EB-5 escrow: Not “just another escrow”
Start early and enhance the likelihood of project success
by Reid Thomas
There can be a lot of moving parts in an EB-5 escrow, and many issuers have learned the hard way that setting up an escrow account successfully can’t be left for the last minute. In fact, the planning for escrow is one of the key elements of the overall offering and should be structured at the same time the offering documents are being locked down. There are many reasons for this:
- Bank’s risk tolerance: It shouldn’t be a surprise that there are relatively few banks willing to hold EB-5 funds. With the tightening of the capital lending market and the significant increase in regulations, banks are selective about the types of deposits they will hold. The EB-5 program is complex. The deposits always involve money from foreign investors, there can be complicated escrow terms, and unfortunately, there has been some bad press about the industry. Despite these factors, enthusiastic relationship managers at banks are too quick to make promises to their prospective clients about the bank’s ability to hold EB-5 funds. We’ve seen this movie play out many times. SPOILER ALERT: If the bank hasn’t done EB-5 before, it’ll be a long arduous process and most likely, the risk and compliance department will kill the deal because the deposits are too “risky” in comparison to other alternatives. So don’t go down the path of trying to convince your favorite bank to take your deposit – pick a proven escrow agent/bank that has experience in EB-5. In the grand scheme of the project life cycle, the subscription escrow phase is a relatively small part.
- USCIS, SEC regulations, and broker-dealer rules: With the explosive growth of the EB-5 industry, there is increasing oversight. Improper setup of the escrow account and the escrow terms can result in failed I-526 or I-829 petitions or complete project failure due to noncompliance with the rules. With the long processing times at USCIS, developing an escrow agreement that balances the needs of the investor and the needs of the project without violating any immigration or securities regulations is highly specialized. Engaging with the right experts early enough to be able to get things set up right and avoid potentially disastrous problems down the road is essential.
- Marketing impacts: Investors and their agents are doing more due diligence than ever before. In addition to the perceived quality of the project and the track record of the project principals, the escrow terms are critical in the investment decision process. Using escrow properly has a positive impact on the marketability of the offering. This results in more money being raised sooner and at less expense. When done right, the proper use of an escrow agreement increases the likelihood of overall project success. Understanding the escrow options is an important part of developing the overall marketing plan, and therefore should be done early in the process.
We recommend that as a best practice, issuers should always work with an experienced EB-5 escrow agent and always implement an SEC compliant escrow structure regardless of whether a registered broker-dealer will be used in the marketing of their EB-5 securities. Competition for EB-5 investor dollars has never been higher, and embracing best practices and emerging standards has become a critical decision factor for investors.
You need to make sure you clearly define what your escrow strategy is going to be, and give yourself enough time to implement it. The easiest way is to work with experts who can help you make the critical decisions and make sure you have the right escrow structure for your project and your investors.
Reid Thomas is the Executive Vice President of Sales and Marketing at NES Financial.