by Edward C. Beshara
In representing the developer, what comes first: EB-5 compliant project documentation or EB-5 funding?
Due to the nature of the EB-5 program, it must meet multiple indicators of success— compliance with EB-5 rules and regulations and financial viability—in order to be marketable to foreign investors. The success of an EB-5 project hinges on foreign nationals investing in it; EB-5 investors will not invest if they are not certain that the project is EB-5 compliant and will lead to a green card. On the other hand, it does no good to have an EB-5 compliant project if investors are not convinced of its financial success and ability to create jobs.
In order to be viable and financially successful, the project often requires the use of EB-5 funds as quickly as possible. Therefore, funding of the project is equally as important as pre- paring EB-5-compliant project documentation. So, how does one determine which comes first—the EB-5 compliant project documentation, or the EB-5 funding?
Any developer approaching the EB-5 program will be but one part of a complex apparatus. For the purpose of this analysis we will focus on three groups, the titular three blind mice: the team of professionals, the project developer, and the intermediaries sourcing the investors. The individuals in these groups are blind because they each believe their roles in the EB-5 project are paramount. First, the professionals desire the documentation to be immediately compliant. Second, the project developers do not want to start the compliant project documentation until they know they can get funding. Third, the brokers and intermediaries desire to force the professionals and developers to prepare documents that they can easily market to the investors who fund the projects. And, of course, the investors desire U.S. permanent residency and a viable exit strategy from the project.
While they may each focus on their individual priorities, the reality is that all the blind mice play an equally important role in preparing an EB-5 compliant and marketable project; therefore, the goal for a successful EB-5 project is the coordination of these efforts. They will coordinate first to combine compliance and marketability, then to receive funding as quickly as possible, all in the hopes of avoiding denials.
A compliant EB-5 project
Key in establishing an EB-5 project are the professional team members—or mouse one—consisting of the immigration attorney, economist, business plan writer, marketing analyst, and securities attorney. These players all understand the technical rules and policies of what makes an EB-5 project compliant. In fact, the team (who should have the appropriate EB-5 expertise) will know how to prepare the documents so that they will be approved by USCIS.
A textbook EB-5-compliant project is supported by documents proving business activity and demonstrating that the investment funds will lead to the required job creation. This is important because, as we will determine, the project needs to be more than compliant to be successful.
An EB-5 project, whether it is a direct EB-5 project or one associated with a regional center, must be compliant with the EB-5 rules and regulations as put forth by USCIS. The laws and rules state the requirements for a compliant EB-5 project; however, these laws and regulations are interpreted by the USCIS officials in the form of written policy memoranda, written requests for evidence (RFEs), and/or through approval decisions of applications and petitions. In fact, after several months of dialogue between the agency and EB-5 stakeholders, USCIS used the May 30th Policy Memorandum to formalize their interpretations of how the EB-5 unit should adjudicate EB-5 submissions. This newest policy memorandum is the key to preparing a compliant EB-5 project, as well as I-526 and I-829 petitions.
The EB-5 compliant direct project consists of a comprehensive business plan, including verifiable details of the business activity—showing how the EB-5 funds will be committed and lead to the creation of jobs.
USCIS will first adjudicate the EB-5 compliance at the time of adjudicating the I-526 petition prepared and filed by the investor. Because non-compliance will cause the investor’s petition to be denied, it is important that the investor be sure that all aspects of the project are in compliance before filing their petition to avoid wasting time and money. USCIS will again consider compliance with EB-5 regulations at the I-829 stage, when the investor files to remove conditions to his permanent residency.
Regional center project
The EB-5 project associated with an existing regional center will be deemed compliant through inclusion of a comprehensive business plan, an economic report showing the creation of indirect jobs, and the security offering documents for the investors to review and sign. If there is non-compliance with securities regulations, the SEC will not hesitate to bring legal action against the project. On this basis, it is imperative that an experienced securities attorney with EB-5 expertise be retained by the EB-5 project for strict guidance.
The compliance of an EB-5 regional center project can reviewed and adjudicated at the I-924 application for pre-approval stage and /or at the I-526 petition filing stage. As stated above, the USCIS EB-5 unit can also adjudicate the compliance of the EB-5 project at the I-829 stage by determining that there has been no material change to the business plan and that the required jobs have been created.
Legal compliance alone will not necessarily make the EB-5 project viable. The next question is: what are the other steps that will make the project marketable and viable?
A marketable EB-5 project
The essence of an EB-5 project is its ability to attract and use EB-5 investments. Therefore, within its compliant documentation, the project needs to incorporate information and terms of agreements that are appealing to foreign national investors. The investors’ expectations will, in the current market, require certain terms to be included in the offering agreements and certain expectations to be stated in the supporting EB-5 documentation.
Certain types of projects tend to be more marketable than others; however, it is usually not based upon the industry classification. An EB-5 project will generally be more marketable if the project can clearly show that the required number of jobs are expected to be created through verifiable calculations, if the operators or developers of the project have an established brand and history of financial and business success, and if the EB-5 project has a clear and compliant exit strategy.
Loan models are particularly attractive to the foreign investor. In such a model, the new commercial enterprise (NCE), which is the fund LLC, is able to accept the investors’ funds as an investment. The fund LLC will then loan the funds to the job creating entity (JCE) to create the required jobs. The SEC and USCIS regulations clearly state that there can be no redemption agreements or guarantee to return any part of the principal investment made to the investor.
However, in a loan model the JCE can guarantee the repayment of the loan amount to the NCE. The loan can be collateralized by the assets (land and buildings) of the JCE; hence, if the loan is not paid back, the NCE can bring legal action against the JCE either for the repayment of the loan or for sale of the collateralized assets to repay the loan. The NCE, owned by the investors, will now have a repaid fund, and the investors can sell their interest in the NCE at fair market value. In this instance, the project will be more marketable if the investors are in the first position for repayment of the loan.
