by Reid Thomas
Nowadays it takes up to, and in some cases more than, 22 months for the USCIS to process an I-526! With these timeframes, it is becoming increasingly difficult to predict the timing of when funds will be available if the traditional hold-until-approval escrow model is used. As you might expect, with the publication of new numbers and data, the conversation around different escrow structures is picking up again. Finding the right balance between the capital timing needs of the project and the security needs of the investors is key. Since virtually all projects promise to refund the investor subscription funds in the event of I-526 denial, there needs to be a rational plan to do so. Within the escrow agreement, it’s “release triggers” that define the plan.
As the name suggests, the escrow release triggers define the circumstances under which funds can be moved (i.e., released) from escrow. To understand the different structures that can be deployed, you need to understand that there are two basic models: “hold-until-approval” (HUA) and “early-release.”
As the name implies, with HUA, funds remain in escrow until the investor’s I-526 petition is approved. Once this happens, the escrow agent can release the funds into the new commercial enterprise. This model assures that funds will be available to repay investors in the event of an I-526 denial. When USCIS processing times were much shorter and more predictable, this structure was the least difficult for issuers to offer their investors. Still, if it is possible to structure the deal such that the USCIS processing times can be managed (e.g., through the use of bridge financing), then I would highly encourage using HUA.
In cases where it is not possible to do so, using early-release escrow structures is a popular alternative. Early-release escrows, when structured properly, effectively meet the needs of the investor and the issuer. Setting up the right escrow triggers starts with a basic understanding of the reasons for an I-526 denial. At a high level, the petition can be denied for two reasons. Either there is an issue associated with the project itself (e.g., job count or business plan assumptions), or there is an issue with the individual investor (e.g., source of funds).
In our experience, the best way to set up early-release triggers is to address each of those potential issues. As an example, an approved project exemplar or an actual I-526 approval means that the project issue is no longer a concern for I-526 approval. If the project has been approved, then a denial would have to be due to something wrong with the individual investor’s petition. USCIS has been publishing denial rates for many years. By using this information, a holdback account structure could be designed and implemented to ensure that there were ample funds available to return the denied investor’s funds. With this model, the investor would have increased confidence in the project, and the issuer would have access to funds much earlier than in the HUA model.
Setting up these types of escrows requires significant expertise. Remember, the investor is in this for their unconditional green card, and the I-829 doesn’t come up until two years after the I-526. Success at the I-829 stage is dependent on providing evidence of certain key facts, such as if the full amount of the required investment was invested and always at risk. Concepts like early-release with a holdback, if not properly structured, can lead to problems down the road. So, always seek the advice of experts to ensure that the escrow triggers not only have the right balance, but are also in compliance with important securities and EB-5 immigration rules.
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