On December 15, 2015, Congress passed an Omnibus appropriations bill containing, among other things, an extension of all current EB-5 rules (with no modification) until September 30, 2016 (“2016 Extension Period”). Congress recognized the need for reform of the abuses that have occurred in the EB-5 program, and the months leading up to the September 30, 2016 deadline were critical in determining whether the various interest groups and stakeholders could work together with Congress to enact meaningful reforms to the EB-5 program.
The EB-5 Program continues to receive heightened scrutiny from regulators. The Office of Compliance, Inspections and Examinations (“OCIE”) of the SEC published its “Examination Priorities for 2016” (“Priorities”), pursuant to its National Exam Program. The Priorities are published annually and highlight “certain practices and products that OCIE believes to present potentially heightened risk to investors and/or the integrity of U.S. Capital Markets.” For the first time, the Priorities specifically included the EB-5 Program and stated that the SEC will, with respect to private placements and offerings in connection with the EB-5 program, “evaluate whether legal requirements are being met in the areas of due diligence, disclosure, and suitability.” In addition, the Financial Industry Regulatory Authority (“FINRA”), which regulates broker-dealers, issued its “2016 Regulatory and Examination Priorities Letter” (“FINRA Examination Letter”), dated January 5, 2016. The FINRA Examination Letter states that FINRA’s “focus on private placements in 2016 will address concerns with respect to suitability, disclosure and due diligence. These concerns are relevant regardless of the underlying industry of the issuer or the type of investment (e.g., notes offerings, pre-initial public offering investment funds, real estate programs, EB-5 investment funds or start-up companies).”
The U.S. Senate Judiciary Committee held a hearing titled The Distortion of EB-5 Targeted Employment Areas: Time to End the Abuse, on April 13, 2016. The hearing constituted the third hearing on the EB-5 Program that the Senate Judiciary Committee has held this year regarding extension of EB-5 Regional Centers. The April 13 hearing focused on TEAs and whether urban, rural, and suburban areas should be able to compete equally for EB-5 capital.
Congress again extended the EB-5 program (for the fifth time), with no changes, on September 28, 2016, under a Continuing Resolution to avoid a shutdown of the U.S. government at the end of the fiscal year, and the President signed the bill into law on Sept. 29 (H.R.5325; P.L. 114-223). But the extension will expire on December 9, 2016. The failure to extend the program any further likely is a result of the increased fraud and scandals involving the EB-5 program, which have weakened the popularity of the EB-5 program over the past few years and reduced the number of applications filed, and the fact that this is a presidential election year. There also is no obvious or organized group currently lobbying to reform the program. But if ultimately passed, a new EB-5 bill likely would redefine TEAs, and raise the minimum investment requirement -- which hasn’t changed since 1992 -- from $500,000 to $800,000 for high-unemployment areas and from $1 million to $1.2 million for low-unemployment areas. As noted earlier in this article, lax oversight and instances of outright fraud necessitate major reforms of the EB-5 visa program. For example, Chinese investors who file an application at the present time can expect to wait five to seven years to obtain a visa.
See David North, EB-5 Program is Renewed, but Only for a Couple of Months, Center for Immigration Studies, September 29, 2016, available at http://cis.org/north/eb-5-program-renewed-only-couple-months, which states, in part, as follows:
The reformers, who will have another bite at the apple in the lame duck session after the elections, want two things: an integrity package, which will make it harder for grafters and perhaps foreign agents to manipulate the program, and a location package that will make it harder to continue to fund big, glitzy projects in prosperous parts of big cities — the current practice.
I suspect that the integrity package is less hard on the big city middlemen, and thus has a better chance of success than the efforts to get the program to do what it was originally intended to do, to funnel alien money to depressed American areas. The original purpose has been blunted over the years by both clever middlemen and by the sleepy federal regulation of the program.
A letter dated October 3, 2016 by the Congressional Research Service (“CRS”), at the request of a member or members of Congress, questioned the validity of the legislative extension of the EB-5 Regional Center Program, although it reached no firm conclusion. The apparent confusion centers on a legal technicality as to whether a funding bill (the Continuing Resolution) can extend the fee-supported EB-5 program without specific language that it is fee-supported, as opposed to most of the rest of the federal government, which is funded by appropriated funds. This has led to speculation that the possible ambiguity may lead to a slowing of activity in EB-5 programs by foreign investors until this issue is resolved (although currently funded EB-5 projects would not be affected). But see Laura Foote Reiff, Congressional Research Service Analyzes Validity of EB-5 Program Extension, The National Law Review, October 6, 2016, available at http://www.natlawreview.com/article/congressional-research-service-analyzes-validity-eb-5-program-extension. The article states in part, as follows:
In its letter, CRS makes no firm conclusion as to the way in which the CR’s operative language should be interpreted with respect to the EB-5 program. Rather, the letter highlights the fact that section 101 of the CR could be read broadly or narrowly, with different results and points out that in its view, there is some ambiguity in the way the law was drafted.
Despite CRS’ view of the CR and its language relative to the EB-5 program, we are confident that Congress successfully extended the program and intended to do so. U.S. Citizenship and Immigration Services (USCIS) as well as the United States Office of Management and Budget (OMB) interpret the language as validly extending the program.
We have no indication from OMB or the USCIS that either believes the EB-5 program was not extended by H.R.5325. Until either agency makes public any different interpretation of the current CR language, EB-5 stakeholders should be confident that the program has been successfully reauthorized through Dec. 9, 2016.
EB-5 financing for commercial real estate, which has increased dramatically since 2008 when financing for new development was very difficult to obtain, has been, and continues to be, a valuable source of funds for many worthwhile projects in the United States, many in the largest cities, although Congress recognizes the need for reform with respect to certain aspects of the program. The EB-5 program has already been reauthorized five times and has resulted in billions of dollars in capital investment, and has created tens of thousands of new jobs throughout the United States. Although certain projects have experienced problems in recent years, this program has nonetheless provided a measurable and much needed financial benefit to many businesses and local economies. All parties participating in or interested in EB-5 financing should closely monitor continuing developments in this area, and interested stakeholders hopefully will collaborate in an effort to approve of and implement the necessary reforms to the EB-5 program so that further extensions will not be required.
