Financial Reporting to EB-5 Investors

By Charles Kaufman

An EB-5 investor entrusts a significant sum of money - $500,000 or $1,000,000 – to a new commercial enterprise in the U.S. for at least several years. Well-advised investors or their advisors thoroughly investigate EB-5 opportunities before they invest, but one area that typically receives little attention is the EB-5 issuer’s obligation to provide continuing financial information to investors.

This inattention is not surprising. For one thing, EB-5 investments cannot be transferred or sold back to the issuer until immigration procedures are complete, so a typical EB‑5 investor could not do very much in response to financial information. In addition, most EB-5 issuers are newly formed companies with little or no historical information to report, so investors are accustomed to receiving only financial projections at the time of investment. These projections are based on the plans and hopes of project sponsors, usually with warnings that the projections are speculative, are based on numerous assumptions, and may not be borne out by actual results.

Investors, however, are becoming more concerned about monitoring post-offering financial activity. In particular, a 2015 Securities and Exchange Commission (SEC) enforcement action against Seattle-based Path America, LLC and its affiliates has escalated these concerns. The SEC has alleged that the developer misappropriated approximately $17.6 million of $125 million received from EB-5 investors, using the funds to buy a personal home and other real estate, and for casino gambling. The SEC alleged that the diversion not only constituted financial fraud, but defrauded investors by falsely promising EB-5 immigration benefits while violating the visa program’s requirement that all invested funds be placed in an EB-5 project. Understandably, many EB-5 investors are now looking for ways to confirm that the issuer will use EB-5 funds as intended to produce the jobs that will secure permanent, unconditional U.S. residency and to provide a prospect of return on investment.  EB-5 project developers are also seeking ways to reassure investors fearful that their investments may not be properly handled.

Post Offering Reports

For post-offering reports, investors will have two concerns: Are funds being invested in the EB-5 project as promised? Is the project performing well enough to create and sustain the required number of jobs and to provide hoped for financial returns? 

Most EB-5 issuers are organized as limited partnerships or limited liability companies (LLCs). State laws applicable to limited partnerships and LLCs generally do not require any kind of financial reporting[1]. For income tax purposes, an EB-5 entity that is taxed as a partnership must provide an annual K-1 statement that provides summary information on the investor’s share of income, losses, deductions and credits, but this is usually not sufficient information to confirm the proper deployment of funds or to understand fully the performance of a business. As a result, the issuer can decide how much or how little financial information investors will receive, and it is up to the investor to decide before investing whether that level of information is satisfactory.

Financial reporting promised by current EB-5 issuers ranges from a vague commitment to provide annual reports, to the provision of full financial statements - a balance sheet, income statement and statement of cash flows - on annual audited basis and unaudited quarterly basis. 

Goals of Financial Reporting

Depending on the entities reporting and the frequency and detail of reports, they can serve a number of functions for EB-5 investors:

  • Confirming that EB-5 capital has been promptly invested in accordance with the project’s business plan.
  • Confirming that the investor is receiving appropriate distributions.
  • Indicating whether the project is meeting financial projections and will be able to deliver on its projections for job creation and exit strategy.
  • Providing an early warning of financial trouble in the issuer or the project.
  • Deterring casual fraud.
  • Deterring and detecting major fraud, especially when the financial statements are audited.

In the absence of any reporting requirement, the issuer may have no obligation to report significant business developments to investors unless and until the investors have a right to vote based on the information – for example, to approve a dissolution or sale of assets. Regular financial reports would make the investor aware of negative developments much sooner. 

Investors should be aware that financial reporting provides limited protection against fraud - a determined perpetrator of fraud can falsify financial statements, especially when there is no auditing or the fraud involves collusion of two or more persons. Nevertheless, a complete absence of financial oversight can make improper use of funds all too easy. Ultimately the best protection against fraud is careful due diligence of the issuer, the project and the people who will carry it out – in particular the background, track record and credibility of the principals running the business. 

Even if the limited partnership agreement or operating agreement give the investors few alternatives to act on information, it is likely that most investors would rather be informed than remain in the dark. At a minimum, if financial reports indicate fraud or other malfeasance, the investors can consider legal action.

