wholesale; various provisions are negotiated and revised, and therein lies the problem. For example, the corresponding provision of California's Uniform Limited Partnership Act of 2008 provides as follows:

A limited partner is not liable for any obligation of a limited partnership unless named as a general partner in the certificate or, in addition to exercising the rights and powers of a limited partner, the limited partner participates in the control of the business. If a limited partner participates in the control of the business without being named as a general partner, that

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