Foreign nationals may obtain a green card if they invest the required amount of capital in a new commercial enterprise that will create ten full-time permanent jobs for U.S. citizens or permanent residents (INA § 203(b)(5); 8 USC § 1153(b)(5)). To “invest” means to “contribute capital” (in exchange for equity rather than a promise for repayment) and capital is (8 CFR § 204.6(e)):

cash, equipment, inventory, other tangible property, cash equivalents, and indebtedness secured by assets owned by the alien investor, provided that the alien investor is personally and primarily liable and that the assets of the new commercial enterprise upon which the petition is based are not used to secure any of the indebtedness.

On April 22, 2015 U.S. Citizenship and Immigration Services announced that it would treat third-party loans as “indebtedness” rather than “cash.” As a result, investors who obtained their investment capital through a third-party loan were required to show that the loan was secured by their personal assets.

In June 2015 two investors whose green card petitions were denied challenged USCIS’s policy of treating third-party loans as indebtedness, and sought certification as a class of investors whose petitions were denied solely on this basis. The named plaintiffs borrowed their investment capital from companies that they owned, and their loans were secured by either undistributed profits or stock holdings in the company. USCIS denied their green card petitions because their respective loans were not adequately secured by personal assets. Both named plaintiffs filed their green card petitions before USCIS announced its policy for evaluating the investment of loan proceeds.

The U.S. District Court for the District of Columbia granted summary judgment in favor of the plaintiffs on November 30, 2018. USCIS appealed, and the DC Court of Appeals affirmed the judgment of the district court.

Some people have apparently read this case as standing for the proposition that the proceeds of unsecured loans may be used for an EB-5 investment. The holding, however, is narrower. Zhang holds that loan proceeds constitute “cash” rather than “indebtedness” under the plain meaning of these words in the regulation. Since loan proceeds are “cash” they constitute “capital” regardless of whether the loan is secured by the investor’s personal assets. Petitions that were denied solely on USCIS’s erroneous interpretation of its own regulation were remanded to USCIS for further adjudication.

USCIS may still have legally valid reasons to continue to require that loan proceeds be secured by the investor’s personal assets. Both the district court and the appellate court acknowledged that USCIS had the authority to continue to ensure that EB-5 Petitioners complied with the other requirements established by statute and regulation, including the separate requirement that the invested capital be lawfully obtained. According to the district court, its decision “does not impact USCIS’ ability to investigate whether the petitioner’s cash loan proceeds were lawfully-acquired.” The district court further recognized USCIS’s position that fraud on a loan application would lead to capital obtained by unlawful means.

Similarly, the appellate court noted:

Finally, our understanding of indebtedness, referencing the alien’s promise to invest in the enterprise, does not make it pointless to consider whether the investor’s borrowing was secured by his own assets. In assessing large loans taken out by foreign investors, security arrangements might help confirm that the loans are legitimate. For an investor still in the process of investing, that consideration bears on whether the enterprise ultimately will receive the loan proceeds. And in all cases, the bona fides of a loan tend to show that its proceeds were lawfully acquired—an independent requirement for any asset to qualify as capital. 8 C.F.R. § 204.6(e). Taken as a whole, the evidentiary provisions of section 204.6(j) do not undercut our conclusion that the “cash” referred to in section 204.6(e) includes loan proceeds.

In addition to requiring that invested capital be lawfully obtained, EB-5 regulations require a petitioner to show that he or she has “placed the required amount of capital at risk” (8 CFR 204.6(j)). Although the district court rejected USCIS’s argument that the “at risk” requirement supported its interpretation of the definition of capital, it did acknowledge the “at risk” provision as a “separate regulatory requirement.” Thus, USCIS’s contention that “the evidentiary requirements necessary to demonstrate owned capital is ‘at risk’ are different based on how the capital is obtained” holds true even though it does not support the conclusion that third-party loan proceeds are “indebtedness” rather than “cash.”

The proceeds of an unsecured loan are indeed cash, but unless the investor repays the loan or secures it with his or her personal assets, then he or she is not bearing the risk of loss. Notably, the named plaintiffs in Zhang borrowed their investment capital from companies in which they held all (or nearly all) of the equity, so they personally had skin in the game even though they invested the cash proceeds of a loan. If the investor doesn’t bear any risk of loss from an unsecured third-party loan, USCIS may still find that the investor has not shown an “actual commitment of the required amount of capital.” Thus, while an investor may contribute loan proceeds as an EB-5 investment, the security of the loan remains relevant to the issues of whether the proceeds were lawfully obtained and placed at risk. Prospective EB-5 investors who are considering borrowing funds for their capital contribution should think carefully about how their investment will meet all of the regulatory requirements.