Who is Reporting?

The typical EB-5 investor invests in a new commercial enterprise (NCE), which accumulates the funds from all investors and invests the funds in the job-creating entity (JCE) that will actually own and operate the project. As a result, financial reports at the NCE level alone will not give the investor much information about how the project is doing. For full transparency, look for an EB-5 issuer that will also provide financial information on the project company. You can see what kind of reports the JCE will be providing to the NCE by examining the loan agreement if the NCE is lending EB-5 capital to the JCE, or the operating agreement if the JCE if the NCE is making an equity investment in the JCE.

If the JCE is borrowing some of its funding from a financial institution – like a construction loan from a bank – that institution will almost certainly require quarterly reports and audited annual reports. The EB-5 fund should be getting those same reports, and a careful EB-5 investor would want to see them as well.

In conjunction with seeking regular financial reporting, investors may wish to negotiate for other protections and safeguards – and project developers seeking to reassure investors may wish to consider offering them. Such provisions may give the investors additional alternatives if the financial reports signal trouble. Examples would include:

  • A provision expressly stating that the general partner or manager must invest 100 percent of EB‑5 capital in the project, and is not simply authorized to do so.
  • A provision that if the project misses a major milestone – such as the JCE’s failure to repay a loan of EB-5 capital or failure to commence construction – that the investors may appoint a representative or special manger.
  • A requirement that if capital is returned to the NCE after the project is complete but before investors have completed the visa process (received decisions on the form I-829 petition), the capital will be reinvested for the benefit of investors in appropriate “at risk” investments in conformity with the EB-5 program.

Disbursing Agents

If the JCE will primarily use EB-5 proceeds for construction, an alternative safeguard to verify that funds will be properly used after leaving the JCE is the use of a disbursing agent. A common requirement in institutional construction loans, a disbursing agent confirms that the project is ready to apply funding and disburses money as needed, in some cases paying subcontractors and suppliers directly. In most regional center-sponsored projects, investors will provide as evidence of job verification proof that expenditures have been made in conformity with the project’s economic report. As a result, use of a disbursing agent may provide greater assurance of proper use of funds by the JCE than detailed financial statements. If the JCE will be borrowing under a bank construction loan, the lender may have already engaged a disbursement agent, and the same disbursement agent may be available to disburse the EB-5 capital. 


In contrast to self-prepared financial statements, audited financial statements have been examined by an independent certified public accountant acting as auditor. On an annual basis the auditor examines company records, including contracts, leases, and third party records such as bank statements, to confirm that the financial statements are accurate and prepared in accordance with generally accepted accounting principles (GAAP) or another accepted reporting framework. The auditor issues an opinion attesting to the fairness of the presentation of the financial statements, and provides notes that provide additional explanations and detail on the line items shown in the financial tables. The auditing arrangement typically provides that the auditor will review, but not audit, the interim financial statements for the three other quarters of the year.

While audited financial statements have greater assurances of accuracy, they are expensive especially if they include the JCE’s financial results. Audited financial statements also place a burden on the company to prepare preliminary financial statements for the auditor on a tight time schedule and to provide significant additional documentation. For these reasons auditing is seldom seen in EB-5 offerings. Most issuers would prefer to devote all available resources to business operations, and investors may agree that an audit is an unproductive and unnecessary expense. 

It remains to be seen whether the market will demand that more EB-5 projects commit to providing audited financial statements. Large projects that already prepare audited financial statements for lenders or other non-EB-5 funding sources will not incur significant additional expense by passing these reports on to EB-5 investors, but for others the cost of auditing could make EB-5 financing less financially attractive as a whole. Investors and issuers alike should consider whether audited financial statements are worth the expense and trouble, based on the specific circumstances of the investment opportunity.

A potential compromise position would be to provide audited financial statements of the NCE and unaudited financial information of the JCE. An NCE operating as a funding entity has minimal operations and a single asset (the investment in the JCE), so audited financial statements should not involve great expense or effort. If use of a disbursement agent is appropriate for the project, audited financial statements of the NCE combined with use of the disbursement agent could provide reasonable safeguards of appropriate use of funds.

