EB-5 Project Immigration Due Diligence

By Robert C. Divine

While return of investment and some profit are important, the major focus of most EB-5 investors is to get and keep a green card. This article addresses some—but hardly all—important items of due diligence that EB-5 investors should conduct in evaluating an EB-5 investment.

Issuers of investment opportunities usually provide a memorandum that generally describes the new commercial enterprise (NCE) and the business plans of the job creating enterprise (JCE) with a focus on the ways in which the investor might lose the investment and the immigration benefit. These "risk disclosures" can sound scary, and they should. The investor should try to understand them and ask questions if necessary. But the immigration risks are complicated and quite difficult to explain. Here are some things to look for:

  • Redemption and Guarantees: U.S. law requires EB-5 investments to be "at risk" equity investments and a loan to the NCE. Agreements to buy back the investor's interest at a scheduled time for amount, or any guaranteed return to the investor, are prohibited. So far U.S. Citizenship & Immigration Services (USCIS) has tolerated arrangements under which the NCE receives scheduled payments (such as repayment of a loan) that are distributed to NCE investors, and it has tolerated some third-party guarantees of the JCE's obligations to the NCE. These are tricky distinctions and need careful review.

  • Dissipation of Capital: All of the minimum EB-5 capital (typically $500,000) must be delivered to and used by the JCE in job creating expenses, and it may not be used for such things as agent or broker fees, escrow fees, regional center fees, loan origination fees, or NCE management fees, all of which instead need to be paid from separate administrative fees, operating income of the JCE, or some other source. Some expenses, such as land acquisition costs, are not inherently job creating, and thus cannot be used by economists to project indirect job creation, but they can be paid with EB-5 funds because they are a necessary part of the job creating business. At the I-526 stage, USCIS reviews the subscription and project documents to confirm that the plan is to spend the capital on job creating activity and not on prohibited fees, etc. At the I-829 stage, USCIS reviews how the capital was actually spent. USCIS will deny at either stage if the plan or action reflects inappropriate dissipation.

  • Job Allocation: USCIS allows investors to agree among themselves in the NCE organizing document who will be credited with the first jobs created, and who will lose out if not enough jobs are created. In general, it seems most orderly to allocate jobs in the order that investors immigrate to the U.S., which correlates roughly to when they will file their I-829 petitions showing that jobs have been created. This allows the latest-immigrating investors effectively to claim credit for the latest-created jobs, and it rewards diligence in pursuing the processes. Nevertheless, other options exist, and investors should question how they will work. Investors should determine where they will be in the job allocation hierarchy, since the lower they are in the ranking the greater the risk of being denied I-829 if not enough jobs end up being created.

  • Location in RC and TEA: Most projects are located in areas of regional center and targeted employment area designations to allow credit for indirect job creation (RC) and investments as low as $500,000 (TEA), though neither is required. To take advantage of those, USCIS requires that at the time of the particular investor's investment (deemed to be the time of I-526 filing if escrow is used) the NCE is "principally doing business" in the sponsoring regional center and in one or more TEAs. The focus is not on the corporate office of the NCE but instead on the location of most of the jobs involved. An approved regional center now can sponsor projects in any industry at all and can sponsor projects with economic impact within or adjacent to the approved area[1]. The regional center approval notice should be reviewed. TEAs must be shown by (1) evidence that the project is both not in a "metropolitan statistical area" and not in a town of 20,000 or more, (2) shown by data that the entire MSA or county has 150% of the national average unemployment rate, or (3) shown by a state designation, based on proper methodology and most recently available data, that the "political or geographic" area chosen by the state has such high unemployment on a weighted average. State TEA designations are not necessarily valid for one year from issuance if newer data has come out, so check the dates and call the state.

  • Detailed Business Plan: USCIS requires a credible business plan for the JCE with meaningful detail about the products or services, market analysis (preferably by a third party) assessing competitors' pricing, required permits and licenses, supply sources, marketing strategy, experience of personnel, staffing requirements, timetable for hiring, job descriptions, financial performance projections, and other necessary financing. Supporting evidence needs to show that it is more likely than not that the jobs will be created by the time the I-829 will need to be filed, which USCIS now deems to be 2.5 years after I-526 approval of the investor. While many securities offerings do not provide so much detail, most EB-5 investors want to see this detail before they invest to gain confidence that they can obtain the immigration benefit.

  • Job Creation: Investors should become satisfied (in consultation with business advisors) that the JCE can accomplish the targets of expenditures, direct job creation, and/or revenues that are used as the basis for any economist's methodical prediction of indirect job creation. The business plan's targets and the economic analysis' inputs should match exactly. Direct jobs derived only by economic model should be reviewed carefully. USCIS heavily scrutinizes claims of job creation in the tenants of JCEs or arising from the spending of visitors to the JCE business (hotel). So should investors.

  • Escrow: No escrow is ever required by USCIS. Some investors prefer escrow to ensure immigration approval before release of funds to the project. USCIS tolerates that, but in its latest policy memo only if the condition on release from escrow is approval of that investor's I-526 or other immigration process up to conditional residence. In practice USCIS has tolerated other conditions on release, such as minimum total investment for the project (a responsible provision normally) and approval of multiple investors' I-526 petitions, and it is not clear how USCIS will continue to handle these. Certain "holdback" arrangements have survived scrutiny of late.

  • Material Change: Businesses change, for sure, but any impact on job creation could have negative effect on EB-5 investors, who should assess the likelihood of meaningful change during the process. Material change before the investor is admitted as a conditional resident can require going back to the beginning of the I-526 process.

  • I-829 Eligibility: Two years after EB-5 admission to the U.S., investors must show that they "maintained their investment" and job creation to the end of that conditional residence period. USCIS has not been clear about the impact of a liquidity event at the JCE that results in return of funds to the NCE, whether or not distributed to EB-5 investors. Plans for redeployment of such funds to other job creating enterprises might help, but policy questions remain. Investors should study the documents to see when liquidity events can occur and consider the implications.

Space does not allow a complete discussion of an EB-5 investor's due diligence for immigration issues, but with hope this provides a useful start. The whole exercise would be easier with clearer rules from USCIS.

[1] The May 30, 2013 memo that first announced the relaxed rule allowing sponsorship outside the approved area did not mention any requirement that the project outside the approved area be adjacent to the approved area. That limitation is the product of USCIS' general rule in setting RC geography that the area be covered by overlapping or contiguous impact of RC projects, real or hypothetical, and USCIS has mentioned the requirement of adjacent effect in its February 26 and September 10, 2014 stakeholder meetings, including the recently published USCIS Q&A summary of the February 26 meeting (Question 14).


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