Since the beginning of the COVID-19 outbreak in early 2020, the United States market has seen an unprecedented level of volatility. Businesses have struggled to stay afloat, and the U.S. government has scrambled to respond to the pandemic and the failing economy. Like most industries, the EB-5 world has experienced many changes and significant uncertainty throughout the pandemic, which has created concern for many foreign nationals involved in the EB-5 Immigrant Investor Program. Understanding what to look for in updated disclosures can help EB-5 investors reduce some of the stress caused by these unprecedented times and help foster a smooth EB-5 process.
Updated Disclosures Necessary For EB-5 Investors to Evaluate Risk
EB-5 investors must accurately assess the risks of their EB-5 investment and especially any potential new risks that have arisen in the midst of the COVID-19 pandemic. EB-5 operators and new commercial enterprises (NCEs) should provide investors with updates and securities disclosures that outline the effects of the pandemic and how the NCE intends to adapt. Such information can aid an investor in determining the best course of action to avoid jeopardizing their EB5 investment and immigration goals.
Due to the COVID-19 pandemic, EB-5 projects could be subject to hiring freezes, layoffs, temporary closures, and even a decrease in demand, if the project is in the travel and tourism industry. A well-prepared NCE may even feature disclosures that discuss how it plans to adjust its business model to overcome the obstacles presented by the pandemic. It is crucial that investors understand what should be in these disclosures, when they should be received, and what rights the investor has after receiving them.
What Documents Prepared Before COVID-19 Should Look Like
The United States Securities and Exchange Commission (SEC) has many laws and regulations in place to protect investors. Thanks to this governing body, EB-5 operators and NCEs are legally required to provide certain risk disclosures to EB-5 investors. The SEC’s webpage outlines the laws covering the general risks and the cautionary language that should be included in the disclosures.
Disclosures will most likely reference the safe harbors available to the NCE under the Private Securities Litigation Reform Act of 1995 (PSLRA). Although it is unlikely that they will directly mention COVID-19, they will probably still discuss risks connected to pandemics and public health crises. If a disclosure does not directly address COVID-19, it does not mean the offering is necessarily untrustworthy, but the investor should ensure the disclosure meets the SEC’s requirement of a “full and fair disclosure.”
SEC’s Full and Fair Disclosure Requirements
By law, investors must be offered documents that provide “full and fair disclosure” of material information on an investment. When EB-5 investors receive disclosures, they should remain aware of the Securities Exchange Act of 1934, which prohibits the disclosure of untrue statements of material fact as well as the omission of material facts that prevent previous statements from becoming misleading. To determine whether these regulations are being violated, it must be determined whether there is a substantial likelihood for an investor to consider a misstatement or omission an important factor in their decision to buy or sell an investment.
It is not always clear what qualifies as materiality, so NCEs should update investors whenever there are significant changes to an EB-5 project or a material fact crops up that could influence an investor’s decision. If the NCE fails to do so, they could possibly be violating some of the SEC’s laws and regulations.
While the SEC does have higher standards, United States Citizenship and Immigration Services (USCIS) adjudicators may also view COVID-19-related changes as material changes. Such changes to an EB-5 project could potentially cause delays in petition adjudication and, in the worst-case scenario, denials.
How USCIS Defines Material Changes
While USCIS is somewhat flexible on the differences between initial project documents and final outcomes, it is important that investors possess the necessary documents to update USCIS so that they do not face a petition denial. Investors need security disclosures so they can ensure compliance with the EB-5 eligibility requirements during their investment period.
Material Changes According to USCIS
Many different changes can affect an EB-5 project, and while they do not all result in I-526 denial, they can create significant delays in the adjudication process. Some of the material changes include the following:
- Changes that involve the investor’s capital in any way (changes to sources of EB5 investment funds is a common reason for a material change refiling)
- Changes to the business plan, including project scope, timeline, and hiring plans
- Changes in regional center sponsorship, particularly if due to regional center shutdowns
- Major changes and updates to the project documentation
In most cases, if USCIS determines a change to be a material change, the EB-5 investor is required to submit an updated I-526 petition that outlines the new position of the project.
Material Changes in Post-COVID Disclosures
Updates and disclosers prepared after the COVID-19 pandemic should specifically address COVID-19 and the risks associated with the pandemic. EB-5 investors should look for previous projections that may no longer be valid and which future events and plans may be suspended or permanently halted. Disclosures should also present any additional risks triggered by the pandemic and traditional risks that have increased as a result of the pandemic.
Specific Topics Disclosures May Address
Examples of specific topics that may be discussed include construction delays, the suspension of operations, and a decrease in demand. An NCE may also provide changes that are expected to take place to aid the business’s successful recovery after the pandemic. Any material changes that may affect the investor’s EB-5 eligibility should be outlined, as well the investor’s rights when a material change requires their consent.
Next Steps After Updated Securities Disclosures
EB-5 investors should work closely with an experienced immigration attorney and EB-5 industry professionals to thoroughly assess these disclosures and their future options. An immigration attorney can help ensure that the investor, the EB-5 project, and the EB5 investment all remain compliant with EB-5 program requirements. An experienced immigration lawyer can also help EB-5 investors plan an exit strategy that helps them to avoid the negative impacts of COVID-19 and not jeopardize their future immigration goals for themselves and their family.