Material Change: Managing the Inevitable During EB-5 Visa Retrogression 

This article originally appeared in The 47th Annual Immigration and Nationalization Institute Handbook, December 2014

Introduction

In light of upcoming backlogs in the EB-5 preference category, it is crucial for EB-5 project stakeholders to prepare for heightened risks posed by “material change.” As we anticipate delays, I advocate for clearer USCIS guidance on defining and managing material changes in projects. This proactive approach aims to protect investors and ensure the integrity of EB-5 investments amidst evolving regulatory landscapes and potential challenges posed by retrogression.

I have written before about the faulty legal premise supporting the material change policy of the United States Citizenship and Immigration Services (USCIS).²  At bottom, those articles advance a simple advocacy point: USCIS should rely on correct authority in formulating its policies. 

This article is more immediately practical and aimed at an audience of EB-5 project managers, by which I mean regional centers, developers, and funds responsible for structuring and maintaining EB-5 compliant projects.  I have two goals here: first, to alert EB-5 project managers that material change will be a far greater threat to achieving investors’ immigration goals once we have backlogs in the EB-5 preference category, currently anticipated to occur mid-2015; and second, in the absence of guidance from USCIS on what kinds of changes are “material,” to provide guidance based on my own analysis of changes to assess whether USCIS might view presented changes as “material.”    

As we go into an era of EB-5 backlogs, EB-5 projects and the USCIS material change policy are certain to collide as projects will undergo change –  some substantial – in the several years between when a project is first filed with USCIS to the time when all its investors become conditional residents.   EB-5 stakeholders will be served by focusing thoughtful advocacy on this problem in the coming year. 

In the meantime, this article may give regional centers, developers and fund managers and investors a sense of when inevitable changes may rise to the level of a material change.  In so doing, I hope to at least give a sense of what the craggy rocks looks like in the hope that it will help pilots to identify and navigate around them.  

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Material Change Problem Recap 

“Material change” is a concept that first found expression in the December 11, 2009 USCIS Policy Memorandum.  Importantly, this is not a concept that is rooted in the statute or USCIS regulations.   USCIS in its December 2009 Memo³ and again in the May 2013 Memo⁴ refer to two USCIS precedent decisions of the Administrative Appeals Office’s predecessor, Matter of Katigbak⁵ and Matter of Izummi.⁶  However, as I’ve explained in my prior two articles on material change, neither decision in fact stands for the propositions USCIS claims to ground its material change policy.   

Having said that, USCIS’s concern about mid-stream changes is not unreasonable; it’s merely questionably lawful in its current articulation.  Let us take an example. 

A project is affiliated with a regional center and proposes to manufacture widgets in Idaho.  The relevant entities are described in the I-526 petition or I-924 exemplar amendment, as are the use of EB-5 funds, project budget, other funding, and other factors describing the investment.  Jobs are modeled out by an economist and included along with a detailed market study, organizational and securities disclosure documents, all measuring 3-4 inches thick, seeking to establish bona fides and job creation potential of this widget making project.  The weight and relevance of each piece of evidence requires careful evaluation.  USCIS approves the widget project, finding that a credible case is made as to project compliance and viability. 

Then let us suppose that after all that, the project takes a different course.  Instead of manufacturing widgets, potatoes will be produced.  EB-5 proceeds will go to seed capital to grow the genetically superior potato, an offshoot of an existing giant potato producer.   From a USCIS standpoint, there is a problem because it has greenlighted granting conditional green cards to investors of the widget project, not the potato project.  USCIS does not know whether the potato project is credible and compliant, and moreover doesn’t know the reason for the switch.  Was there fraud, bad faith, poor planning, or some other culpable conduct precipitating the change?   

Under current USCIS policy as set out in the May 2013 Memo, if these changes occur before the EB-5 investors are admitted in conditional permanent residency status, the approved I-526 petition is revocable.  Pending I-526 petitions may be denied.  In either event, investors are required to start from the beginning of the process to file a new I-526 based on the changed project.   This is plenty bad enough for investors.  This risk increases multiple-fold once we have delays spanning several years before investors are admitted in conditional residency due to EB-5 visa retrogression.   

