By Jeff Campion
This article discusses, in broad strokes, a general overview of the project players, the documents necessary to access EB- 5 capital, the process, and some common pitfalls. Clearly, each of these topics could use an article on its own, but hopefully this will provide a roadmap and general overview for the reader.
The Project Players
The project players for an EB-5 capital raise are
- The regional center;
- The project entity where the jobs will be created the job creating entity (“JCE”); and
- The new commercial enterprise (“NCE”) the entity into which the investor invests his money.
At times, the principals of the RC are also principals in the JCE and NCE. Sometimes, the principals of the JCE and NCE are the same and associate with an existing RC. And at other times, all the principals are distinct. Any one of the combinations is seen in the EB-5 space and can be justified depending on the specific project.
The NCE is the issuer of securities and is the entity into which the investors invest. The capital invested is then deployed as a loan to the JCE. This will be further explained under “The Process” below. Each of these entities must produce documents for the EB-5 capital raise.
As the issuer of securities, the NCE will have to produce:
- A Matter of Ho compliant business plan,
- Proof of regional center designation (including scope),
- A TEA letter (if applicable),
- Economic analysis, and
- Offering documents (these include private placement memorandum, articles of entity formation, partnership agreement, subscription agreement, loan agreement between the NCE and JCE, collateral agreement for the loan and other documents)
The JCE will have to produce among other items:
- A deed to the property (if it is a real estate transaction),
- Market analysis,
- Bank loan commitment,
- As-built appraisal,
- Proof of developer capital,
- Proof of any other capital or lending instruments utilized,
- Developer track record, and
- Method of loan repayment (refinance, sale, or other method)
The lists above are not exhaustive and may change as mentioned in “The Process” below.
There is no one sure-fire process in the capital raise cycle, but below is a description of what an EB-5 capital raise may look like.
As mentioned, a typical EB-5 capital raise has three principal entities involved – RC, NCE, and JCE. Initially, a project is looked at in conjunction with the NCE and the RC to determine preliminary viability. The first issue to be addressed is job creation as the EB-5 program is a job creation program. Normally, the economist is sent a pro forma construction budget and income statement from the developer. With those documents, the economist can provide an initial job creation analysis. As the reader is aware, ten (10) jobs must be created for each investor per EB-5 requirements. Thus, with the preliminary job analysis, the total amount of investors that could invest is determined (the number of investors that invest will be less to allow for a job cushion). The amount of capital that could be raised is arrived by taking the total amount of investors (job count divided by 10) multiplied by $500,000 (if in a targeted employment area).
After the preliminary economic analysis is performed, the other professionals (immigration attorney, SEC attorney, corporate attorney, and business plan writer, among others) begin to prepare the documents mentioned above. At the same time, preliminary marketing should begin for the project so that there is broker awareness and feedback. Part of the marketing process will ensure that the project meets the current market conditions. This is normally done through communication with migration brokers. Since the EB-5 territory is new territory for most, the NCE will hire what the author refers to as a “guide.” A guide is a necessary component to make introductions to migration brokers and to provide valuable feedback on the marketing of the project and its corresponding documents.
Once the documents are finalized, they are taken to market for investor review and due diligence, with the goal that the investor subscribes to (makes an investment in) the NCE. Most investors invest through means of a migration broker. These brokers take the project documents to market and hold seminars for investors. At a minimum, a representative of the NCE needs to attend the seminars, and many times the developer attends as well to answer any questions. Assuming the seminar goes well, the investors will subscribe to the NCE and wire the capital to the escrow account. Thereafter, immigration counsel for the investor will prepare the I-526 petition including the source of the investor’s funds demonstrating their legitimacy. The I-526 petition is now taking twelve (12) months to adjudicate and, assuming approval, the money is released from escrow to the NCE and subsequently loaned to the JCE. The loan to the JCE is, normally, for a period of five (5) years. After five (5) years (and assuming no loan extensions), the loan is paid off, the JCE issues a liquidating distribution to each of the investors, and the process is complete.
Obviously, anything that one attempts for the first time may seem cumbersome. The additional challenge in the EB-5 space is that it is an infant industry. As such, there are not a lot of set-in-stone guidelines. There are, however, some basic pitfalls or “mentalities” to avoid:
“I don’t need a guide mentality.” This person thinks because she has raised capital in traditional markets before, she doesn’t need a guide. This is a major mistake in China and the reason that many projects flounder and may eventually fail. The reason is that Chinese business is based on a relational concept known as “Guanxi.” Without it nearly no business takes place. Hire a guide with Guanxi.
“I’ll just form my own regional center mentality.” This person thinks that it is a simple enough process to form her own RC and goes down a path of forming an RC. The problem with this is that an RC takes more than 15 months from the initial kickoff with the EB-5 professionals until approval. Moreover, it may not be approved. While forming her own regional center is an option, it is not as easy as it first appears. It is important to consider all of the costs and time associated, as choosing to associate with an existing regional center for a fee can be a better option for some.
“I’ll handle the raise on my own mentality.” Many times, the JCE principals plan to be the NCE principals assuming that it is cheaper for them to raise the money on their own. Several factors are not taken into account: (a) the amount of time needed to adequately build the Guanxi mentioned above, (b) the number of trips to China to answer questions about the project, and (c) the financial cost. Normally, there are persons in the EB-5 space associated with an RC that will handle the EB-5 capital raise as principals of the NCE and loan the capital to the JCE. This could result in cheaper capital to the developer (as compared to the capital that may be obtained in the traditional markets). In addition, the cheaper capital may be higher in the capital stack and be nonrecourse.
While there are certainly other pitfalls, these are the ones most commonly seen.
The EB-5 space is in its infancy, which provides many opportunities and challenges. It requires involvement of several different parties, including the RC, JCE, NCE, EB-5 professionals, and, of course, the most important player – the investor. But, if the developer is willing to be patient through the process, it may result in obtaining cheaper capital that is higher in the capital stack, thus providing a win/win for all the parties involved, including permanent residency for the investor and a return of capital.
 This assumes the loan model which is most common.
 For example, if there were 100 jobs created then that number divided by 10 equals 10 investors, multiplied by $500,000 equals $5 million.