There are three types of EB-5 projects: regional center-based projects, direct EB-5 projects and pooled investment projects. The investor requirements remain the same—make a $500,000 or $1,000,000 at-risk investment and create 10 jobs; however, the three paths are slightly different. Below is some guidance an investor should consider as s/he contemplates an EB-5 investment.
Investor Profile & EB-5 Involvement
In a direct EB-5 context, the investor is usually driven by an entrepreneurial spirit. The investor is:
keen on starting and/or managing a business;
motivated to actively control the investment and make day-to-day decisions on the project;
usually interested in residing in the area where the investment will be made. Ultimately, the investor is usually looking to maximize profit from the investment.
In the regional center or pooled EB-5 context, however, the investor typically tends to be more passive and has little interest in managing a business. While the investor may invest in a project in one part of the United States, s/he may reside in a different state altogether. Often, the investor maintains other businesses outside of the United States and spends a lot of time traveling. Profit maximization is generally not a top priority because the rate of return is often lower than in the direct EB-5 context. On the other hand, regional center-based projects (and some pooled investment projects) often provide the quickest and most secure exit strategies.
A majority of the large EB-5 deals tend to be structured under the regional center model because the job count is much higher. This is because, rather than proving that each investor’s capital contribution will result in the creation of 10 qualified U.S. worker employees (supported by evident tax documents), as is the case in a direct or pooled EB-5 deal, for regional center projects, projected indirect and induced employment will qualify. In this scenario, an EB-5 economist will calculate the job impact resulting from the capital contribution. Ultimately, with greater job numbers in the regional center deals, most developers tend to prefer using this path.
The current upside to a direct EB-5 deal is that I-526 processing times for the conditional green card are generally much faster (usually 2-6 months). This may be because the deal structures are usually not as large and complicated as regional center deals. However, larger developers are now exploring direct deals and processing times may, in fact, be impacted in the future.
On the regional center side, the current I-526 processing time is roughly 12-16 months (sometimes even longer) for the first investor. Theoretically, if USCIS approves the first investor within the 12-16 month time frame, the remaining investor approvals should come faster since USCIS will primarily be focused on the source and path of funds for each investor. Although there is no consistency on this point, in larger projects, this may be an incentive for the later investors.
The processing times for pooled investments are somewhere in between the two paths.
If the investor decides a regional center project would be preferable, there are a few issues to consider: 1) due diligence to get your green card, and 2) due diligence to get your investment back if your I-526 is not approved. While these considerations mostly apply in the regional center context, many are equally applicable in the direct or pooled EB-5 context as well. The investor is also advised to refer to a recent EB-5 alert issued by the US Securities and Exchange Commission (“SEC”) by clicking here SEC Article. Also, see question #4 below related to selling of securities.
Suggested questions when conducting due diligence (please note that this list is not comprehensive, but merely includes suggestions by Wayfare United).
Has the EB-5 Sponsor successfully raised EB-5 capital in the past and is the Regional Center (“RC”) they are partnering with actually been designated by USCIS? The EB-5 Program is a lengthy and difficult process to navigate. If the Sponsor Group you are working with has never gone through the process successfully in the past, it could delay the investor’s visa application or worse, the visa could get denied altogether due to the wrong structure, not enough jobs, lack of information, etc.. The Principals of Wayfare United have successfully raised capital for several EB-5 projects in the past and only partners with reputable USCIS-approved regional centers.
How many projects has the EB-5 Sponsor or Regional Center sponsored? If the regional center is brand new (certainly not a bad thing), focus on the expertise of the RC principals. At the same time, if this is an older RC, it is also important to consider how active the RC has been. For example, if it was approved in 2009 but has not worked on any projects since then, the investor will want to determine whether the RC has maintained its filing obligations with USCIS and whether the ownership structure has remained the same. Before investing in a project that will be handled by a third party, the investor should conduct some due diligence on these individuals. The Thomas Scott and Justin Neelis, Principals of Wayfare United, have successfully completed several EB-5 transactions and have worked together for the past four years.
EB-5 Sponsor and Regional Center’s track record. Focus on the I-526 (and if applicable, the I-829) success rate. While past success is no guarantee of future success, the regional center’s track record is of some importance. The Principals of Wayfare United maintain a 100% track record in receiving I-526 and I-829 Petition approvals with the USCIS.