It is reasonable for USCIS to conclude that conditional green cards should not be allowed for investors who have invested in a project that may not be EB-5 eligible.  USCIS has a valid interest in seeking a policy and procedural framework to review large-scale changes that may affect eligibility.  The current material change policy has three problems, however: (1) it is based on flawed application of legal authority; (2) it does not define “material change;” and (3) it ignores equally effective methods to accomplish understandable government objectives with far less harsh consequences found in other immigration contexts.  These problems magnify exponentially in retrogression.    

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Material Change “On/Off” Switch:  Longer “On” Periods with Retrogression 

As mentioned above, material change under the May 2013 Memo has a rather unique timing feature.  

Before an investor’s conditional residency starts, material change nullifies an approved I-526 and makes a pending I-526 deniable.  After an investor’s conditional residency starts, however, the approved I-526 is undisturbed.  Moreover the I-829 based on the changed project may still be approved as long as the independent I-829 requirements are met – i.e. requirements to have invested, sustain the investment, and create the required jobs.  So the period of material change exposure for an investor starts when she files the I-526 (assuming that the project in fact is still as described in the I-526 business plan), through adjudication of the I-526 and the immigrant visa consular processing or adjustment stage, to admission into the U.S. as a conditional permanent resident. 

For consular processing investors under current USCIS and NVC processing times, this period is about 22 months to Immigrant Visa issuance plus an average of 3 months to enter the U.S., for a total of about 25 months. Considering that a project is scribed in the business plan months, say around 3 months, before the first investor files a Form I-526, and further considering that for a large project the I-526 filing period for investors may span many more months, let’s say 9 months, the last investor in a large project may not be admitted in conditional residency until about three years from the time the project was first penned in the business plan.  

This would be the hypothetical timeframe when the EB-5 visa category is “current,” meaning there is no wait required for an investor to proceed to consular processing or adjustment after I-526 approval.   

Once we have visa retrogression requiring investors to wait after I-526 approval for their priority date to become current before proceeding to consular processing or adjustment, we will have significantly longer time periods – spanning perhaps 4+ years based on the two year backlog the Visa Office currently anticipates – from the time an EB-5 project was first set out in a business plan to the time all the project investors are admitted in conditional residency.  It would be unreasonable to think that there could be no change in a project during that time frame.  The risk of changes rising to the level of “material change” increases with time, so retrogression escalates material change risks. 

Aside from the increased risk of material change occurring with retrogression, we also have increased likelihood of investors in the same project arbitrarily falling on the side of salvation or disaster.  

Suppose material change happens on date “x” in a $100 million, 200 investor project.  One hundred of those investors had obtained conditional residency before “x”; they are in the clear and their I-829s may be approved, material change notwithstanding.  One hundred other investors had yet to obtain their conditional residency.  Perhaps some had already received their immigrant visas but hadn’t yet landed in the U.S.  Some have children now over the age of 21 whose derivative status as “child” was protected under the Child Status Protection Act.  These investors’ I-526s are revoked or denied and are required to file new I-526s. 

With retrogression, that will mean that these investors will have to wait potentially 3 to 4 years before they obtain their conditional residency based on a second I-526 petition, during which time children previously covered may age out.   The disparate investor treatment problem will be more pronounced in larger projects with longer time periods for EB-5 fund raising and I-526 filing.  There will be more material change risks, therefore, to later subscribing investors in large-scale projects under the current material change policy.  

The project side of the EB-5 program – regional centers, developers, and funds sponsoring the EB-5 project – will also be affected.   If investors’ I-526 petitions are denied, it is currently market to return the full amount of the investment.  While the revocation scenario has not yet been prevalent enough to trigger a refund obligation, it is probable that it will be if material change-based revocations become more common with retrogression.  Projects will face the double prejudice of being deprived of the capital they initially raised and furthermore face difficulty in replacing those investors under the cloud of denial or revocation, and without assurance that USCIS will approved the changed project.   

It’s unlikely that USCIS considered these impacts of visa retrogression when formulating its material change policy, either in its first articulation in the December 2009 Memo or in its current version in the May 2013 Memo.   Year 2015 will be the first year the EB-5 program will face retrogression since the preference category was created in 1990.  However, there will be a pressing need for USCIS to address the three problems I’ve outlined above – sooner rather than later to get ahead of what may be potentially very serious consequences for investors and U.S. projects using EB-5 capital.  

