Significant Risks Related to EB-5 Disclosure Documents

by Ronald Fieldstone

All professionals, as well as regional centers, involved with any private offering of securities (“Offering”) in connection with the EB-5 program need to be sensitive to key disclosures and risk factors that must be addressed in connection with the preparation of offering documents. This article focuses on some of the key disclosures required in EB-5 offerings and how to navigate the risk assessment and manner of disclosure related to such disclosures. This article is not meant to be inclusive of all necessary risk factors, but focuses on some of the key risk factors that need to be addressed in every EB-5 offering.

Role of the regional center

A regional center that sponsors an EB-5 offering which enables the sponsor company to utilize not only direct jobs, but also indirect and induced jobs, plays a key role in the EB-5 program and it is extremely important to clarify the role of the regional center in a particular transaction. Generally, a regional center can play the following three roles in any EB-5 transaction, among others:

  1. Sponsoring the project. At a bare minimum, the regional center must sponsor the project and take responsibility for ensuring that the offering and procedures related thereto at least meet the minimum guidelines required under the EB-5 program as part of the minimum due diligence responsibilities of the regional center. In connection therewith, the regional center is paid compensation for services rendered, which should be adequately disclosed in the offering documents.

  2. Serving as manager/general partner of new commercial enterprise. In many cases, the regional center (especially where it is not affiliated with the developer/project company), may serve as the manager/general partner of the new commercial enterprise (“NCE”) formed to undertake the EB-5 offering. In connection with that role, it is important to specifically articulate the role of the regional center and/or its affiliate in managing the entity, including, but not limited to, various reporting requirements, oversight of the EB-5 program with respect to immigration matters and, most importantly, the administration of the operation of the NCE (including, but not limited to, assisting in all aspects related to the due diligence and enforcement of the loan provisions that normally apply with respect to a regional center EB-5 project). In connection therewith, it is important to disclose exactly how the regional center and/or its affiliate intends to undertake its due diligence and administrative responsibilities and whether or not third-party professionals will be engaged to provide any of those functions. By way of example, in connection with a typical real estate-related EB-5 program involving significant construction activities, it is common for the manager/general partner to engage a qualified disbursement agent, title company or financial institution to administer the loan disbursement in order to protect the EB-5 loan.

    A good practice would be to interpose an entity between the LP/NCE and the regional center to be the GP/manager and thereby minimize the liability of the regional center in the event that the project/joint commercial enterprise fails and the partners, members or any other creditors of the NCE decide to make a claim against the GP/manager for failing to protect the NCE, or that the GP/manager improperly administered the NCE.

  3. Assisting with marketing. In addition to sponsoring the project and serving as a manager of the NCE, the regional center can also assist in the marketing of the EB-5 offering. In assisting in marketing activities, the regional center has a further responsibility to ensure that such activities are in compliance with U.S. securities laws and, in all cases, should ensure that the EB-5 offering otherwise complies with U.S. securities laws. In particular, the offer and sale of securities to investors under the EB-5 offering will need to fall within the permitted exemptions from registration under Regulation S and/or Regulation D of the Securities Act of 1933 (the “1933 Act”) and otherwise not violate the registration requirements related to broker-dealer registration under the Securities Exchange Act of 1934, investment adviser registration under the Investment Adviser’s Act of 1940 or investment company registration under the Investment Company Act of 1940.

    It is important to disclose exactly what roles the regional center is playing in an EB-5 project and any affiliations the regional center has with other parties involved with the EB-5 project. In certain situations, the developer may be affiliated with the regional center and the NCE and serve as the manager/general partner of the NCE. In such a case, there is an inherent conflict of interest concerning how a lender entity having the borrower-affiliate as its manager/general partner can properly administer a loan to itself. We have suggested in such cases that, at the least, an independent co-manager be appointed to assume the responsibilities of administering the loan program. As a fallback position, the affiliated manager/general partner could appoint an independent/third party to at least administer the loan, even if such party is not a co-manager/general partner of the NCE. Appropriate disclosures need to be undertaken to reflect all of these affiliated relationships between the various parties in order to articulate more clearly how investors are being protected in all oversight matters related to the program.

Treatment of escrow arrangements and holdback requirements

It is now very common for EB-5 projects not to require that each investor receive I-526 petition approval before any funds may be released from escrow. In fact, there is no legal requirement from either a securities or immigration standpoint that there be an escrow at all. There are many forms of escrow arrangements and escrow holdbacks through the combination of the following:

  1. No escrow. Having no escrow at all and funding the money directly to the NCE, which disburses the proceeds to the developer/project company. In this situation, the offering documents provide for refunds to denied investors and it is important to disclose the risk factors related to such refunds being made and assurances that the refund will be forthcoming. For example, it is important to disclose to what extent the project company/developer guarantees the refund and from what other resources and other parties that refund obligation will be satisfied or what additional collateral/security is being provided to ensure that there will be sufficient funds to cover the refund.

  2. Release upon filing. Another alternative is having the funds initially escrowed and released upon the filing of the investor’s I-526 petition. At least in this manner the investor is assured that an immigration attorney has been able to obtain necessary information to legitimately file the I-526 petition on their behalf, unlike the above-referenced structure where there is no assurance that the I-526 petition will be properly filed. Furthermore, in dealing with these issues, there are several variations of how and when funds are released from escrow. Some programs require at least one or more I-526 petition approvals or an exemplar approval of the project before funds may be released upon I-526 petition filing; thus, ensuring that the project itself has been approved by USCIS, which substantially reduces the risk of an I-526 petition denial. Generally, the only reason for an I-526 petition to be denied after an exemplar project approval would be due to the personal information provided by the EB-5 investor and not due to failures in the economic model or other information related to the project itself.

