By Kate Kalmykov and Anastasia Xidous
Investors in the EB-5 program need to understand the essential “at risk” aspect which is required for their invested capital to qualify as an EB-5 investment. The primary function of EB-5 investment funds is to create new jobs for United States workers. In order to ensure that EB-5 investment funds will be used for the creation of new jobs, the capital invested by EB-5 investors must qualify as an “at risk” investment.
For capital to be considered “at risk,” the possibility must exist that the capital invested could either produce a loss or a gain. What this means for investors is, according to EB-5 regulations, not only do investors need to show that they are actively in the process of investing in a particular project, but that there is no guarantee that the capital which they invested will be returned to them. Any portion of invested capital which is protected against loss is not considered “at risk” and therefore, does not qualify as an EB-5 investment.
According to the May 2013 “EB-5 Adjudications Policy Memorandum,” although the degree to which capital must be placed “at risk” is unclear, any assurance or guarantee of return or a guarantee of a particular rate of return on any portion of invested capital invalidates the capital as an EB-5 investment. The capital must therefore be placed in a position where there exists some risk of loss and some potential for gain.
Furthermore, if there is an agreement between the investor and the chosen new commercial enterprise which grants the investor the power to redeem any portion of their investment based upon the acquisition of conditional permanent residence, that portion of capital will not qualify as “at risk.” This means that if the investor is promised capital back in the event of an I-526 petition approval or denial, a visa issuance or visa denial through consular processing or through adjustment of status or an I-829 petition approval or denial; that capital does not qualify as an investment in the EB-5 program. The “at risk” requirement also applies to any type of promised ownership of a particular asset made to the investor by the new commercial enterprise in return for the investor’s EB-5 capital. If such an arrangement is made, the expected value of the promised assets will be deducted from the invested capital in establishing how much capital the investor put “at risk.”
The May 2013 “EB-5 Adjudications Policy Memorandum” further details that the investor’s EB-5 capital must also be “at risk” regarding the requirement that it is transferred directly to the job creating entity (in the regional center context, this almost always refers to the specific project) by the new commercial enterprise to be used for valid project expenses. The investor’s capital may be used in whole or in part for project expenses as the capital is helping the project create jobs by paying project expenses. More specifically, EB-5 investment capital which remains in the new commercial enterprise and is not transferred to the job creating entity to be utilized for project related expenses is not considered “at risk.”
The “at risk” requirement does not mean that investors are not allowed to receive a gain on their investment (as previously stated, “at risk” capital may also generate a return). In light of this, investors are not prohibited from receiving a return on their investment so long as the return is not considered a portion of the investor’s principle investment and that at no point was this return guaranteed to them prior to or during the two-year conditional residency period.