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Better Solutions 

Again, USCIS’s concern regarding project changes reflects a fair understanding of its mission as set out in the May 2013 – to assure EB-5 program integrity and compliance with requirements.   USCIS should be apprised of and adjudicate project changes to assure both, but in a manner that avoids the three problems.  

First, USCIS would have greater integrity if it did not rely on the authorities it currently cites to support a need to adjudicate project changes – namely, Matter of Katigbak, Matter of Izummi, and Chang vs. United States.  If no authority on point can be found, simply resting on its general imperative to assure program integrity and compliance with program requirements is preferable to misapplying specifically referenced authority.   

Second, USCIS must articulate standards for when a change is “material.”  The current formulation in the May 2013 Memo amounts to “it’s material if it’s material.”  It borrows the materiality standard from a Supreme Court decision arising from a naturalization case, Kungys vs. United States, where the Court said that a fact is material if it has a predictable tendency to affect the adjudicator’s decision. 

That only makes sense where there are clear eligibility factors, almost in checklist-like fashion, such as length of U.S. residency, duration of physical presence, and residence within a USCIS district for 3 months prior to application.  So for example, a matter is material under Kungys if it affects determination of whether an applicant has been physically present for the required time.  This standard makes less sense, or requires greater elaboration, where the eligibility factors are more contextual and interdependent.  

The core of EB-5 project eligibility is feasibility of job creation.  This cannot be determined by ticking down an objective check list of facts and so cannot be compared to determining naturalization eligibility.  Because it’s a totality of the evidence determination by a USCIS examiner, the petitioner and applicant in the EB-5 context need more than “it’s material if it has a tendency to affect an examiner’s decision.”  That is so because any one thing or a number of things in different combinations may have such a tendency in EB-5 adjudication and so no one fact or a set of factors can be identified predictably.   

Third, there must be a better process with less harsh consequences.  USCIS need only to look to its own precedents in other immigration contexts permitting amendments.  Currently, investors, EB-5 project managers, and advisors all have no idea whether a change is material.  It is not entirely certain whether USCIS, itself, knows and whether or how it trains examiners to identify material changes.  If a change amounts to one project changing to a completely different project with no claim otherwise, under the May 2013 Memo, new I-526 petitions would need to be filed.  For changes short of delivering that level of certainty, there is no guidance.     

Understanding that USCIS has a valid interest in being apprised of changes and to adjudicate such changes to determine whether investors still qualify for EB-5 immigration benefits, USCIS should consider the following which would achieve its objectives, provide clearer procedure with more appropriately nuanced consequences: 

• Permit investors and EB-5 project managers to give notice to USCIS of the change on a Form I-924 if regional center-based or on a Form I-526 if not, both with fee, setting forth an amended business plan and economic impacts report, related disclosure supplements and transactional documents – all the documents reflecting the change. 

• USCIS should adjudicate the Form I-924 or the Form I-526 disclosure.  If it deems the change not “material,” it gives a Reaffirmation notice, as it does after adjudicating Intents to Terminate regional centers, that the project is still eligible. 

• If USCIS deems the change “material,” then adjudicate the changed documents to determine whether the post-change project is still eligible.  If the project is not eligible and does not meet EB-5 requirements, then it should deny the I-924 or the I-526.  As the investors are no longer participants in an EB-5 eligible project, at that point, their immigration benefits may be revoked or denied.  

• If USCIS deems the change not “material,” then it approves the I-924 or the I-526 as amendments to the previously filed I-924 or I-526, and the investors may continue their immigration process without interruption.  These investors, despite the material change, would not suffer loss of priority date and all its harsh consequences, amplified in retrogression, because the changed project still qualifies as meeting EB-5 requirements.     

USCIS indicated in the May 2013 Memo that it will devise a procedure to notify USCIS of changes.  As it has yet to do so, the above procedure offers a balanced solution respecting USCIS interests.  The proposed procedure contemplates two-part test to adjudicating material change:  first, adjudicate the change as material or not; if material, then adjudicate whether the materially changed project still qualifies.  If it does, then allow the investors’ immigration process to continue without interruption.  If it does not, then the changed project cannot support its investors’ conditional green cards.  

