Last Minute Compromise on EB-5 Reform and Reauthorization – Glaring Issues that need to be fixed before this Bill becomes Law
By Mona Shah, Esq. & Omar Hakim, Esq.
Will they…won’t they…will they??…This has been the question EB-5 stakeholders have been asking for weeks. On social media, such as the Chinese WeChat, speculation has been rife, an article was widely circulated only this week quoting former Congressman Aaron stating that the law may be extended for another 2-4 months.
As the EB-5 reform calendar counts down to December 11, 2015 and the tensions rise, a bicameral, bipartisan proposal to reauthorize and reform the EB-5 Regional Center Program, due to expire next week, has emerged. The proposal, modifying the original legislation pending before Congress, was issued by Senate Judiciary Committee Ranking Member Patrick Leahy (D-Vt.) and Chairman Chuck Grassley (R-Iowa.), with the support of House Judiciary Chairman Bob Goodlatte (R-Va.), Ranking Member John Conyers (D-Mi.), Immigration Subcommittee Ranking Member Zoe Lofgren (D-Ca.) and Congressman Darrell Issa (R-Ca.). The bi-partisan proposal, which extends the EB-5 program through September 2019, is scheduled to become effective on the date of enactment. Designed to increase transparency, it offers investors greater protections and more information about their investments, including existing business risks and conflicts of interest.
The bipartisan compromise also has the support of Invest in the USA (IIUSA), by far the largest association of regional centers and EB-5 stakeholders, as well as the Leadership Conference on Civil and Human Rights (LCCR). Unfortunately, the bill is not supported by all, in particular the EB5 Coalition.
In general, we think the revised bill has the potential to be good law. While no bill can satisfy all, there are, however, some glaring issues that we believe must be fixed in order to earn the EB-5 community’s support. In some respects, EB-5 leadership, including IIUSA, has “jumped the gun” in throwing its full support behind this bill. There are still very pressing “technical” changes that may need to be made, and we believe there is still time, the program will be severely damaged if these changes are not made.
First, and most importantly, though at first glance the revised bill does use a 12 census tract approach as requested by the EB-5 community to mirror the “California approach” to prevent gerrymandering, the actual language is much more severe and limiting than it initially appears. Additional language has been added in the bill regarding TEA configurations such that in practice, we still have an one-census tract approach in this bill. Leading EB-5 economist, Jeff Carr, has run an analysis that shows that there are virtually no areas that qualify for TEA designation under the 12 census tract approach in this bill that would not already qualify for TEA designation under a one census tract approach. This additional “gotcha” language that virtually eliminates the benefit of the 12 census tract approach must be eliminated and this should not be negotiable. If this language is not removed, then IIUSA and its membership should withdraw its support for the bill.
Second, there has been language that serves labor unions and other special interests groups added in at the last minute, the effects of which are difficult to fully understand without extensive analysis that there is simply not time for. Labor law should not be made through an EB-5 bill. These special interest provisions relate to labor certifications and obtaining the approval of local economic agencies before proceeding with EB-5 projects, among other things. We fear that these last minute add-ons have the potential to lead to unintended consequences that would severely hamper the EB-5 program. These additions should also be eliminated before the revised bill receives IIUSA’s and the EB-5 community’s full support. Otherwise, we believe the EB-5 community, at a minimum, needs a short-term extension to fully understand the effects of these provisions.
The proposal does attempt to combat fraud; it provides the Department of Homeland Security (DHS) with increased authority to investigate fraud, using a dedicated EB-5 Integrity Fund for such purposes. It permits DHS to deny or terminate applications where there is fraud, criminal misuse, or a threat to public safety or national security. The proposal expressly requires greater project oversight and attention to securities compliance.
The legislative compromise not only increases DHS enforcement functions, but raises the amount of investment required in Targeted Employment Areas (TEA) to $800,000, also including in the TEA definition, infrastructure projects. No one can deny that investment in infrastructure is not sorely needed. The terms of the proposal ensure that the corresponding capital and job creation occur in rural areas and areas with high unemployment as intended originally. The proposal also improves the calculation of job creation so that EB-5 projects truly create the statutorily required 10 jobs per investor.
In turn, DHS is expected to restrict preferential treatment in adjudications, accommodate premium processing and improve adjudication times, and administer the program as intended by Congress.
Thus, the bipartisan proposal addresses some of the most onerous problems attributable to in the existing EB-5 program: fraud, lack of disclosure, insufficient oversight, deviation from the TEA program objectives, and unjustifiable adjudication delays.
In summary, we feel this bill has a lot of positives that could potentially reform the program for the better and provide a solid long-term foundation for the program’s future. However, we must not allow this revised bill to be forced through Congress without key “technical” changes being made that could have huge, landscape changing effects on the long-term future of the EB-5 program.