Managing the Process of Bankruptcy with EB-5

Obtaining exit financing can be a difficult piece of the puzzle for chapter 11 corporate debtors. In fact, in a closely held company, the inability of equity security holders to retain their securities in light of the absolute priority rule in bankruptcy without finding new investors, can be a death knell to a reorganization from the moment a small business meets with a bankruptcy attorney. In the realm of larger businesses, finding a buyer for a planned section 363 sale or to purchase the equity securities and allow a reorganized company to emerge from a successful chapter 11 proceeding is the one issue that determines whether the company continues or liquidates. Those discussions with business owners and boards of directors can be devastating for all involved. But they don’t have to be.

EB-5 Visas and Bankruptcy

EB-5 investment based visas have been a stronghold of the real estate development industry since the 2008 recession. In fact, EB-5 Visas have become the go-to source for relatively cheap capital at the mezzanine level for eight years, and a strong industry has grown up around this. What is nearly always overlooked is the potential combination of bankruptcy and EB-5. The overlay is overlooked mostly because of the fact that EB-5 attorneys do not know and understand bankruptcy, and, within the larger firms in which bankruptcy and EB-5 securities law are both practiced, the chasm between the groups and the overlay of the separate timing requirements and governmental oversight is difficult, results in traveling the wider road of keeping EB-5 practice group closely tied to the real estate development practice group, and the bankruptcy and restructuring practice group walled off.

There is no need for this to be the case. With appropriate foresight, there is an easy convergence of bankruptcy and EB-5 Investment Based Visas, both within the closely held company and within the context of a larger corporate chapter 11 bankruptcy. However, effectively and efficiency in managing the process requires two things. First, the use of an attorney (or firm), who understands both areas of law; and second, the foresight necessary to view projections and understand some time in advance that a capital infusion will become necessary if the company wishes to succeed over the long term.

Purchasing Assets

EB-5 can be used as the necessary funding to provide required new value. Further, EB-5 can be used to create a new commercial enterprise, which can purchase the bankrupt company’s assets at a section 363 sale. Such use is authorized by virtue of the concept of saving jobs, which is built into the EB-5 immigration law and regulations. Both of these scenarios come with some degree of uncertainty, but the uncertainty can be reduced significantly by proper planning.

The moment a CFO or CEO recognizes that a capital infusion will become necessary in upcoming years, or when facing down a balloon payment with uncertainty as to whether the loan can be renewed, it is important to immediately seek the counsel of a bankruptcy attorney. At that point, the various options can be considered, weighed, and appropriate plans can be put in place. One potential option is to look into EB-5 as a funding source to replace specific financing, or to infuse necessary capital. This is where it is important to have an attorney who understands how to use EB-5, whether as a direct investment or through the regional center program. Even better, you could be consulting an attorney who is an expert in both fields.

The board’s or C-Suite’s decision will be tempered by the cost of the money, the timing during which he funds must be raised, and the ultimate plan related to continuing the business. With the right planning and expertise, a company (large or small) facing difficult financial decisions can use EB-5 as a vehicle to forge a new and more successful path into the future.

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