By Reid Thomas
When the EB-5 Regional Center program expired recently, it threw a wrench in many existing and prospective immigrant investors’ plans. After all, an estimated 95% of all EB-5 visa applicants go through a Regional Center rather than direct investment.
It’s easy to understand why. Unlike direct EB-5 investment, investments through Regional Centers don’t require investors to own or operate a commercial enterprise themselves; it also facilitates compliance with relevant regulations, and any indirect and induced jobs stimulated by the job-creating enterprise also count towards the 10 new jobs needed to satisfy EB-5 requirements.
Though many believe that the program will likely be reestablished in a few months, the current pause provides a real opportunity for Regional Center issuers to offer direct investment – and therefore capitalize on rising investor demand, a newly lowered minimum investment threshold, and the ability for new I-526 petitions to skip to the front of the line, as all backlogged ones tied to Regional Centers will be held in abeyance as long as the program remains in limbo.
The pros and cons of direct EB-5 investment
All that said, quickly pivoting to direct investment isn’t without its challenges.
Since most EB-5 applications go through regional centers, most investors aren’t aware of the advantages direct investment provides. Making these clear to investors will go a long way in attracting their capital. For instance, with direct investment:
- The program is permanent, so it’s not impacted by Regional Center sunset dates
- With the Regional Center program on hold, there is less waiting line. More visa capacity and processing power of USCIS is available for direct EB-5 investors
- How funds are deployed and returned is like any other private equity investment Instead of dealing with a variety of processing times and permitted returns in a loan model.
- EB-5 Investors have more daily involvement with business operations, providing greater control for those who want to have an active role in their investments
On the other hand, switching to a direct investment model brings obstacles for issuers and investors alike.
The biggest downside is the job creation requirement. Direct investment projects requires that 10 full-time employees are hired on the EB-5 project’s payroll for each EB-5 investor who are involved, and the enterprise “must directly create the full-time positions to be counted.” This criteria is strict and means these positions need to be of a specific kind and limited number since the workers must be employees of the enterprise.
For investors, this often means these investments are more likely to be in operating businesses than real estate development projects. Those who had hoped to take a hands-off approach may be wary of the active role they’ll now have in such a business.
For issuers, it means the size of the EB-5 investments they can make is likely to be smaller because, without the benefit of indirect and induced jobs, a limited number of direct jobs can be created, which will cap the number of EB-5 investors that can be accepted.
Be prepared to navigate new administrative complexities
Administrating direct EB-5 investments will be a challenge – especially for issuers looking to move fast. Rather than funds being pooled and deployed through a loan model – with a clear exit strategy – issuers will have to adapt to a true equity offering, with multiple assets to boot.
Investors will seek out issuers who understand these differences and the administrative, compliance and reporting complexities that come with them. They’ll need to be guided through the process and will likely demand heightened communication and transparency given the more hands-on nature of the direct investment. A third-party fund administrator might be a valuable partner for issuers who want to capitalize on the opportunity – even if they may not have the requisite experience in-house.
The difficulties in offering direct investment may be significant, but the potential upside is also significant. Smart Regional Center issuers have a tight window to capitalize on this opportunity. They shouldn’t wait too long to get started.