by Elizabeth Krukova
Nowadays, many businessmen are seeking funds to support implementation of their investment projects. The question is, is worth it to obtain a regional center designation in order for an ordinary business to attract foreign investors’ capital under the EB-5 program?
Introduction
The EB-5 Immigrant Investor Pilot Program, established in 1992, has not only opened an easier path to U.S. residency for foreign nationals but also allowed business entities to attract investors who would contribute funds for business projects while not hunting for guaranteed high rates of return. This is why passive EB-5 investment through regional centers has become the most common choice for foreign investors.
Under the pilot program, a regional center can accumulate funds from foreign citizens interested in permanent residency in the United States to finance investment projects and use direct and indirect job count to comply with the EB-5 program job creation requirement. Obviously, this unique opportunity to attract less costly financing for business development, and to avoid high cost bank loans, makes many business owners think that it is absolutely necessary to become a regional center in order to raise funds from foreign investors. In our practice, we have seen many entrepreneurs who were ready to seek regional center designation without a clear understanding of the legal consequences of their decision. The purpose of our article is to take a closer look at various aspects of the economic and legal environment in which each regional center has to operate and determine when it is reasonable to establish a regional center for EB-5 investment.
Regional Center Requirements
USCIS defines a regional center as, “any economic entity, public or private, which is involved with the promotion of economic growth, improved regional productivity, job creation and increased domestic capital investment.” In order to obtain the regional center designation from USCIS, a business entity must submit a proposal, supported by economic and statistic reports, showing:
- A specific geographical region within the United States where a regional center will promote economic growth by implementation of a certain investment project;
- Economic models verifying the number of new jobs to be created, directly or indirectly, through capital investments made in accordance with the regional center’s business plan;
- The promotional efforts made and planned for the business project;
- A positive impact on the regional or national economy as result of investment project implementation.
At first glance, complying with these four requirements may not seem that difficult. However, each of them is hiding a lot more requirements to meet. Let’s take a closer look at what is required to obtain a regional center designation. First, a certain geographical region should be selected in order to consider its current economic conditions and to determine whether the investment project is to take place in a targeted employment area (TEA). The foreign investor’s qualification for a $500,000 investment depends on operating the regional center in a TEA. Therefore, due diligence is important to obtain designation within a TEA, as it will affect the attractiveness of a project for potential investors.
Other requirements directly relate to the investment project and its business plan. A business entity seeking regional center designation shall be ready to spend substantial funds to hire professionals for preparation of the business plan accompanied by economic and statistical reports in support of job counts and forecasted economic results. It is also necessary to prove that the investment project implementation would result in a positive impact on the region.
Additionally, the application process for regional center under the EB-5 Immigrant Investor Pilot Program is quite costly (as it requires a $6,230 fee). The average processing time for the application is about nine months. Moreover, after a business entity receives the desired designation from the USCIS, it is required to demonstrate an approved regional center’s continued eligibility for the designation every year by filing form I-924A. It does not require a governmental fee, but a regional center will definitely need to budget for expenses on lawyers, economists and marketing analysts on an annual basis.
Designation and SEC Compliance
Despite the above mentioned complexities, many regional centers have successfully received USCIS designation since 1992. The vast majority of EB-5 money is funneled through regional centers (the number of which has increased up to 251 in 2012 from only 11 in 2007). However, this impressive statistic does not indicate that it has become easier to obtain USCIS designation, nor that each project promoted by a regional center receives the projected amount of funds from foreign investors. Recent information illustrates that the USCIS is stuck with processing of applications for regional center designation and many applicants have been waiting for adjudications for over 10 months. These delays are probably caused by the fact that many projects, “have gone bust and some are in legal disputes alleging fraud which cast doubt on the immigration agency’s ability to effectively monitor the program.” USCIS, in turn, has enforced additional rules to control activities of the regional centers. As a result, compliance with Security and Exchange Commission rules has become one of the most vital aspects for all active regional centers.
The entities offering investments must either register with the SEC or qualify for an exemption, and they must follow stringent rules on how they market their investments and which assurances they give while marketing. USCIS strives to restrain activities of unauthorized brokers who have been reported to receive up to $100,000 in commission for each investor they bring to a regional center. Non-compliance with even basic securities regulations could result in fines and penalties for a regional center, meaning the investors could sue them to recover money.
Weigh Pros & Cons
Therefore, those who are planning to attract capital by means of the EB-5 program shall consider each and every aspect of becoming a designated regional center. It might not be worth trying to get a regional center designation for a single project, especially as it is not uncommon for the process to take many years. In most cases, acting under the standard EB-5 program would be much more efficient for business owners who have prepared a comprehensive business plan for their project and managed to find interested foreign investors. It is important to understand that EB-5 requirements for an investor under the pilot program are essentially the same as in the standard EB-5 investor program. It is a realistic business plan with a detailed explanation of business necessity, investment objectives and the number of full-time positions to be created that matters. In order for investors to be qualified for the lower investment threshold of $500,000, a business entity may do research on the geographic area where it operates and obtain appropriate documentation from the local government to prove that the investment project is to take place within a TEA. So in many cases, it is probably better to revise the business model rather than try to get regional center designation.
Conclusion
In conclusion, we encourage entrepreneurs who are ready to engage in business relationships with foreign investors to focus first of all on their strategic goals. For those interested in cooperation with developing companies on various projects, designation as a regional center would be the best way to attract and coordinate substantial amounts of foreign capital. Those planning a particular project to expand existing business, or establish their presence in a new market, shall rather use foreign investment under the standard EB-5 program, and those seeking funds for implementation of an existing investment project or business idea may always try to cooperate with a regional center on the project promotion.
Resources
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USCIS official website: http://www.uscis.gov/portal/site/uscis/menuitem.eb1d4c2a3e5b9ac89243c6a7543f6d1a/vgnextoid=2785a5f224a2e210VgnVCM100000082ca60aRCRD&vgnextchannel=2785a5f224a2e210VgnVCM100000082ca60aRCRD
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Sarah Ryley, The Daily, “Investor Visa” Probe http://www.thedaily.com/article/2012/09/10/091012-news-investor-visa/
Elizabeth Krukova
Elizabeth Krukova, Esq., is a founding partner of National Capital Legal Services, Inc. and an expert in immigration related matters, including green cards and EB-5 investor visas. She completed her Juris Doctorate degree at Moscow State Law Academy in Moscow, Russia and her Masters degree in Law at Indiana University of Law. Elizabeth specializes in investment based immigration, cross-border transactions and corporate law.
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