As potential EB-5 investors are likely already aware, one of the strictest requirements for an EB-5 visa is proving a lawful source of funds. USCIS’ policy has extensive rules on how funds for an EB-5 investment can be sourced and properly demonstrating they meet those requirements is one of the most important steps in the process for an EB-5 investor. While USCIS guidelines say that “cash” is an appropriate source of funds for an EB-5 investment, since 2015 USCIS policy dictated that cash an EB-5 petitioner obtained from a third party loan did not in fact constitute cash, but “indebtedness”. USCIS used this policy to deny I-526 petitions with unsecured loans as a source of funds, leaving potential investors with less options to fund their EB-5 investment. A recent court ruling may have changed this practice:
Background: Zhang v. USCIS
The case in question is Zhang and Hagiwara v. USCIS, which was decided in the plaintiff’s favor by a US appellate court last October. In 2013, Zhang and Hagiwara each borrowed $500,000 in cash from businesses they owned and used the funds to invest in an EB-5 project. However, after USCIS’s 2015 reinterpretation of EB-5 guidelines ruled that unsecured loans could not be used as a source of funds, the plaintiffs’ petitions were denied by USCIS. They then filed a suit against USCIS, arguing that the denial of their petitions was an “impermissible interpretation of the governing regulation”.
Zhang and Hagiwara went on to win their case in district court in late 2018, USCIS then appealed the ruling to the US court of appeals in 2019. In October 2020 the Circuit Court once again ruled that USCIS’s interpretation of the rules was incorrect and that unsecured loans were a legitimate source of funds for an EB-5 investment. In upholding Zhang and Hagiwara’s victory the court wrote, “Text, structure, and regulatory context show that the term ‘cash,’ as used in 8 C.F.R. § 204.6(e), unambiguously includes the proceeds of third-party loans. Because USCIS’s contrary construction is impermissible, we affirm the district court’s decision to set aside the denial of the plaintiffs’ petitions.”
Potential Changes to USCIS Policy
After ruling their appeal last October, the only option left for USCIS was to appeal the decision to the US Supreme Court, an option that the agency certainly may have considered. However, last month Zhang’s I-526 petition, and its unsecured loans, were approved by USCIS. This would appear to signal that USCIS does not intend to further appeal the Circuit Court’s ruling.
While Zhang’s victory in Court and the approval of his I-526 petition are certainly victories for EB-5 investors everywhere, there is still a disconnect between the court’s ruling and USCIS policy manual. Despite the approval of Zhang’s I-526 petition USCIS has not yet changed its online policy manual, which still states that EB-5 investors must be secured by an investor’s assets.
So What Does this Mean for Investors?
As shown by the Zheng ruling, the courts are clearly on investors’ side in this matter, and believe that unsecured loans qualify as a legitimate source of funds for an EB-5 investment. Although Zhang’s case appears to set a firm precedent, potential investors should still be cautious and do their due diligence before they use unsecured loans as their source of funds. We will need to continue to see how USCIS reacts to the court’s ruling, and watch for any changes in regulations; however, the clear court ruling in favor of investors certainly makes unsecured loans a viable option to consider for your EB-5 investment. Potential investors who wish to use an unsecured loan should absolutely consult with an immigration attorney before making any decisions or commitments.
While we here at EB-5 daily remain cautiously optimistic about the Zheng decision, it certainly appears that USCIS is moving towards once again accepting unsecured loans as a legitimate source of funds.