Featuring special guest securities attorney Mark A.Katzoff, – Hosted by Kurt Reuss and Rupy Cheema
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 NCE Managers and EB-5 investors face when re-deployment must be considered.
Many NCE’s 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 (New Commercial Enterprises) 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 USCIS (U.S. Citizenship and Immigration Services) 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.
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.
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
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
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
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
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.
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
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
Cheema: What are the manager’s options?
Can the Manager decide “there’s a project that I like or I have vetted and this
is the project we’re going to reinvest in,” or is the Manager required to give
Mark Katzoff: That’s really up to the Manager, and what the Manager chooses to do can have an impact on the level of disclosure that would need to be provided to investors. The Manager may not have a particular project in mind and either define or not define parameters that they would need to meet for reinvestment, and basically tell the investors to give us the authority and trust us.
If they have a particular project in
mind, for which they want to seek the consent of the investors, or they want
to give the investors the chance to choose between multiple projects, then that
would require the NCE to provide the investors with a reasonable amount of
detail regarding the proposed projects. Essentially, the equivalent of what
they provided in the original offering documents.
Cheema: Does the Manager have an obligation to keep
that redeployment in a very similar market or risk level?
Mark Katzoff: Again, it depends. There are some agreements which give them Manager some
discretion for reinvestment and may require that the investment either be in a
similar industry or of a similar risk profile. Basically, if the agreement is
being amended and there is no particular guidance on that, then the Manager has
a bit more flexibility.
One particular concern is under the
USCIS guidance. The new investment has to be consistent with the scope
of the NCE’s ongoing business. So if the NCE, in its initial purpose is very
rigid and just talks in terms of the first investment, then as a matter of
USCIS policy, the Manager would really be limited in terms of finding a
subsequent investment consistent with the initial investment.
If the business purpose of the NCE
is broader, and for some of these older NCEs there may not necessarily have
been a reason to do that, then the Manager may need to find something that’s very
similar to the initial investment.
Cheema: One of the challenges, considering the requirement that the
redeployment be of a similar risk level is, who determines that? And getting
that opinion, I imagine, would be costly, and it may be challenging to find
something of a similar risk profile?
Mark Katzoff: Similar risk profile really is a very subjective term and
it would be sort of difficult to find a 3rd party that would be able to say
that without some degree of caveats.
The best you can do is look at some of the quantitative aspects of the
So investors come to realize they
won’t get their immigration benefits in that timeframe they expected, and the
NCE realizes it needs to redeploy. Would an investor be entitled to a higher
rate of return than they originally accepted?
Mark Katzoff: It wouldn’t necessarily be the case that they’re entitled to a higher rate of return. The Manager has the authority for redeployment unilaterally, in which case investors are stuck with whatever the original economic deal was. But, that original deal may have been structured so that the interest rate starts ballooning to provide the investors with an additional return for the risk; the longer it takes to get their EB-5 Green Card, then, arguably, the larger risk they’re taking.
Kurt Reuss: Well, we’re likely motivating the NCE to repay as quickly
as possible or even the developer to repay as quickly as possible.
Mark Katzoff: Exactly!
Kurt Reuss: But now we’re in a situation where through no fault of
the developer, and through no fault of the NCE, the investor needs to keep
their money at risk.
It seems to me that that Manager is
still in a pretty strong negotiating position with investors to say, “listen,
if you want your money back before you get your immigration benefits and you
want to abandon your petition, that’s fine, but if you want to maintain your
investment, I’m going to need to reinvest it,” and I don’t see why the Manager
has much motivation to increase the investor’s rate of return at that point.
Mark Katzoff: Well, if the increase is already built into the documents, then the Manager has essentially two choices. One is to go to an investor and say, “this is taking longer than we all expected and we need to redeploy. In order to be able to redeploy successfully, we need to maintain the lower initial interest rate,” and get the investors to agree to amend the agreement to keep the interest rate where it is for a few years.