Documented job creation
EB-5 projects will not be marketable to investors unless the project can show reasonable projections that the required number of jobs will be created, either by the business plan and/or the economic report. Along this line, the project will become even more marketable by demonstrating that more jobs than required will be created. If, at the I-829 stage, USCIS determines that not enough jobs were created, then the foreign national investor will not obtain approval to remove conditions on their permanent residency. Demonstrating that more jobs than are required will be created is a clear safety net or back up for the investor, in case of changing economic conditions.
Step one: combination of compliance and marketability
It is the primary goal of the project developers—mouse two— to obtain EB-5 investment funding for the project. However, the project developers must let themselves be guided by the brokers or intermediaries sourcing the investors—mouse three—before they receive funds. The brokers and intermediaries usually know the market for the investors they are dealing with and know what clauses need to be inserted in the EB-5 compliant documentation to make it easy to sell the project. The general conditions for marketability, as established above, are a good place to start, but brokers and intermediaries are key players in helping to determine what makes a project marketable to a specific group of investors. Brokers and intermediaries can help the players understand that, oftentimes, compliance is marketable.
Step two: funding before I-526 approval
The time delay between the filing and the approval of the investor’s I-526 petition is significant and consequential; this is one major factor that has a profound effect on the financial and business viability of the EB-5 project.
Traditionally, EB-5 projects marketed to investors utilized a full escrow model, stating that investors’ funds would be transferred to the project for use upon the approval of the I-526 petitions. Now, because of the long time delays in adjudicating I-526 petitions, it is detrimental for the EB-5 project to wait this long before using the investors’ funds.
Therefore, the EB-5 project principals must again rely on the brokers and intermediaries to explain to the investors that EB-5 funds will often be used, at least in part, at the time of filing the I-526 petition, rather than at the time of I-526 approval. The investors will usually agree to allow the EB-5 project to commit their investments funds at the time of the filing of the I-526 petition if the developers and/or operators of the project have a brand name and a successful financial and business history. In addition, investors are more likely to agree to this condition if the project can clearly show that they have financial reserves committed to the project, and hence will have the financial means to quickly repay the investor if their I-526 petition is denied.
Such a release schedule has become the norm in the industry, and investors are generally agreeing to these terms. In fact, USCIS requires the EB-5 investor to have invested, or be in the process of investing, the funds at the time of filing the I-526 petition.
Step three: avoiding denials and return of funds
The three blind mice are now convinced they have an EB-5 compliant project that is also marketable to investors. That is, the professional team members believe the documentation will be approved by USCIS, the brokers and intermediaries believe that the project is marketable to investors, and the project developers believe that they will receive investments for the project. But the journey is not over yet!
In order to make the EB-5 project marketable, there is usually a stipulation that funds will be returned to the investor within a set period of time if the I-526 petition is denied. Therefore, it is paramount that the professional team, the project developers, and the brokers and intermediaries work together to ensure that the I-526 petition will be approved by USCIS.
In the EB-5 Regional Center context, the I-526 petition consists of three parts: the regional center approval documentation, the EB-5 compliant project documentation, and the authentication of the source of investor’s funds. Before investors decide to commit their funds to the EB-5 project, the compliant project documentation must be prepared, and the regional center must be designated. However, the individual investors’ source of funds authentication documents may not yet be prepared.
One of the dilemmas for the EB-5 project developers and the brokers and intermediaries is that investors may desire to use their own immigration attorneys who may not have EB-5 expertise. Because these players are also concerned about the immigration success of the investor, it is highly recommended that investors engage experienced EB-5 attorneys to advise in the preparation of the authentication of their source of funds. If investors decide to retain their own immigration attorney to represent them in their I-526 preparation and filing, it is wise for the project developers to retain EB-5 immigration counsel to review the I-526 petition prepared by outside counsel, to ensure quality control and consistency of the I-526 filings.
As stated, the ultimate goal for all the blind mice— the team of professionals, the project developers, and the brokers and intermediaries—is to obtain approval of the I-526 petition. If the petition is denied, the EB-5 project will need to return the investment principal funds to the investor, which results in delays for the business development of the project, and delays for the investor and family members in obtaining conditional permanent residency. Additionally, the brokers would not be paid their finder’s fees, and the professionals would miss out on further retainers for services to be provided.
So what do we do about the three mice’s blindness? Some improvements in the EB-5 process may help, and could include increased USCIS predictability, expedited processing, and clarity. These could change the timing of EB-5 approvals and hasten the commitment of investors’ funds. For example, an I-526 petition processing time of three or four months could allow projects to wait for USCIS approval of these petitions before committing investors’ funds, making sure that the investors have the success of their petitions in sight before moving forward.
Hopefully, the Comprehensive Immigration Reform Act will make the processing of I-526 petitions, I-924 applications, and pre-approvals of EB-5 projects quicker, facilitating these positive results. Funding for the EB-5 program is paramount, so obtaining the commitment of funding from the brokers or sources of the investors should be started before completing EB-5 legally compliant documentation.
With reform in the EB-5 program, maybe these three mice would not be so blind, and have objectives that work better together, helping them all win the race against the clock and build successful projects.
 The SEC has clearly stated that the EB-5 projects need to follow complex and strict rules so as to make sure the offerings and representations to investors are transparent, accurate, and credible, and that there are no intentional misrepresentations or fraud. That is, the foreign national investors need to know the risks of the investment, how their investment and administration funds are being used by the EB-5 project, and that there can be no guarantees for the return of the principal amount of the investment.
 For a detailed discussion of escrow in EB-5, see Triantaphyllis and Yen, Evolving Escrow: Navigating Delayed USCIS Processing Times in this issue.