An Unsecured Loan is an Acceptable Source of Funds for EB-5 Investment

November 13th, 2020 Peter Bibler

The U.S. Circuit Court of Appeals for the District of Columbia Circuit, in Zhang v. USCIS et al., held that loan proceeds qualify as cash. Thus, it rejected USCIS’ interpretation that loan proceeds are “indebtedness” that must be secured by assets of the EB-5 investor. (Read the decision.)

Previously, USCIS had rejected the I-526 petitions of two investors who had funded their EB-5 investments by borrowing the capital from companies that each controlled. USCIS denied the petitions because the loans were unsecured. The petitioners sued USCIS, and on November 30, 2018, the district court sided with the petitioners. The court held that USCIS’ policy of treating loan proceeds as indebtedness that must be secured was arbitrary and capricious. See Behring’s blog on the impact of original Zhang case here.

Cash is Cash

USCIS has lost its appeal. The Court stated that the EB-5 regulations clearly treat loan proceeds as cash. Looking at the plain meaning of the term “cash,” the Court stated:

“Cash is fungible, and it passes from buyer to seller without imposing on the seller any of the buyer’s obligations to his own creditors. The buyer’s source of cash—whether paycheck, gift, or loan— makes no legal or practical difference. Here, when [the EB-5 investors] took out loans from their companies, they received cash proceeds. And when they invested the proceeds into the [new commercial enterprises], they gave and the enterprises received cash, plain and simple, regardless of how it was obtained.” (emphasis added)

When the Court reviewed the definitions of “indebtedness,” it observed that they do not include “loan proceeds, which are the product of a debt, not the condition of being in debt or the debt itself.” (emphasis added) Further, when the investor invests loan proceeds in a new commercial enterprise, “the enterprise does not receive his indebtedness at all – much less receive it as an asset.”

Lawful Source of Funds

The Court made clear that whether cash is obtained from wages, a gift, or a loan makes no difference, so long as it has been lawfully acquired. Thus, an unsecured loan is an acceptable source of funds for an EB-5 investment. The Court recognized that “security arrangements might help confirm that the loans are legitimate,” but USCIS can no longer reject an EB-5 investor’s I-526 petition merely because it is unsecured.

Potential Alternative to Gifts … and Taxes

The Circuit Court opens the door for EB-5 investors to source their investments in new lawful ways. Few investors can assemble the capital from one source. Especially, now when the minimum investment is $900,000. Investors often seek the help of family and friends to “sponsor” their petitions through gifts funds. Potential donors can be daunted by the sheer size of the gift as well as its potential tax consequences. Now family members may help to provide an unsecured loan as an acceptable source of funds.

A New Opportunity to Fund Your EB-5 Investment: Unity Lender

Behring has launched Unity Lender LLC, EB-5 Industry’s first licensed lending company for qualified EB-5 investors. Unity Lender is a lending company licensed in California equipped to provide loans for alternative investments. It offers a solution to qualified EB-5 investors who might not have the immediate liquidity to fund their investment. For example, investors may have illiquid real estate investments or are waiting for ideal time to liquidate stocks or sell other assets.    Unity Lender will work with you and your immigration attorney to provide a loan package to comply with source of funds requirements.

Contact Behring to Learn More

If you would like to learn more about this decision and how you might use an unsecured loan to fund your EB-5 investment, contact Behring for a free consultation. Behring welcomes you to visit our FAQs and blogs to enable you to get the information you need to best prepare you for your EB-5 investment and green card journey.