12 Jun June 2017 – How New Legislation Will Impact Source of Funds
JUNE 2017 By I.A. Donoso & Associates
I. Proposed EB-5 Program Revisions in the US
On 13/01/2017, the Department and Homeland Security (“DHS”) published a proposed rule, titled “EB-5 Investor Program Modernization” (“Proposed Rule”), seeking to introduce significant changes to the existing EB-5 Immigrant Investor Visa Program (“EB-5 Program”). The Proposed Rule has not yet been adopted as a final rule by DHS.
The Proposed Rule explains the rationale behind new EB-5 regulations on priority date retention, increase to the minimum investment amount, and revision to the targeted employment areas (“TEA”) designation, among other changes.
On 28/04/2017, the U.S. Congress extended the EB-5 regional center program through30/09/2017, without any changes. Simultaneously, members of Congress are negotiating an EB-5 reform package. One such proposed law from Senator John Cornyn of Texas was circulated for discussion (“Cornyn Bill”). The key issues of Cornyn Bill concern: (1) raising the minimum investment amount; (2) revising the definition of TEA; and (3) establishing visa “set-asides” for certain investments. Another proposed law from Senator Chuck Grassley of Iowa was circulated on 15/04/2017 (“Grassley Bill”). The key issues include: (1) increasing minimum investment amount; (2) temporary “set-asides” visas; and (3) changing USCIS designations.
Increases in EB-5 Investment Thresholds
Both the Proposed Rule and the Cornyn & Grassley Bills include an increase of the minimum required investment for all new EB-5 investors. The proposed increase to minimum investment amount, if passed, would impact investor’s source of funds and result in a number of changes in the way investors may prove their source of funds.
In the Proposed Rule, DHS proposes to raise the standard minimum investment amount from the current USD1 million to USD1.8 million to account for the rate of inflation since the program’s inception in 1990. DHS also proposes to raise the investment amount for TEA projects from USD500,000 to USD1.35 million, which is 75% of the new standard minimum investment amount. DHS further proposes to adjust the minimum investment amounts every five years, based on the Consumer Price Index for All Urban Consumers (CPI-U) and the TEA minimum investment amount remains 75% of the standard minimum investment amount.
The Cornyn Bill proposes an increase to investment amount, which calls for USD925,000 in non- TEAs and USD800,000 in TEAs, while the Grassley Bill proposes to raise the investment threshold to USD1.2 million for non-TEAs and USD800,000 in TEAs.
By raising the current minimum investment amount, investors need to establish that they are the legal owner of the increased amount of investment capital and that those funds came from legal sources. While raising the investment amounts will increase the amount invested by each individual, some investors may be unable or unwilling to invest proposed higher level of the investment. The proposed increase might be a particular disincentive to investors who are struggling to reach the minimum investment amount.
Meanwhile, DHS will continue evaluating the source of investor funds for legitimacy and investors need to prove that he or she obtained the investment funds through legal means. It is worth noting that, along with the investment capital, investors also pay ancillary fees, including an administrative fee to the regional center handling the EB-5 investment, which may come under the scrutiny of U.S. Citizenship and Immigration Services (“USCIS”). Though current EB- 5 regulations do not extend the lawful source of funds requirement to the administrative fee, in practice, USCIS has shown its interest in the source of the administrative fee through requests for further evidence.
Priority Date Retention for Foreign Investors
In a positive development, the Proposed Rule would permit EB-5 investor to retain their priority date – the date that fixes their place in line for an immigrant visa number – if circumstances beyond their control require the filing of a subsequent EB-5 petition. This provision could aid foreign investors whose initial EB-5 petition is detrimentally affected by the termination of a regional center or a material change in a business plan. If finalised, priority date retention would be a significant benefit to Chinese EB-5 investors, who are currently subject to multi-year backlogs.
The comment period of the Proposed Rule ended on 11/04/2017. As the Proposed Rule proposed drastic reform to the EB-5 Program and received extensive public comment, it is difficult to predict the timing of when the regulation amendments could be adopted as final by DHS, but the Proposed Rule and the Grassley & Cornyn Bills are roadmaps of what to anticipate for EB-5 Program in the future.
II. New Currency Control Rules by the Chinese Government
Investors from mainland China currently make up majority of the participants in the EB-5 Program. China, however, has stringent laws to control the transfer of money out of China. China’s current regulations restrict individuals from transferring more than USD50,000 abroad annually and the investors need to go through several layers of transactions to transfer funds to the US for EB-5 investment.
The Chinese government has recently enacted new rules to further restrict the outflow of capital, making it even more challenging for Chinese EB-5 investors to transfer funds for EB-5 investment.
Starting 01/01/2017, Chinese individuals desiring to send capital overseas will be required to disclose the purpose of the money transfer to the Chinese government is a new requirement. Additionally, Chinese citizens will be required to confirm that they are not lending or borrowing funds to or from other Chinese citizens to evade currency restrictions.
Furthermore, starting 01/07/2017, Chinese citizens will only be able to transfer up to RMB50,000 (approx. USD7,201) per day out of China, as opposed to the current USD50,000 restriction per year. Financial institutions in China must disclose foreign and domestic transactions involving more than RMB50,000 and all foreign transfers by individuals of USD10,000 or more.
Just like the evidence for the lawful source of funds, the evidence for the path of funds must be clear and fully traceable. The path must clearly show that the funds have been lawfully transferred from the individual investor to the new commercial enterprise in the US. China’s new, strict controls on overseas investment may make it more difficult to comply and these regulations introduce additional parameters as to what would constitute lawful source of funds. This is particularly troublesome for potential EB-5 investors who may have been able to use the cooperation of friends and family to transfer funds out of China and other countries in the past.
With the implementation of the new rules, Chinese investors will experience more practical difficulties with foreign currency transactions that are likely to slow down currency transfer out of the People’s Republic of China. As it applies to an investor’s sources/path of funds, these delays and complications must be taken into consideration when considering transferring funds to the US for EB-5 investment.
As we wait for the Proposed Rule to take effect and with the implementation of new currency regulations in China, the industry is going through a period of major change. It will be interesting to see how things unfold over the next several months and hopefully the final version of the Proposed Rule will be adopted after properly vetting the interests of various market participants.
June 2017 Legislation Update
I.A. Donoso & Associates, based in Washington D.C., is uniquely positioned to monitor and report on developments in the U.S. Congress affecting the EB-5 Regional Center program.