Finally, the effect of an ultimately adverse material change finding – meaning, a finding that the change is material and the subsequent change renders the project as not qualifying – is intolerable where some investors have cleared the conditional residency threshold while others have not in the same project.  If at least half of investors in the project have already obtained conditional residency status, there are strong policy and equitable reasons in favor of treating the remaining investors alike.  

Given the inevitability of change, and the greater likelihood of large scale occurring in the 4+ years from the time a project is first committed to a business plan, a project without material change for the time half its investors obtained conditional residency should be allowed to have the remaining investors also progress to conditional residency.  

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Material Change Factors

In the absence of USCIS giving stakeholders guidance, I have devised my own list of factors against which I evaluate clients’ project changes.   

First, I look at whether there is an impact on the job count.  If there are more jobs – for example, by greater construction spending – then that’s a positive factor, meaning a factor against the change being determined “material.” 

Second, I look at whether the primary industry or industries of the job creating activity have changed.  For example, if the project was originally a project in the manufacturing sector and the project is now construction and operation of a hotel, that’s a change from the original job creating activity, requiring different inputs to the economic impact model.  This is a negative factor.  On the other hand, if the original project contemplated manufacturing spinal surgical devices but then changed to manufacturing knee joint replacements, I would deem that to be in very closely related industries if not the same industry, a positive factor.  For the first two factors, consultation with economists is necessary.  

Third, I look at the whether there are structural or organizational changes in the investment.   By structural I mean, are there components of the project that have changed, and if so, what is the nature and scope of those changes?  For example, the original project encompassed construction of retail and condominiums.  The changed project encompasses retail, condos and no apartments.  

These are usually fact-sensitive inquiries that often turn on the job creation impacts.  If the project is in the same location with the same participants – that is, essentially an evolution of a project rather than a switch or change from one project to a different one – then I think a good case can be made as to the change being not “material” particularly if there is no adverse impact on job creation.   

By organizational, I mean are there changes in management or ownership of the relevant entities such as the new commercial enterprise of the job creating enterprise?  Does such a change impact project progress, for example by requiring additional consent or authority?  Is there a change in the structure of the investment – for example, originally the new commercial enterprise was making a loan directly to the job creating entity, and the change would involve the new commercial enterprise making an equity investment.   The greater the degree and nature of these changes, there is proportional movement toward materiality. 

Fourth, I look at whether there is an economic impact, in particular adverse economic impact, to the investors.   If originally investors were to get their pro rata share of 3% interest revenue, and now they’re getting only .25%.  If nothing else has changed to impact the business plan, this factor alone might not tip the change into “material,” but it could be in a basket of other changes that in their totality tip the balance.  

Fifth, I look at change from the perspective of the fiduciary:  is the general partner or managing member’s role in the change, if any, in furtherance of its fiduciary obligations to its investors?   For example, is the change of a major scale but is it necessary to protect the investors’ immigration and/or economic interests, in particular their immigration interests?  If so, then it’s a positive factor in defense of the change.   

Lastly, I check my intuition both before and after running the more technical analysis.  Does this change feel like one that USCIS ought to be concerned about?  Is it the kind of change that USCIS wants to guard the EB-5 program from?   

It must be said that even if my “gut,” colloquially speaking, tells me that a change should not concern USCIS – either because the change arises in good faith and/or because the change is substantial but the changed project is still eligible –that change may still be deemed material under the current policy and therefore trigger new I-526 filings.   

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Conclusion

Material change has not yet emerged as among the most pressing problems retrogression will herald.  This article is intended, therefore, as an alert.  To balance the alarm, I provide a proposal for a more sensible policy with specific procedural fixes, along with factors I examine in my own analysis of clients’ project changes.  With retrogression increasing the risk to every project encountering material change, it is clear we need a revised material change policy, and in the interim, greater awareness. 

Lee, Carolyn S. “Material Change: Managing the Inevitable During EB-5 Visa Retrogression .” 47th Annual Immigration and Naturalization Institute, 2014.