By Phuong Le, Aaron Goforth and Osvaldo Torres
We probably all know someone who’s gone through the headaches of selecting an EB-5 project. If you’re an overseas investor who’s interested in the EB-5 program, you begin your thoughtful due diligence process, wade through stacks of glossy marketing brochures for multimillion-dollar condo developments, 4-star hotels or bridges. Some projects seem appealing, while others not as much.
However, there are various issues that might begin to eat at you, namely, most EB-5 projects give what you consider a marginal return and you also might not like the idea of giving up control to someone else.
At some point in the process, you might consider creating an investment through your own direct or regional center EB-5 project.
Is this a good idea? The answer is: “Maybe.” Below, are some considerations an investor should consider before taking the plunge. There are pros and cons if an investor considers using the direct or regional center route. There are also advantages of hiring an experienced team of professionals and their roles in structuring the project with the purpose of creating a deal that meets both immigration and investment goals.
Direct or Regional Center EB-5?
Practical Issues to Consider for Direct EB-5 and Regional Center as Risk Mitigation
If you are wondering whether you should you invest in your own project, you should pursue this option only if you’re willing to invest much more than the current minimum investment amount of $500,000. Understand that minimum wage laws may eat up a third or more of your start-up capital, there are tedious document keeping requirements, and compliance with federal immigration (I-9, E-Verify), local employment, labor and employment benefits laws.
Higher Total Investment
Although it may be tempting to consider going the direct EB-5 route, it’s worth considering that the risk calculus concerns more than maximizing your return on investment (ROI). If you’re using the direct EB-5 model, there are hidden back end costs to consider that may doom both the project and the intended job creation.
You may have higher ROI, yes, but your total investment will be far greater than $500,000. After all, in addition to putting up the initial investment, you will be responsible for securing the rest of the capital to operate the business as well.
This is magnified when you consider things from a small business and employment perspective. Investors should be aware that although their family members can work for the direct EB-5 project, they do not count towards the required creation of a minimum of 10 full-time jobs. It’s easy to overlook or underestimate how much minimum wage for 10 full-time jobs is. Depending on your location and business, it can very well be $200,000 to $300,000 per year.
Record Keeping and Proving Job Creation
In addition to the difficulty of opening a business in a foreign country in compliance with local business and labor laws, EB-5 job creation requirements are more strenuous.
Let’s consider you’re an aspiring Korean BBQ restaurant franchisee. There are numerous threats to the viability of your business.
In addition to stemming the initial challenges of getting your restaurant into the black and keeping a steady stream of customers, you now have to be responsible for documenting and maintaining copious amounts of paperwork to prove job creation. About two years later, you will have to begin organizing paperwork to prove job creation for your Form I-829 petition.
If you’re a direct EB-5 project, you begin to wade through a maze of foreign terms that appear vaguely English: I-9 paperwork, E-Verify, W-2 forms and so forth.
On the flipside, if you are using a regional center, proving job creation can be as simple as providing evidence to verify the line items you’re using for job creation. Often times, that will be construction expenditures and operational revenues. This greatly simplifies the document keeping process and minimizes your exposure as a business owner because you won’t be responsible for other people’s immigration violations.
The Role of a Professional EB-5 Team
Moreover, whether you go with the direct or regional center EB-5 model, it is critical to hire an experienced EB-5 team. In addition to an experienced EB-5 counsel, your business plan writer, economist and securities/transactional/corporate counsel will be critical to the success and safety of your EB-5 project as well.
Business Plan and Economic Analysis
While you may know your business model well, and you have good supporting documents, including revenue and expense pro forma and market study, having a strong EB-5 team in your corner—including an experienced business plan writer and economist—is an invaluable necessity. The main role of the EB-5 business plan writer is to take your business model and present in a way that is fully compliant with USCIS requirements. This in turn will allow for a successful capital contribution and immigration process by the investor.
Matter of Ho is the precedent case study that your EB-5 business plan will be evaluated against and it is the writer’s job to make sure your business plan is presented in a way that is compliant with that standard, If you are unsure of your business model or the market conditions, the writer can also help to correctly shape your plan, but if the plan is too speculative, you may want to reconsider a more institutional regional center project offering, especially if immigration is the primary motivation.
