Under the New Law of Zhang, Unsecured Loans Are Now Permissable for EB-5 Investment

Zhang v. USCIS

The recent decision in the case Zhang v. USCIS Civil Action No. 2015-0995 (DDC 2018) could potential greatly assist prospective EB-5 investors in financing their investments.

Click Here to Read the United States District Court For The District of Columbia Opinion Memo

Prior to this decision, USCIS imposed requirements on the kinds of loans an investor could use to obtain the funds that would be used as a source for their EB-5 investment. USCIS treated the proceeds of loans as contributed “indebtedness,” which, under the regulations, required the debtor to be the primary debtor of the debt and to guarantee the debt with assets of at least equal value to the debt.

For example, previously, if a prospective EB-5 investor planned to utilize a loan, they would need to secure that loan with some kind of collateral. Typically investors would utilize Home Equity Loans (HELOCs), cash-out refinancing, and loans secured by their 401K account or brokerage account.

USCIS Regulatory Basis

In the case,  Ira Kurzban successfully argued that loan proceeds should be considered cash and not “contribution indebtedness.” In assessing the cash, the USCIS lacked the regulatory basis for imposing any conditions on the qualities of the loan transaction. The ruling determined USCIS could not require that the loan transaction be a secured loan, nor could it require the investor to be the principal debtor.

Furthermore, the court has led USCIS to ask lawmakers to create requirements that go beyond what is contained (under the Administrative Procedure Act. This case opens up jurisprudence for a large number of USCIS practices for similar challenges.

Legally Obtained Capital And Job Creation

Under the original requirements,  USCIS imposed a standard where only the value of an investor’s asset could be used to finance the investment. The court ruled that so long as capital has been legally obtained and jobs are created in the United States economy,  it does not matter if the source of EB-5 investor’s capital is debt or derived from the investor’s equity.

New Possibilities For EB-5 Investors

The Ruling in the case of  Zhang v. USCIS has the potential to open EB-5 to a broader demographic of investors. Many potential investors do not have $ 500,000 in current cash or assets needed to secure a loan. However, many potential investors have friends and relatives who they could receive the required balance of funds from.

Under the old rule, investors could not utilize funds received from these kinds of loans because the ‘cash resources’ of that loan would not have met the requirements imposed by the USCIS. Previously the only alternative would have been a gift or donation, which often creates a tax consequence for the giftor. Now, under Zhang’s jurisprudence, unsecured loans are permissible.

It should be noted that cash loan proceeds still need to be proven to be legally sourced. If the loan is made from a trustworthy financial institution, this should be sufficient; however, in the case of a personal loan from friends or relatives, the investor will need documentation on how the lender earned the funds that they are providing. 

This decision should greatly expand the EB-5 market as an investor’s friends or relatives may also be more willing to lend money, rather than offer it, dramatically expanding the capital available to a potential EB-5 investor. 

Information in this article was originally sourced from the Witeradvogados article “Loan Investment In EB-5 Now allowed”, published on January 20, 2019, at http://www.witeradvogados.com/noticias/emprestimo-para-investir-em-eb5-agora-permitido


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Categories EB-5 Policy