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EB-5 BASICS

EB-5 Due Diligence

By Rohit Kapuria

Suggested Questions to Ask a Regional Center

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:

  1. keen on starting and/or managing a business;
  2. motivated to actively control the investment and make day-to-day decisions on the project;
  3. 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.

Timing

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 timeframe, 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.

Job Creation

A majority of the large EB-5 deals tend to be structured under the auspices of a regional center 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 evidentiary 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.

Due Diligence

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”).

Suggested questions when conducting due diligence (please note that this list is not comprehensive, but merely includes suggestions by the author).

  1. Has the regional center (“RC”) actually been designated by USCIS?

    Visit the USCIS website, consult the directory at EB5Investors.com, review the regional center’s website, conduct an online search for public records and ask your immigration attorney for further advice. Of course, just because the regional center has an approved designation does not mean that USCIS has approved the project (unless it is an exemplar-approved project). At the same time, keep in mind that some regional centers participate in “soft” marketing while the regional center designation is pending. In such cases, it is important to understand that no I-526s can be filed until the regional center has officially been approved.

  2. 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.

  3. How long has the regional center been operational and how many projects has it sponsored?

    If the regional center is brand new (certainly not a bad thing), focus on the expertise of the RC principals. Note, there are many pending RC applications that have been submitted by credible and successful project developers across the country. Just because they are new to EB-5 does not mean they are new to project development. 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. The same consideration should be accorded to the developers of pooled EB-5 projects. Before investing in a project that will be handled by a third party, the investor should conduct some due diligence on these individuals.

  4. 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.

  5. 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, and economist involved in the deal.

  6. 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.

  7. 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.

  8. Determine how the EB-5 funds will be released to the project

    Most investors would prefer the investment to remain in escrow until their respective I-526 petitions are approved. However, most developers are weary of this option because it would mean that the capital contributions necessary to develop the project would not be available for 12-16 months (2-12 months in the direct or pooled investment context). As a result, many hybrid release mechanisms have been developed. The investor has to decide what would be most palatable for him/her.

  9. 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-$50,000 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.

  10. 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.

  11. Rate of return (ROI)

    What is the return on investment?

  12. 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. See (m) below.

  13. When will the job creation occur?

    EB-5 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 timeframe.

  14. 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.

  15. 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 weary of the deal.

  16. 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.

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