Does the EB-5 Group or Regional Center that is selling the securities have a registered representative or broker deal that they work with on transactions? Those involved with selling securities for EB-5 projects have been, more recently, under a lot of scrutiny with the Securities and Exchange Commission (SEC) for receiving commission based compensation for finding EB-5 investors and being non-registered brokers. Regional Centers have recently been shut down and individuals have been sent subpoenas. EB-5 investors must make sure that your EB-5 Sponsor or Regional Center is not paying commission based compensation to any individuals or entities that are not broker dealers with ties to the United States and if the Regional Center or EB-5 Sponsor is selling the securities that they have registered representatives of a FINRA registered broker dealer. Certain Principals of Wayfare United are registered representatives of, and securities transactions are conducted through, StillPoint Capital, LLC Member FINRA and SIPC, Tampa, FL. StillPoint Capital, LLC is not an affiliate of Wayfare United, LLC.
Consider the reputation of the project developer. Ultimately, the investor’s fate is in the developer’s hands. Therefore, the investor should research the development team’s experience and background, and be on look-out for any red flags. Wayfare United only partners with experienced real estate developers. Each developer goes through a rigorous due diligence review process, including in-depth background checks, review of personal financial statements, credit check, and personal and professional references.
Consider the reputation and experience of the project developer’s outside counsel and consultants. Critical to this point will be the experience of the immigration counsel, securities counsel, business plan writer and economist involved in the deal. Wayfare United prides itself with its work product and the partners in which we do business. Wayfare works with some of the industries most well-known in professionals that have extensive track records in I-526, I-924 and I-829 approvals.
Determine whether the project has been pre-approved by USCIS. For investors filing I-526s months after the first project investor has filed, determine whether the project has been pre-approved by USCIS. A project approval is a very good sign.
Determine whether the project will be developed in a Targeted Employment Area (“TEA”). This will be critical to determine whether it is a $1 million or $500,000 investment requirement.
If the I-526 is denied, when and how will the funds be returned to the investor? Will the administrative fee (typically an additional $45,000-$55,000 on top of the investment amount) be fully returned? In most cases, developers will return the full capital contribution and a portion of the administrative fee.
Exit strategy. This is definitely a critical issue. Most importantly, the investor should realize that there can never be a guaranteed return of investment. If such a guarantee exists in the project documents, this is a red flag because the investor’s contribution must remain “at risk” until his or her I-829 is approved. There can be a proposed exit strategy in the event that the project is successful, e.g. it is sold to a third party or refinanced by other equity. It is highly recommended that the investor retain a financial professional to conduct a business risk analysis on the project.
Is there a job cushion? Remember, for every one investor, at least 10 jobs must be created. The greater the job creation number over and above this amount, the more assurances the investor will have that the job creation requirement will be met. Of course, if the job creation cushion is being created with impermissible or complicated job forecasts, it may not be a true cushion. All of Wayfare United’s EB-5 projects that we promote have at least a 20% jobs buffer. This means that every EB-5 investor creates at least 12 anticipated jobs vs the 10 jobs, which are required.
What type of investment is being made with the investor’s funds and how are the jobs being created? The investor should retain immigration counsel to advise on whether or not the job creation methodology will be acceptable to USCIS.
When will the job creation occur? USCIS rules require that the job creation occur within 2.5 years following approval of the I-526 petition. For example, if the project proceeds with some form of bridge financing, the deal structure is critical to determining the job creation time frame.
What percentage of the total capital stack is comprised of EB-5 money? Investors tend to prefer projects where the project developer is making a sizable contribution in the form of equity and/or additional financing. Therefore, if the capital stack only consists of EB-5 capital, investors may be wary of the deal. Wayfare United focuses on projects where EB-5 investors are less than 50% of the total cost of the project and, in most cases, EB-5 is less than 35%.
How credible is the business plan? One of the most basic EB-5 requirements is that the business plan must be Matter of Ho compliant. The investor’s immigration counsel will be able to advise on this issue. However, the key is to determine the project’s credibility.
Ultimately, the investor must determine his or her risk tolerance.