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Thursday, July 2, 2015
The Shareholder Loan Source of Funds is Alive and Well
Following USCIS’ recent stakeholder calls and the guidance issued on April 22 which signaleda departure from generally accepted successful strategies for source of funds, the industry has been abuzz with rumors as to what USCIS will and will not accept as the basis of a cash investment. One specific area of confusion involves Shareholder Loan cases. But to appropriate a famous quote by Mark Twain, rumors of the death of the Shareholder Loan case have been greatly exaggerated. By way of background, many investors – especially those in China – prefer to make an EB-5 investment by investing cash derived from a loan. USCIS (taking a position that we would argue is not supported by the regulations) requires such loans to be collateralized with a personal asset valued at least as much as the loan itself. Although loans from banks collateralized with real property are the most common, many entrepreneurs seek loans from companies that they own, collateralizing their ownership equity as opposed to taking a profit distribution. The above-linked departure from historical USCIS practice affects these kinds of cases as well. Very recently at Greenberg Traurig we have received an I-526 approval following an RFE relating to a shareholder loan case. In this case, the Petitioner received a RMB 3.4 million loan from his company in which he held a 40 percent ownership. The collateral of the loan was his ownership in the company, and repayment of the loan was to be made from his share of company profits. USCIS issued an RFE questioning whether the loan was fully collateralized by the Petitioner’s assets specifically by questioning the method of repayment.
In response to the RFE, we argued that USCIS misapplied the regulations and did not fully read the loan contract. Specifically, the Petition included financial statements evidencing that the company held total owner’s equity of RMB 9,832,916. We argued that the Petitioner’s 40 percent of this interest – RMB 3,933,166 – was more than sufficient to collateralize the RMB 3,400,000 loan. Further we argued that even though the loan could be repaid through future profit distributions, the source of the repayment is not relevant to the source of funds underMatter of Izummi, the regulations, or the May 30, 2013 Memorandum.
The case was approved less than two weeks after response. So what are the key takeaways for Shareholder Loan cases? Given USCIS’ ambiguous new approaches to cash investments derived from loans, we strongly recommend the following:
1. The loan needs to be secured by the investor (or at least the giftor’s) shares. We have received reports that loans secured by the future profits are being denied because the investor/giftor does not yet own the profits as they have not been distributed. Thus while a loancan be repaid from profits, the actual collateral in a shareholder loan case must be the shares themselves.
2. The value of the pledged ownership interest needs to be greater than the value of the loan. As explained above, USCIS is accepting the formula of (Percentage Ownership) x (Total Owners’ Equity) = Value of Collateral. Thus if a petitioner owns 50 percent of the company, the total Owners’ Equity must be at least RMB 7 million to support a RMB 3.5 million loan. If the Owners’ Equity is less, USCIS is likely to consider the loan to be unsecured and deny the case.
3. The Shareholder Loan contract needs to explicitly state the terms of the loan. USCIS is unlikely to consider the contract to be valid without stating the loan amount, interest rate, usage of the loan (see below), and collateral. Further a Shareholders’ Resolution will also bolster the credibility and lawfulness of the loan.
4. In line with the guidance issued on April 22, the usage of the loan must comply with an EB-5. USCIS will question a case if the loan reflects a specific purpose or restrictions incompatible with EB-5. Ideally, the loan documents will explicitly reference the investor’sintended immigration through EB-5 investment and not include any limitations on investing in equities.