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Restructuring your NCE operating documents for redeployment

Special guest is Mark A. Katzoff, senior counsel, corporate, with international law firm Seyfarth Shaw. Mark has been practicing business and securities law for more than two decades and is an EB-5 expert. This discussion deals with the issues that New Commercial Enterprise (NCE) Managers and EB-5 investors face when re-deployment must be considered. Many NCEs did not made provisions for redeployment in their offering documents — so how do you allow investor funds to remain “at risk”? As most Managers aren’t registered investment advisors, under Securities rules, can they make a reinvestment decision? Learn what a Manager’s options and obligations are. Discover aspects that can determine similar risk profile. Can redeployment mean a higher rate of return? Learn what questions investors can ask — and what savvy ones can negotiate.

Rupy Cheema: What we’re discussing today is generally older NCEs that never made a provision for redeployment in their operating agreement or Limited Partnership agreement.

Mark Katzoff: So just to address why the issue is important, as we’ve seen with U.S. Citizenship and Immigration Services (USCIS) increased processing times for visa applications, the issue is that USCIS is requiring investors to maintain their funds “at-risk” until the conclusion of the sustainment period, which is the two-year-period after they’ve gotten their temporary visas, and given the processing times for I-526s that can be a while. Many older funds did not make provisions in their offering documents for redeployment

Mark Katzoff: A lot of funds may have structured their initial investments to have a maturity date of five to seven years out, in the anticipation that all of their investors would actually have received Green Cards by then, and obviously with retrogression that hasn’t happened.Funds may not have made provisions for a subsequent investment, so the initial consideration is if the fund agreement does not expressly permit reinvestment of the initial EB-5 investment, how do you address that to allow the fund to maintain the investor’s capital to be at risk over the sustainment period. Unilateral amendments to comply with EB-5 requirements may be included in agreements. Most agreements tend to be structured to allow for unilateral amendment by the Manager to comply with EB-5 requirements; the Manager can presumably allow for re-investment without having to go back and obtain the consent of the members to make a re-investment.

Kurt Reuss: Because the members have already consented to it in the original documents?

Mark Katzoff: Right, by giving the Manager discretion to amend the documents as needed to comply to changes in the EB-5 rules.

Kurt Reuss: Is that typical? Do most of the documents that were drafted at a time when we weren’t really contemplating the length of time it would take for I-526 approvals typically give the Manager that kind of discretion?

Mark Katzoff: In my experience, yes.

Kurt Reuss: So are there an issues with that? Is it straightforward that if the Manager has that ability to make adjustments to the offering documents without investor consent, then we don’t have a problem?

Mark Katzoff: There shouldn’t be a problem under those circumstances because the immigration rules are clear that the funds need to stay at risk. I suppose the potential issue is if you have a project where the useful life cycle of the funds is already concluded and the Manager, rather than continuing to extend the term of the initial investment, wants to redeploy the funds into a different project, there may be a potential question of if they have the option of maintaining the funds in the original project, whether there’s a need for redeployment in order to satisfy the EB-5 visa requirements or whether it’s a matter of convenience.

Kurt Reuss: So the Manager at this point has the right to make an adjustment because EB-5 rules affect investors. So the question is whether it’s in the best interest of the investors that he make that adjustment, make that reinvestment decision?

Mark Katzoff: This is one of the criteria the Manager would need to consider, yes.

Kurt Reuss: In almost all cases, the Manager is not a registered investment advisor. Does that Manager have the right, under Securities Rules, to make a reinvestment decision on behalf of investors?

Mark Katzoff: Generally, the thinking is that the Manager of these funds, since they’re really just doing one-off investments rather than really managing a portfolio of investments — for example, doesn’t need to be an investment advisor when Managers can’t redeploy without investor consent.

Rupy Cheema: So the next question is, if the Manager doesn’t have that discretion to make a reinvestment decision without the consent of the limited partners, what options do you typically suggest to the NCE?

Mark Katzoff: Well, the only real option, if the Manager does not have discretion and doesn’t have the option of maintaining the funds in the original project, or they would rather redeploy the money into a different project, is to obtain the consent of the investors to amend the agreement to allow for this.

Kurt Reuss: And is that a majority vote of investors? Is that the goal of the Manager to get more than half of the investors to acquiesce?

Mark Katzoff: It depends on how the agreement is drafted. Generally, I would expect the agreement would only require a majority.

Kurt Reuss: How is a majority vote determined?

Mark Katzoff: In terms of counting the majority, there’s a couple of approaches in agreements. One is actually requiring the affirmative vote of the majority. You send out a request for consent and you need to get those requests returned by a majority of the investors. The other approach, which is built into some of the agreements to try to provide more flexibility for the fund, particularly given the fact that we’re dealing with foreign investors, is a provision which states that unless an investor affirmatively votes against the request for an amendment within a set period of time, then they’re deemed to have voted in favor of the amendment.

Kurt Reuss: And is this language typically in the original documents where silence means consent?

Mark Katzoff: I would say it’s in the majority of the documents that I’ve seen.

Kurt Reuss: And even though it’s in those original documents, do you have any potential problem with that or do you think that the fact that it’s in the original documents gives the Manager the flexibility he needs?

Mark Katzoff: As long as this is clearly stated in the original documents, and as long as the Manager is providing a reasonable period of time to investors and not saying, you’ve got to turn this back around in two days — more like 10 days or two weeks, as a minimum, if not longer. I don’t think there’s an issue in relying on that. Obviously, it’s always better for the NCE when you have an investor affirmatively agreeing to the amendment because it makes it more difficult for the investor to challenge the amendment after the fact.

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