As the EB-5 program continues to grow investors look for immigration compliance and financial controls

By Reid Thomas, Daniel Lundy and Kaitlin Halloran

As the EB-5 industry has grown in popularity and continued to mature, prospective EB-5 investors have increased their project due diligence before making an investment decision. In addition to evaluating the viability of the project itself, investors now also assess the project’s financial controls and the immigration compliance strategy the issuer has put in place to support I-829 approval.

Investors know that the right project structure is essential to immigration success, and now evaluate:

Escrow use and structure.

In the past, simply using an escrow for subscription funds may have been enough to reassure investors.

But as early-release escrows have become commonplace, investors now look for structures that retain a portion of investor funds in escrow to repay investors if their I-526 petition is denied after funds have been released into the project. Moreover, if the holdback structure is not in compliance with immigration requirements, I-526 or I-829 petitions associated with the project risk being denied.

Capital stack interdependencies.

All projects need to have a firm capital stack in place. Some have not yet identified a senior lender, or must meet additional conditions before identified sources of funds are committed. For investors, confirming that the project has the financial resources to be completed is critical to making an investment decision.

In these cases, investors look for alignment between EB-5 escrow terms and senior loan requirements. If there is a clear reason EB-5 capital must be released from escrow before the senior loan is required to meet any thresholds, it’s important to carefully track the use of those funds.

Construction draw schedule and controls.

After the release of funds from escrow, projects should have third party controls in place to monitor the movement of funds and ensure capital is released to legitimate job creating expenditures outlined in the project’s offering documents.

For the immigration process to be successful, the project must document that funds have been deployed in accordance with the job creation plan approved for the project. Investors are becoming more and more aware that without these controls, funds are vulnerable to mismanagement or misuse, particularly if the job creating project and New Commercial Enterprise are controlled by the same entities.

It’s important to have easy-to-identify safeguards against misuse of funds built into a project throughout the EB-5 process to appeal to potential investors. These safeguards include:

Funds security.

The right solution both protects against mismanagement of funds and meets immigration requirements. While a subscription escrow, third party controls, and ongoing transparency protect investors against improper use of funds, all should be informed by the right immigration compliance expertise to help ensure the immigration process is successful.

Immigration reporting capability.

Automated tracking and reporting helps reassure investors that their issuer has the information necessary for investors to successfully achieve unconditional permanent residency. Working with an immigration attorney experienced in EB-5 provides additional assurance that a project’s tracking and reporting will support successful I-526 and I-829 filing for its investors.

Third party administration.

To determine the viability of a project’s escrow structure, investors look for projects working with an established EB-5 escrow and fund administrator. An escrow and fund administrator not only helps the issuer work with the escrow agent to ensure the right escrow structure, but also tracks and maintains a comprehensive audit trail of the flow of funds in a manner that is compliant with USCIS requirements.

Investment transparency.

To be sure funds are managed correctly, investors look for an EB-5 solution that provides real-time account information to investors and issuers, allowing visibility into the location and use of funds. Projects which provide investors with the ability to track the flow of funds from escrow into job creation and ultimately back after the I-829 provide the investor an additional level of confidence in the project’s viability.

Investor repayment and exit strategy.

With lengthening I-526 and I-829 processing times and a visa availability cutoff date in place for investors born in mainland China, it’s important to have clear plans for investor repayment, including measures to keep invested funds compliant with EB-5 requirements until green card conditions are removed. Use of a third party EB-5 fund administrator helps ensure funds remain in compliance throughout the project lifecycle. In projects using the debt model, it is also critical to make sure there are third party controls in place to safeguard against misuse of funds particularly if the same parties control both the New Commercial Enterprise and the Job Creating Entity.

Use of a third party administrator throughout the EB-5 project’s lifecycle ensures funds are properly managed, protects issuers against allegation of fraud, simplifies financial administration, and reassures investors that their investment is secure.

Project Issuers should also consider engaging in a Compliance Review. The objective of this review would be to uncover potential areas of exposure, and make recommendations on how they could be addressed. The typical process for an audit review would include:

Training of regional center or project staff on what documents and information to retain.

Ensuring compliance requires a working knowledge of what kinds of documents and information need to be kept, and how to organize and present them. An investor’s I-829 approval depends on the records kept by the regional center and project. If the proper documents and information aren’t collected and preserved during the course of the project, it can be difficult or impossible to go back and recreate them several years later when it is time to file an I-829.

Creation of procedures and protocols for document retention, organization and presentation.

While knowing what documents and information to collect is critical, having a protocol and following it are equally critical in ensuring that the knowledge is applied and the necessary material is kept.

Third party review of documentation on an ongoing and regular basis to ensure proper documents and information are, in fact, being retained.

The benefit of this should be obvious. When there is an experienced third party looking over the books, it is possible to spot problems and correct document deficiencies in a timely manner.

With more EB-5 projects on the market than ever before, the right project structure and compliance review can help set projects apart for prospective investors. With immigration outcomes on the line, it’s important for investors to know that their immigration success is a priority for their project’s issuer.

About the Authors

Reid Thomas serves as the executive vice president for NES Financial. Responsible for global sales and marketing, he brings over 20 years of sales and marketing leadership in both public and private companies in high-growth Silicon Valley technology companies. Thomas’ active participation in the EB-5 community has made him a frequent and sought after author and speaker at events and conferences across the country. He has written numerous articles, blogs, and white papers on the topics of escrow and fund administration, solidifying his position as an industry expert.

Daniel Lundy is a partner at Klasko Immigration Law Services LLP, where he leads the firm’s EB-5 project group. Lundy primarily specializes in representing regional centers, projects and developers, while still handling the occasional investor case. A frequent speaker and writer on EB-5 topics, he has been featured in publications such as The New York Times. Lundy is also a member of AILA and the Banking Committee of IIUSA.

Kaitlin Halloran is marketing coordinator at NES Financial. She is a frequent author of articles, blog posts, presentations, and other written content at NES Financial, providing information for EB-5 issuers and investors alike in the dynamic EB-5 marketplace. In her role as marketing coordinator, Halloran’s responsibilities include managing NES Financial’s investor marketing, including the Chinese-facing website, social media and articles as well as providing support to the company’s thought leadership in the EB-5 industry.


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