Suggested Procedures and Possible Options for Accepting Minors as Investors in EB-5 Investment Funds - Investment Law Blog

By: Catherine DeBono Holmes, Esq. and Bernard P. Wolfsdorf, Esq.

The delay in processing EB-5 immigrant visas caused by the increasing waiting line commonly referred to as “retrogression” is causing an increase in demand by parents in China to have their minor children named as the primary applicant on I-526 petitions.

With estimated delays of five to six years for the processing of EB-5 immigrant visas or green cards for applicants subject to the Peoples Republic of China (“PRC”) quota, many parents are concerned their children will “age out” by reaching the age of 21 before their final green card interviews are scheduled. As a result, the children may be ineligible to immigrate as derivative beneficiaries and may be unable to join their parents and younger siblings when immigrating. Since many PRC parents are primarily motivated to obtain green cards under the EB-5 Program for the benefit of their children, these parents are requesting EB-5 investment funds to accept their minor children as investors, so that the child can file the I-526 petition as the principal applicant.

Acceptance of minors as investors in EB-5 investment funds poses risks to EB-5 investment funds, escrow banks and EB-5 investors under U.S. laws.

Under the laws of every state in the United States, minors under the age specified in that state’s law, normally persons under 18 or 21 years of age, are not legally competent to sign certain contracts, and many states provide that such contracts are voidable by the minor. Under these state laws, an investor who signed a subscription agreement who was not of legal age to enter into a contract would have the right to void the subscription agreement, and to make a claim against the EB-5 investment fund to return the investment funds to the investor. This may be done usually when the child reaches the age of majority. For this reason, EB-5 investment funds typically require that each EB-5 investor represent in their subscription agreement that the investor is of the required age to legally sign a contract. Some escrow banks believe they also could be subject to claims if a minor investor voids their subscription agreement and demands their investment funds be returned to them, and for this reason, these escrow banks will not accept subscription funds from investors who are minors. In addition, EB-5 investors who are minors may face a risk of denial of their I-526 petitions, although to the best of our knowledge no EB-5 investor has been denied approval of their I-526 petition solely on the grounds that the investor is not of legal age to sign a contract.

There are immigration issues, including the ability of a minor to fulfill management responsibilities to the extent required, and whether the investment funds of a minor investor are irrevocably committed to the EB-5 investment fund, that have not yet been considered by USCIS, because until now there has been no need to have the derivative child file as the principal applicant. On the positive side, USCIS allows only “children age 13 or younger” to file a Form I-485 Application to Register for Permanent Residence or Adjust Status paying the reduced fee for children, while persons aged 14 and over must file the full adult fee for the Form I-485 application. In addition, USCIS has accepted minor children as principal applicants in other Employment Based (EB) categories such as for EB-1A extraordinary ability aliens.

Chinese law may allow minors to legally sign subscription agreements with EB-5 investment funds with the consent and co-signature of their parents.

The General Principles of the Civil Law of the Peoples Republic of China provide that: (i) a citizen aged 18 or over has the full capacity for civil conduct; (ii) a citizen aged 16 until the age of 18 whose main source of income is his own labour also has the full capacity for civil conduct; (iii) a minor aged 10 or over has limited capacity for civil conduct and may engage in some civil activities appropriate to his age and intellect, and in other civil activities must be represented by his agent ad litem or participate with the consent of his agent ad litem; and (iv) a minor under the age of 10 has no capacity for civil conduct and must be represented in civil activities by his agent ad litem. The General Principles also provide that the parents (or other designated persons if the parents are not living or competent) of a minor shall be his guardians, and that the guardian of a person without or with limited capacity for civil conduct shall be his agent ad litem. According to these General Principles, it appears that a parent (or other legal guardian) may represent the child in civil activities, including the execution of contracts.

EB-5 investment funds may select PRC law as the governing law for purposes of execution of a subscription agreement and other legal documents required for an EB-5 investment, to permit the parent or legal guardian to co-sign the documents on behalf of a minor investor.

EB-5 investment funds which desire to accept minor investors who are citizens of the PRC may wish to specify PRC law as the governing law for purposes of determining the capacity of the minor to legally enter into a subscription agreement and other agreements required for an EB-5 investment. In that case, the EB-5 investment funds would provide for the subscription agreement and other agreements to be signed by both the minor investor and the parent of the minor investor. The parent of the minor investor should also sign an attestation representing that the signer is the parent of the minor investor, the parent and the minor investor are citizens of the PRC, the parent has reviewed and approved the EB-5 investment on behalf of the minor investor, and the parent has provided the funds used to make the EB-5 investment. Courts in the United States will generally accept the choice of law specified by the parties to a contract, unless the law specified has no connection with the parties to the contract or there is a strong public policy of the state that would be violated by the choice of law. It is possible that, upon a legal challenge, a state court could hold that a choice of PRC law in a contract will not be accepted by the court, but if the parent and the minor are citizens and residents of the PRC, the primary purpose of the contract is to allow the minor to qualify for a United States immigrant visa, and the parent has reviewed and approved the investment and provided the funds for the investment, there would appear to be sufficient reasons for a court to accept the choice of PRC law for the purpose of recognizing the validity of the choice of law in the subscription agreement.

