How can EB-5 investors set up bank accounts safely for their investments? -

How can EB-5 investors set up bank accounts safely for their investments? Staff

Investors applying for the EB-5 visa through a regional center (RC) usually must transfer their funds into an escrow account in the U.S. before fully investing them in an EB-5 project.

Common practice today is for the EB-5 investor to escrow once they choose a project and are ready to invest. The developers or RCs behind the projects establish the accounts through a third party (escrow agent), usually determining conditions for when and how the funds will be released. A usual condition is for the EB-5 applicant to have successfully filed an I-526 form or the USCIS approving it, or when it’s time for the money to be fully invested in the Jobs Creating Entity (JCE), the business in charge of creating the jobs required by the EB-5 program.

Escrowing is considered a safe option because both the sellers and buyers of the EB-5 project have equal access to this type of bank account.

“It is the safest way to invest the funds,” says Bobi Ahn, managing member at Ahn Law Group. “The invested capital can be either invested directly in the new commercial enterprise or placed in an escrow account.”

However, there are drawbacks and risks associated with this type of bank account that EB-5 investors must understand.

EB-5 attorney Phuong Le, Partner with KLD LLP, says, “While escrow has traditionally been offered as a depository option for EB-5 investors, it’s questionable if they still have the same protections that investors expect. One simple (and major) reason is that it’s common for escrow agreements nowadays to release funds upon I-526E receipt. So, you need to ask yourself what exactly you’re protected against. About six weeks of funds sitting in an account?”

Red flags to avoid when using an escrow account for EB-5 funds

One key advantage of using an escrow account is its flexibility. If an EB-5 investor decides to halt their application, they can easily withdraw their funds. To avoid any potential risks, it is recommended that EB-5 investors regularly check their funds to prevent them from being misused before their application is approved. If it becomes difficult for investors to monitor their funds, this could be a potential red flag.

Other risks associated with using an escrow account include the timing of releasing the funds and baseless pledges.

According to Ahn, “possible red flags that investors should avoid are RCs that are opting to use the filing of the I-526 petition as the trigger condition – i.e., where the escrow account terms condition the release of funds upon acceptance of the I-526 petition filing by USCIS and not upon approval of the petition. This shortens the escrow period, beginning from the time funds are wired to the RC and ending when USCIS approves the I-526 petition, to the earlier date on which the investor simply files the petition. This poses a significant risk to investors, as denial of the I-526 petition would potentially occur months or years after funds have been released with no assurances of an approval.”

The EB-5 attorney also explains that there is a downside if the RC pledges a refund if the I-526 is denied to facilitate the transfer of funds to projects quickly. “Regional centers have begun to include in escrow agreements the provision that in the event of an I-526 petition denial, the center will refund the investment amount to the denied investor, in some instances by creating a fund consisting of portions of the initial capital invested by the investors in escrow to refund denied investors, which can lead to the investors’ full investment amount not being applied/released to the [JCE],” she adds.

According to Securities and litigation attorney Robert Cornish, another significant drawback is a lack of dependence publicized as an advantage for faster fund deployment on the EB-5 project. “Remarkably, in several failed projects I have seen in the past, escrow providers under the control of the developer or even immigration counsel tout that they are not independent, all in an effort to convey swiftness in the deployment of funds. My view is that projects touting this supposedly competitive advantage should be avoided.”

Best practices for EB-5 investors to successfully escrow their capital

A thorough due diligence of the escrow account conditions for releasing the funds is the first step to avoid risk, EB-5 attorneys say. These conditions are usually part of the documentation of the EB-5 project the applicants must review, including the private placement memorandum (PPM) usually handed to potential investors and the operating or partnership agreements.

A proper escrow setup can make or break an EB-5 application, so transparency is crucial.

“Proper planning and structuring of an EB-5 escrow account are fundamental elements of the overall EB-5 offering since the improper setup of the escrow account can lead to denial of I-526 petitions (i.e., capital placed in escrow after filing of I-526),” Ahn explains.

In addition, the EB-5 investor must transfer the investment funds to a separate account from the one used by the JCE. Le insists its documentation should also clearly state the timeline for releasing funds and whether they will be invested solely in the EB-5 project in question.

“This is why investors need to understand what protections and safeguards to ask for when investing in the first place because the escrow period is over in a blink of an eye now,” he adds. “Two simple things are whether they should even invest with that particular project to begin with and what refund provisions there are if there’s a problem with their I-526 — specifically what refund period and conditions are they looking at. A refund provision backed by actual cash is generally safer than one based on finding replacement investors (you’re banking on the issuer successfully raising more money to swap you out).”

The EB-5 attorney recommends investors question the speed at which the escrow agents can release the funds. “The real question is: if an issuer is able to release funds quickly, what safeguards are they offering the investor? Put another way, the NCE/issuer has essentially stepped into the role of the escrow agent to provide these protections. That’s the reality. All roads lead back to project underwriting and whether you should be investing with the project in the first place because investors will find out they have limited protections from the escrow agent. This is true regardless of whether it’s a Regional Center of direct EB-5 investment. If you don’t trust the people managing your investment, why would you hand them your hard-earned money?

As to how the escrow is managed, the due diligence must confirm that the service provider knows EB-5 program regulations and complexities.

Cornish adds that EB-5 applicants understand who this third-party agent is. “[They], more often than not, fail to look into the creditworthiness of their escrow providers. The roadmap for this often originates in the deal’s PPM or Operating/Partnership Agreement, where the qualifications of the escrow provider are provided. The investor should look into whether any qualifications imposed upon the escrow provider in these documents have been met. This includes the corporate status of the escrow provider, its financial stability, and understanding its experience in project development similar to the deal at hand.”

He also suggests investors should fully understand the escrow fees and who is paying them. “This is especially so if an investor anticipates negotiation of a bespoke fee arrangement as a special member/special partner.”

Le concludes that common sense must prevail when transferring money even if the escrow account seems safe. “If you receive wiring instructions to a brokerage account or personal account, it’s best to run away from that EB-5 project as fast as possible.”

Alternatives to escrow accounts for EB-5 investors

Escrow accounts are not the only option EB-5 investors can use to transfer their funds. However, there are limited checking or savings account offerings to hold EB-5 capital in the current banking system, Le cautions.

“Regardless of whether it’s a Regional Center or direct EB-5 investment, funds can be transferred into any US bank account, but only a handful of banks nowadays feel comfortable holding EB-5 investments. The majority of accounts will be either escrow or checking accounts (that will receive EB-5 funds once they’re released from escrow).

East West Bank is one of the active U.S. banks that allows foreign nationals to transfer their capital for EB-5 investment purposes.

According to business relationship manager Holly Huang, “Before our clients arrive in the U.S., we can assist them in opening a bank account. Clients can easily open an account online and receive their account and routing number. Making an EB-5 investment typically involves a large incoming wire.”

The bank works with EB-5 investors referred by real estate agents who are in the process of getting their green cards or have recently obtained them. Establishing an overseas account in the US can help clients prepare for their arrival and their legal stay in the US. The EB-5 visa is the first step in living here legally, but they must take care of other things, such as where their kid is going to go to school or where they’ll live.”

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