While a business plan writer is a necessity for both a direct or regional center EB-5 compliant business plan, you should also consider the benefit of having an economic analysis/job creation study performed for your project. If you use a regional center model, you are allowed to use the jobs associated with direct, indirect and induced business activities of the project. These jobs typically come from two categories. The first one is construction: you can count certain costs associated with construction activities to create jobs. To go back to the example above, it is conceivable that a regional center project that contemplates several Korean BBQ’s would create enough jobs via construction expenditures alone (including FF&E, tenant improvements, etc.) to support an EB-5 investor. There is typically much less risk involved with counting jobs from construction expenditures than with providing evidence that your project has the ten qualifying full-time employees/job positions at the time the investor files for their permanent residence.
The other activity from which to demonstrate creation of EB-5-eligible jobs, within the context of a regional center project, is operations. Similar to a direct EB-5 project, you can use direct hires as an input to the model. In the regional center example, not only would you gain credit for the 10 full-time employees, but also for the indirect and induced jobs associated with the project.
Jobs from operations can be evidenced by direct hires, but with the help of an economist, you could instead use revenues to calculate the direct, indirect, and induced jobs through economic modeling. An important consideration to this option is that you must be confident that you will hit your revenue targets; however, one of the advantages is that demonstrating job creation at the I-829 process is achieved by providing audited financials, which is arguably less onerous than having to provide I-9’s and W-2’s for each employee that would be needed under a direct model.
A misconception among would-be EB-5 issuers is that there is no need to prepare offering documents if there are a small number of investors or if the offering is only for a few million dollars. However, regardless of the number of investors or the amount of the EB-5 raise, preparing offering documents is required in almost all cases and is nonetheless a best practice to help mitigate securities liability and increase the marketability of a project.
Under U.S. securities laws, any investment is a security and an issuer may not offer or sell securities unless its offering is registered with the U.S. Securities and Exchange Commission (SEC) or falls under an exemption to registration. EB-5 offerings are mostly conducted under the Regulation D exemption from registration. For strictly off-shore offerings to non-U.S. persons, the Regulation S exemption should apply.
Although offerings exempt from registration are typically not subject to the same disclosure requirements as registered offerings, exempt EB-5 offerings are still subject to the anti-fraud provisions of the securities laws, which impose liability for material misstatements or omissions in connection with the offer or sale of securities. It should be noted that the officers, directors, and other key persons of the issuer could have personal liability for any alleged misrepresentations in an offering—even if such persons had little input or involvement on the offering process. As such, great care must be taken in any offering of securities.
The offering documents serve the important role of providing investors with the material information they need to make an informed investment decision. Furthermore, the preparation of the offering documents should involve engaging in due diligence on the project. Proper due diligence should decrease the risk of material misstatements and omissions in connection with the offering. A finding that an offering contained material misstatements and/or omissions could lead to rescission and fraud claims against the issuer and, as noted above, personal liability to the officers, directors and other key persons of the issuer. If the offering is rescinded, such officers, directors and other key persons may have to pay fines and be liable to refund the investors capital contributions.
For the past couple of years, the SEC has increasingly cracked down on EB-5 projects. As such, securities liability is a very real risk for issuers that may be mitigated by consulting with a securities lawyer who can help ensure that you are aware of the applicable U.S. securities laws and how to comply with them.
Failure to prepare offering documents may save you money in the short term, but it is a gamble that may end up costing you more in the long term and needlessly expose the officers, directors, and other key persons of the issuer to personal liability.
The investors should be aware of the potential risks they should consider before making their EB-5 project decision. As always, a thorough consultation with counsel and consultants who are experienced with the process will be invaluable during the planning process. After all, it’s arguable that the ideal type of EB-5 investment is essentially a bond—since the primary concern is the green card and it’s ideal to minimize risks whenever possible.
Put in another way: any successful businessman understands that risk is unavoidable. That’s fine for a normal business or venture, but combining business and immigration only amplifies the risk of both goals failing. Because of the unique nature of the EB-5 program, taking the reigns with your own direct EB-5 project versus using a regional center brings complicated risks.
If regional centers, consider sponsorship and timing, you will need to have a regional center in place before investors can file their Form I-526 petitions.
Ultimately, it’s up to the investor of course, but the issue is clearly more than higher ROI. More control equals more risk, but of course, may also lead to higher returns. It’s an age-old adage that applies in EB-5 as well.