EB-5 investment funds could alternatively consider allowing parents to make a gift to a minor investor under the Uniform Gifts or Transfers to Minors Act that applies under state laws of the United States.

If EB-5 investment funds do not wish to rely on PRC law to accept minor investors, another possible option might be to use the Uniform Gifts or Transfers to Minors Act that is in effect in the state where the EB-5 investment fund is located, and select that state’s choice of law for purposes of execution of the subscription agreement. A similar version of this Act has been adopted in every state within the United States. This Act allows any person to make a legal gift of any form of property or cash to a minor, without the adoption of a formal trust agreement. The Act provides that the person making the gift, who is normally the custodian of the property that is gifted to the minor, will control the property until the minor reaches the age of majority, which is normally either the age of 18 or 21, at which age the minor automatically becomes the control person of the property. The only requirement for the gift is that the instrument that confers the gift contain the appropriate language specified by the applicable state Act, which is normally stated as “[Name of Custodian”] as custodian for [Name of the Minor] under the [Name of State] Uniform Gifts [or Transfers] to Minors Act.” There may be some reluctance to use this alternative because the name on the Subscription Agreement will be both that of the Custodian and the Minor, and this may create a greater risk of denial of the I-526 petition. To our knowledge, no reported I-526 immigrant petition has been filed using the Uniform Gifts or Transfers to Minors Act, but this may be due to the fact that the age out issue did not become a serious concern until the retrogression policy was announced commencing in May 2015. It would be difficult to use both this method and the PRC law method of subscribing for an EB-5 investment, because each method would require a different choice of law and a different method of signing the subscription agreement.

EB-5 investment funds may need to accept minor investor subscription funds outside of escrow unless the escrow bank approves the acceptance of minor investors.

EB-5 investments funds should discuss the procedures for acceptance of minor investors with their escrow banks and administrators to determine if the escrow bank will accept those subscriptions. If the escrow bank will not accept those subscriptions, the escrow bank may be willing to allow the EB-5 investment fund to accept subscription funds from minor investors outside of escrow, subject to some conditions, such that those investors will not receive any repayment from the escrow holdback account if the investor’s I-526 petition is denied. In that case, the EB-5 investment fund will need to prepare a separate agreement with the minor investor and his or her parent, under which they agree to waive the deposit of their funds in the escrow account, and waive any other benefits that would apply if their funds were held in the escrow account.

These suggested procedures are new and untested, and as such there are risks that they may not work as intended.

Since the Chinese quota or waiting line only emerged in May 2015 as a result of a surge in demand from Chinese applicants, who still represent over 80% of EB-5 investors, this area is evolving. As is the case with respect to many other issues in EB-5 investing, there are uncertainties as to whether these procedures will be accepted by USCIS, or by courts in the event of a dispute. The USCIS has indicated they are preparing regulations which hopefully will address this issue. Until such regulations are adopted, there are risks to EB-5 investment funds and to parents and minors who seek to use these procedures as a means of making an EB-5 investment and applying for a visa under the EB-5 program. The alternative is for EB-5 investment funds to accept only those investors who can legally enter into contracts under the governing law of the applicable state, but in that case the parent and the minor will retain the risk that the minor will age out before the parent is able to obtain the visa. This problem could be better solved if Congress amends the Child Status Protection Act [8 U.S.C. 1153(h)] to freeze the child’s age as of the date of filing, rather than merely allowing the child to deduct the time the petition was pending from their actual age. With the September 2016 sunset of the EB-5 regional center program, Congress has a perfect opportunity to amend the law to protect children from aging out.

Conclusion

While it is possible that USCIS may establish a bright line cut-off age for principal EB-5 immigrant visa applicants, it is likely that each case will be evaluated on a case by case basis providing an opportunity for EB-5 investment funds and their counsel to structure a framework that complies with state and federal law. Presently it appears unlikely that it would be necessary to file with a primary applicant “age 13 or younger” as these children are likely to be derivatively eligible for immigration benefits. Since USCIS has articulated age 14 as a cut-off age for payment of the children’s filing fee when applying to Register for Permanent Residence or Adjust Status, it would make sense to establish a transparent bright line test that investors can use when making the commitment of funds in order to obtain a green card.
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Bernard P. Wolfsdorf is a recent past President of the American Immigration Lawyers Association (AILA). His successful record of navigating complex immigration issues has earned him numerous awards and accolades, including his recent selection as Who’s Who Legal “Most Highly Regarded Immigration Lawyer”. Who’s Who Legal (WWL), the research partner of the International Section of the American Bar Association, considered 637 of the world’s leading practitioners in the selection process for this award. The award marks the seventh consecutive year that Mr. Wolfsdorf has been recognized by WWL as the highest ranked immigration attorney in the U.S. and North America.

Catherine DeBono Holmes is the chair of JMBM’s Investment Capital Law Group, and has practiced law at JMBM for over 30 years. She specializes in EB-5 immigrant investment offerings and hotel and real estate transactions made by Chinese investors in the U.S. Within the Investment Capital Law Group, Cathy focuses on business formations for entrepreneurs, private securities offerings, structuring and offering of private investment funds, and business and regulatory matters for investment bankers, investment advisers, securities broker-dealers and real estate/mortgage brokers. Contact Cathy at CHolmes@jmbm.com or +1 310.201.3553.