The flip side to this is the
investors decide they want to play chicken, to the extent that the Manager is
seeking their consent for reinvestment, and they say “if you want our consent
then we want a higher return to give you an incentive to try to return the
funds as soon as possible.”
Kurt Reuss: Obviously, the number one goal with the reinvestment decision is the preservation of capital. No one wants to lose the money, but the jobs have been created, so we’re not desperate about creating jobs anymore. We’re just looking for a place to put the investors money that’s going to meet the guidelines that USCIS has laid out.
But I still don’t see how these
investors have any leverage to negotiate a higher return. In fact, if the Manager
decided that to placate investors and offer them a higher rate of return, they
might need to make a more risky investment. Right?
Mark Katzoff: I would say yes. Again, the investors may want to try to
negotiate for a bigger piece of whatever’s available for the return on
investment in exchange for the right to reinvest.
Kurt Reuss: Going in a different direction for a moment. As a
securities attorney, Mark, you are going to have to help create the documents
to address this situation. What are some of the things that you have to look at
when you’ve got a situation where the documents didn’t originally contemplate
Mark Katzoff: If there was absolutely no contemplation of redeployment in the documents, then likely that also means that there was no discussion of the risks of redeployment. So in a scenario where the NCE has decided to go to the investors and get their consent for authority for redeployment, you want to have some discussions of the risks involved, and especially when they’re not seeking authorization for a specific project, but basically a blank check consent to allow the NCE to re-invest the funds.
Kurt Reuss: And what percentage of the documents out there do you
think will require this adjustment?
Mark Katzoff: It’s hard to come
up with an exact percentage but I suspect that most of the documents had at
least some provision for redeployment. It may be the case that what they’re
allowed for in terms of timeframes may not be adequate under the current retrogression scenarios.
It may be the case that even if
there was some authority to redeploy, there may be a requirement that the
life cycle of the redeployment investment is still too short to continue to
allow the funds to be maintained at risk during the full sustainment period. I
think that’s the likelier scenario.
Kurt Reuss: So to summarize, we
talked about the offering documents and whether they contemplated redeployment
or didn’t fully contemplate the situation we’re currently in, and we’re
considering what kind of consent we need from investors or whether we need any
And if we do, then how do we get
that consent. And consider whether consent might require some
negotiation with investors. Is that accurate and is there anything else that we
can add to that.
Mark Katzoff: That’s all accurate.
Reuss: What about a situation where
agents are expecting to get a portion of the rate of return each year? How much
does that come into play in the situations that you’ve seen.
Mark Katzoff: That is another potential factor. If the agents are
getting a portion of the return then they obviously would resist any attempt to
reduce that return.
Kurt Reuss: Do they become part of the negotiating parties, where
investors want a higher rate — and may not have even known what their agents
were earning when they signed up and now documents need to be revised?
So, is it your experience that
you’ve got a three way conversation, where the Manager is attempting to make an
investment that is as safe as possible — which is in the benefit of the
investors, not necessarily in the benefit of agents, although they do have a
reputation that they want to protect — but the agents are also trying to maintain
this recurring revenue stream that they’ve been getting, for as long as
possible? Have you seen this play out?
Mark Katzoff: I haven’t seen a lot of circumstances where it’s played
out that way, but again, certainly the agents could find themselves, as they
often do, arguing in what they view to be the best interest of the investors,
but is also, as it turns out, in their own best interest.
Kurt Reuss: So what is your experience thus far in this ménage à trois between the agent, the investors, and the Manager,
all looking after their own interests?
Mark Katzoff: I think under the circumstances the agents would tend to
argue that their interests are, for the most part, aligned with the investors.
Kurt Reuss: Doesn’t it seem just the opposite. That they’re actually
completely not aligned, because the investor wants as much as he can get, with
as little risk as possible, and the agents probably are more concerned with a
higher rate of return.
Mark Katzoff: Well, the other scenario I suppose is the investors are
interested in getting their funds back as quickly as possible and depending on
how the agreements are structured, if the advisor is continuing to get a fee as long
for as long as the funds are invested, then they actually have an interest in
seeing the funds stay invested for as long as possible.
