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EB5 INVESTORS MAGAZINE

How Investors Can Protect Themselves in EB-5 Deals: A Guide to EB-5 investor risk exposure and other tools of risk management.

by Bonnie Novella

Investing in EB-5 projects has inherent risks, but many immigrant investors may not realize that they have significant power with project sponsors to demand protections from these risks.

Given recent incidents in the industry, investors should harness this power by choosing projects that offer protection from these risks.

In the United States, numerous projects are vying for investor capital—offering investors the power of choice. Investors want to invest in funds that are in line with their personal risk and investment return goals, but may overlook the risks in projects that don’t offer the proper insurance to protect investors.

This article outlines the risks EB-5 investors’ face and details the available insurance solutions to mitigate those risks.

A World of ‘Risk Management’

The term “risk management” is commonly used in the business community to talk about controlling risk. Many times, EB-5 investors may not be cognizant of the risks they are exposed to during a project, along with ways to protect themselves from these risks. EB-5 investors should put their focus on projects with the highest risk management standards and ones that offer the necessary insurance coverage that protects investors. 

One of the biggest risks that EB-5 investors face is the complete loss of capital. This magnitude of investor losses can be averted with insurance solutions available for EB-5 projects today. Due to the fact that regulatory agencies don’t require risk insurance protecting investors, it’s the responsibility of project sponsors to ensure that such coverage is provided. 

EB-5 investors should make risk management a high priority, and invest in projects that offer this type of coverage. Using this method, investors can diminish the risks connected with an EB-5 project—knowing they will obtain a permanent U.S. visa and a complete return of their capital.  

Investment Peace of Mind

People invest in EB-5 projects with an expectation that they will get both a permanent U.S. visa, along with a full return of their capital after five to 10 years. During this period of time, these investors deserve peace of mind regarding the protection of their investment.

Those raising capital today for these projects can help foster this peace of mind and instill a sense of investment protection by instituting a risk management and mitigation platform for their investors. Seasoned project sponsors know how important this is and will explore ways to manage the risks—ensuring EB-5 investors are protected.

In creating a project’s risk management framework, the focus is usually on the insurance policies that protect investors with respect to fraud, mismanagement and failure to pass the I-526 and I-829 application processes.

The table below defines and identifies these risks and the potential solutions:

 

Table 1                      Investor Risk Exposures and Mitigation Tools

Risk

Risk Mitigation Actions

Loss of capital risk resulting from fraud, theft, or misappropriation of the investor’s funds.

In order to guard against this possibility, projects should be required to carry a Fidelity Bond, which protects the investor against the risk of fraud, theft, and misappropriation of assets. The Fidelity Bond may be bought by the project.   

 

Misrepresentations risks, breach of fiduciary duty and general partner mismanagement.  

The Management and Professional Liability Insurance policy, which projects should also carry, should be designed to ensure that it provides the required protections needed. If the structure is a Limited Partnership, the policy would provide coverage for the indemnification obligation of the limited partners (the investors) to the General Partner for any omission, error, breach of fiduciary duty, misstatement, etc.

Risks connected to disapproval of I-526 petition:

 

   - Loss of capital risk.

   - Disruption in life risk resulting from disapproval.

An I-526 Insurance Policy provides coverage offering a greater amount of protection against the risk of denial of an investor’s I-526 petition than a standard developer guarantee or no guarantee. To quality for coverage, projects must pass a significant due diligence underwriting process by the insurance company.  

 

Note: In the event a project is using "early release" of funds from escrow (before the I-526 petition is approved), insurance is important to make sure the investor receives a return of their investment in the event of petition denial.

Denial of I-829 petition risks:

 

   - Loss of capital risks.

   - Disruption in life risk resulting from disapproval.

An I-829 Insurance Policy can be purchased for projects that have adopted the I-526 policy to ensure they get a return of capital for protection in case of the failure of an I-829 petition. In the event projects can’t prove that jobs were created, or funds sustained in the investment, an investor’s petition could be denied.    

 

Note: In the case of an I-829 petition denial, the I-829 Insurance Policy serves as a direct contract between the investor and insurance company.

Requesting Risk Protections

Many people understand that the EB-5 program is a great way to enter the U.S. and obtain a permanent U.S. visa.  But many EB-5 projects don’t have a strong risk management framework or insurance that protects investors from unexpected risk.    

The financial markets offer an example of the choices investors have to pick projects with healthy risk management programs that protect them from risk. Investors need to understand these risks and what is available to protect them against those risks. It’s up to investors to demand such protections.   

Risk is a required element of the EB-5 program, but it can be managed and mitigated.

 

 

 

 

 

 

 

 

 

    

Bonnie Novella

Bonnie Novella

Bonnie Novella, senior vice president at Mark Edward Partners, specializes in alternatives, banking and financial technology. Novella previously worked for NES Financial, SunGard, JPMorgan, Yardi, and several real estate developers. Novella was educated at Northeastern University in MIS, received her private equity certificate from the Said Business School at Oxford University, and earned her CAIA charter in 2014. In 2015 she founded Mohawk Realty Partners, a private fund to eliminate vacancy in upstate New York.

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