The direct EB-5 model was the original version of the program introduced in 1990 through IMMACT 90. In the direct EB-5 model, investors will most likely purchase or start a new business and create at least 10 jobs that can be verified through a veritable head-count of that business’s employees. As the regional center program has grown, the use of the direct EB-5 model decreased, with direct investments accounting for only 5-10 percent of all EB-5 investments. However, recently some in the EB-5 industry have foretold a comeback of direct EB-5 model investments. Below you will find a step-by-step approach to a direct EB-5 model investment highlighting the differences of investing through a regional center.
- Identify an investment: In the direct EB-5 model, an investor will most likely be purchasing an existing business or position himself to open a new business, such as a new location of a well-known franchise. In cases where investors want to pool funds, it is important to note that they will be limited in doing so based on the requirement that they create 10 jobs per investor. Nonetheless, pooling of funds in a direct EB-5 model investment is becoming increasingly popular.
- Make the qualifying investment: Unlike the regional center model, where the investment is one of the final steps in the process of filing an I-526 petition, the qualifying investment in the direct EB-5 model will likely be made very early in the process. This arises because, typically, the investment must be made by the investor in order to finalize the documents required for their I-526 petition.
- Create an EB-5 compliant business plan: Unlike the regional center model, which creates a business plan to be used by each investor, a direct EB-5 model investor must commission their own Matter of Ho compliant business plan. This will come after the investor has purchased or created substantial infrastructure for his investment. This is because much of the information necessary for an adequate business plan can’t be obtained until after investment.
- Establish a baseline of workers: This is the biggest difference between a regional center investment and a direct EB-5 model investment. Regional center investments pool capital and create jobs through economic calculations. In the direct EB-5 model, an investor must show through a head count that at least 10 jobs have been created. This requires demonstrating that each employee works over 35 hours per week, has a W-2 and is lawfully permitted to work in the United States. Because existing businesses typically already employ some workers, each direct EB-5 model investor must establish an initial baseline of employees. This is important because it will determine the exact number of workers required to be created by the direct EB-5 model investment.
- Define investor’s role in the direct EB-5 model investment: Another important distinction from a regional center investment is the role of the investor. In the direct EB-5 model, the investor is maybe heavily involved in the investment and possibly drawing a salary. This presents a potential pitfall, because an investor must demonstrate any salary or profit gained from his investment does not diminish the required investment amount. This may include demonstrating the reasonableness of any salary earned by the investor.
- Compile required documents for I-526 petition: In a direct EB-5 model investment, the investor must supply and compile all of the necessary project documents related to the qualifying investment. Additionally, the investor must also put together the entire necessary source of funds documentation to demonstrate that the source of his investment was obtained through lawful means. This can include a business plan, purchase agreement, documentation of existing workforce, evidence of investor’s role and other project specific documents.
This step-by-step approach to a direct EB-5 model investment is not necessarily inclusive, and by nature, direct EB-5 model investments can vary greatly. The type of investment will ultimately determine the steps necessary to put together a successful EB-5 investment. A direct EB-5 model investment can be advantageous over a regional center investment because it can allow for greater business control, better transparency in the investment and a more liquid investment.