Kurt Reuss: Right. So the agent motivation might be to have another
long-term duration, where the investors want as much liquidity as possible.
Mark Katzoff: Well, the Manager, depending on their proposed use of the
funds, may want to have a little longer time frame to fully utilize the funds.
The advisors, they’re happy to see an extended timeframe of the return of the
money, and the investors would like to see their money returned as soon as possible.
There’s actually another potentially interesting piece. As a negotiating point among the parties, a lot of the agreements provide that investors can only get their money back on I-829 approval, as opposed to at the end of the sustainment period, because nobody contemplated a few years back that USCIS would allow funds to be returned at the end of the sustainment period.
So to the extent that agreements
don’t allow for it, if I’m a savvy investor and I’m saying, you’re asking me to
amend the agreement to allow for reinvestment. Maybe investors start pushing
for an adjustment to the term of when they get their money back.
So long as we’re amending, we ought
to also allow for earlier return of the funds since it’s not compromising our
Kurt Reuss: Sounds like a nice tidbit for savvy investors.
Kurt Reuss: It seems that relative to a redeployment decision, the very first thing that investors and Managers need to discuss with their attorneys is how tightly bound are they are to the original NCE’s purpose?
Mark Katzoff: Correct.
Reuss: Once you’ve defined what the NCE
was set up to do,
should Managers come up with a number of
options of how the NCE can stay within that scope and still provide
reinvestment options that offer safety and liquidity for the benefit of the
Mark Katzoff: Yes. Now there may be
provisions in the agreement to deal with it. In some of the agreements I’ve
worked on there have been specific requirements in terms of how redeployment
needs to be structured and what types and the timing of liquidity the redeployed investments
have to provide for.
Kurt Reuss: So that’s the framework that we need to work within?
Mark Katzoff: Yes.
Cheema: Mark, this is may be a bit off
the topic but I’ve seen where investors can be liquidated at different times as
they become qualified to get their money back. But I always wonder, if some
investors get liquidated, and then the fund loses its investment and the remaining investors
don’t get their money back, what are the consequences? Doesn’t the NCE have to treat all the investors equally?
Mark Katzoff: Well, it depends on how the agreements are structured.
EB-5 is sort of an unusual case. Under most conventional funds one would expect
that distributions would be made to all investors at the same time.
In the case of the EB-5 funds, investors wind up being eligible for return of their funds at different times and the agreements generally provide for that by saying, “to the extent we have money to return capital to investors, we can only return the capital to investors who are eligible to receive their return of capital without compromising their visa applications.” So that’s something which is already built into the EB-5 documents.
And as long as at the time the
company is making the distributions it’s solvent and it’s at a later date that
suddenly the NCE loses the rest of its investment, it’s not necessarily an
issue that they previously were able to return funds to just some of the
Cheema: Mark, do you have any overall guidance for
issuers who are in this situation where they hadn’t made the provision and are having
to redeploy now?
Mark Katzoff: The first consideration is to take a careful look at your
agreement and to the extent that you’re comfortable that you’re able to make the
changes unilaterally to permit redeployment without needing the consent of
investors. But to the extent that you do go to the investors for their consent,
make sure that you couch it in a way where you’re providing them with adequate
disclosure of what it is you’re planning to do, because in the end, consent is meaningless
unless it’s reasonably informed.
Cheema: And what would be your advice to
investors who are being asked by the Manager for their consent?
Mark Katzoff: If that’s all they’re
asking for, I think the question is, if you’re worried about the prospects of
another investment, start by asking, can the funds stay in the initial investment? If the answer
is no, whether because the recipient of the funds has a right to repay, then
ask about what the intention is with respect to the redeployment. What types of
how is it structured? How is it going to impact on my ability to get my money
For NCE’s that haven’t contemplated redeployment, they must look at the original agreement to determine if they are comfortable making unilateral changes. To be aligned with that agreement, and to meet USCIS requirements, managers need to tread carefully. Here are some key takeaways from this podcast:
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