Again, investors should remember that even audited financial statements by prominent CPA firms do not promise to prevent or detect all fraud. In its most recently published Professional Standards, the American Institute of Certified Public Accountants warned:

Fraud may involve sophisticated and carefully organized schemes designed to conceal it. Therefore, audit procedures used to gather audit evidence may be ineffective for detecting an intentional misstatement that involves, for example, collusion to falsify documentation that may cause the auditor to believe that audit evidence is valid when it is not. The auditor is neither trained as nor expected to be an expert in the authentication of documents.[2]

What Reports Will the Investor Actually Receive?

The NCE’s reporting obligations will be spelled out in its organizing document – in the limited partnership agreement if the NCE is a limited partnership, or in the operating agreement if the NCE is an LLC. In addition, if the offering has a well-drafted private placement memorandum, it will include a clear description of the reporting regime established in the organizing document.

At one end of the spectrum, the organizing document may be silent about reporting or say only that the NCE’s manager or general partner will provide reports in its discretion. An investor in such an enterprise should expect to receive little information until the NCE provides materials for the investor’s I-829 petition, or until an occasion when the investor’s vote is necessary for a major transaction or the investor has to make a decision affecting its investment. More common is a commitment to provide annual or sometimes quarterly reporting. If the form of the financial statement is not specified, the investor would ordinarily expect to receive at least a balance sheet and a statement of income.

In evaluating an EB-5 issuer’s reporting provisions, potential investors should review the organizing document and private placement memorandum for the following:

  • Does the NCE commit to provide financial statements to investors?
  • What financial information about the JCE will the NCE provide to investors?
  • Will annual reports be audited?
  • Will specified types of financial statements (balance sheet, income statement, statement of cash flows) be provided?
  • Will financial statements be prepared in accordance with GAAP or some other comprehensive basis of accounting? 
  • How often will the NCE provide reports?  Annually?  Quarterly? Semi-annually?
  • How soon after the completion of a fiscal period will the NCE provide reports?

Regional center projects receive credit for jobs created indirectly and jobs induced by the effect of the invested funds on the local economy. They often have more complex entity structures than direct (non-regional center) projects and usually rely on proof of expenditures rather than payroll records to document some or all of their job creation. As a result, financial reporting in a regional center project should be designed to verify that funds move appropriately among the various entities and that expenditures conform to the project’s economic report. 

Special Considerations for “Troubled Businesses”

In addition to job-creating investments in new commercial enterprises, EB-5 investors may qualify for permanent residency by making an investment that preserves or creates jobs in an existing troubled business. The regulations define a “troubled business” as one that has existed for more than two years, but that has incurred a net loss for accounting purposes (based on GAAP) during the 12- or 24-month period before the investor files his or her I-526 Petition. The loss taken during the period must also be equal to or greater than 20 percent of the business' net worth prior to the loss.

As the above definition indicates, financial statements prepared in accordance with GAAP will be necessary even for the threshold determination that the JCE is a troubled business. The importance, and reputed difficulty of establishing troubled business status with USCIS argues for the use of financial statements that have been audited to confirm conformity with GAAP. In addition, investors in an existing troubled business should receive reliable and preferably audited financial statements at the time of investment to understand the nature of the business’s financial distress and the feasibility of rescuing the business with EB-5 investments, and continue to receive such statements to substantiate the job preserving effects of the EB-5 capital. At the time of investment, reliable pro forma financial projections that forecast the troubled company’s financial performance after the infusion of EB-5 capital will be especially useful.


With investors seeking greater assurance that EB-5 investment proceeds will be properly invested, EB-5 issuers and project sponsors should consider whether they need to offer more frequent and more detailed financial reporting to investors, and in particular whether offering audited financial statements makes financial and marketing sense. For their part, investors should take the time to understand and evaluate an issuer’s financial reporting regime before investing, and consider whether the level of reporting is appropriate based on the specifics of the offering and the proposed project.

[1]     California is an exception, requiring an LLC with more than 35 members to provide a balance sheet, statement of income and statement of cash flows within 120 days after the end of each fiscal year. 

[2]  AICPA Professional Standards AU-C 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards” (2015). 

Charles Kaufman

Charles Kaufman