  3. Holdback of funds. As a further modification, we have employed a holdback concept where a portion of the investor’s EB-5 capital is escrowed as a holdback amount in order to ensure that there is at least a certain amount of funds available to refund a denied investor or otherwise provide that the next investor who subscribes becomes substituted for the denied investor so that there is a process to provide a further level of protection for the investor whose I-526 petition is denied. There are many variations to this structure that further reduce the risk that there will be insufficient funds to cover project denial, including minimum escrow amounts, additional contributions from the developer entity, developer guarantees and the like.

    Additionally, it is a best practice to have a mechanism to collateralize the loan disbursements so that, in the event there is a project denial and a certain portion of EB-5 funds have already been advanced, there is at least collateral available to protect refunds to the investors.

Identify unique risks of a specific project

It is not sufficient to provide generic risk factors that do not otherwise take into account the specific risk factors that are unique to the project in question. By definition, each project has unique risk factors that need to be addressed, which take into account the following factors:

  1. Nature of the industry. Specific risk factors that are unique to the industry of the project need to be analyzed. For example, a hotel project would have unique risk factors related to the hospitality industry that are different than other types of real estate projects, such as tourism, business travelers or the like.

  2. Collateral. The collateral being provided with respect to the particular project needs to be analyzed. Typically the loan-to-cost, loan-to-value and loan-to-stabilized-value ratios are disclosed in order to determine the projected surplus of equity that protects the EB-5 loan. It is always advisable to have a backup feasibility study or appraisals prepared by a qualified professional to independently verify the projected values.

  3. Analysis of real capital/equity invested by project company. It is important to adequately disclose exactly how much “skin in the game” is being provided by the developer to better analyze the relative risk being taken by the developer.

  4. Disclosure regarding senior debt. It is important to disclose in detail any senior indebtedness related to the project and the terms and conditions related to the funding of such senior indebtedness. The larger the amount of the senior indebtedness incurred for the project, the greater the risk that the NCE’s interest could be foreclosed as a result of a default under the senior loan. If the senior loan is small in relation to the total project cost, then the risk is reduced, given the fact that there would hopefully be enough collateral and equity available over and above the senior loan to minimize the risk factor of the senior loan default. The “capital stack must be clearly disclosed in detail in the offering documents. There should be a clear delineation on a percentage basis as to all the funding sources, including the developer equity, EB-5 funding, the senior indebtedness and other types of incentives that may either be superior or subordinate to the EB-5 financing, such as new market tax credit, other governmental credit, governmental grants, or similar types of support to the program that add capital to outfit the cost of the project.

    To the extent of any senior indebtedness, there needs to be a disclosure of an intercreditor agreement that would otherwise help protect the interests of the NCE and enable the NCE to otherwise take over the position of the developer with respect to the project if there is a potential default of the senior indebtedness. That is why it is very important that the manager/general partner of the NCE have either direct experience in administering the applicable program or have access to professionals that could step in and protect the interest of the NCE for the applicable project. Many sophisticated regional centers have established internal control and due diligence teams that have added significantly to the investor protection.

  5. Potential for cost overrun. Each project always faces the risk of cost overruns and there needs to be a detailed description of such overruns, and the mechanisms to fund cost overruns if they are incurred.

  6. Unique immigration risk factors. With respect to construction-oriented projects, construction jobs seem to be the safety net for job creation, together with related operational jobs associated with the real estate project. The economic summary should be adequately described, including an evaluation of the job-generating activities and the risk factors related thereto.

  7. Failure to raise entire EB-5 capital amount. What may seem obvious, but is not necessarily always disclosed in other offerings, is the risk factor of failing to raise the maximum capital in the EB-5 offering, and whether the smaller EB-5 raise would still enabled the project to be completed. In this regard, it is important to describe what mechanisms are in place to bridge the difference between the actual amount of the EB-5 capital required and the maximum offering amount. It should be disclosed that additional capital may be generated by additional senior indebtedness or other funding sources or equity and mezzanine financing, since it is not acceptable to commence development without all the capital stack sources identified.

  8. Unique securities-law-related risks. As briefly noted above, each EB-5 offering has unique securities related risks that, in part, depend upon the size of the offering and the manner in which the NCE is marketing the sale of the securities. Generally, the following are the securities issues that need to be addressed.

    1. Investment Company Act of 1940. Although not specifically highlighted, the Securities and Exchange Commission (“SEC”) has taken the position that the creation of an NCE to undertake the loan program involves the Investment Company Act of 1940 (the “IC ACT”) and potential registration thereunder. In order to be exempt from registration, there are generally two significant exemptions that are undertaken; one is the so-called C-1 Exemption which involves an offering to no more than 100 investors and the C-5 Exemption whereby the NCE is engaged in a transaction that involves real estate collateral either directly or through a first mezzanine pledge that could otherwise qualify as a mortgage-backed collateral loan.

    2. Broker/dealer registration. To the extent that securities are being offered through the instrumentality of the United States commerce or otherwise involving “directed selling efforts” within the United States, and assuming that transactional compensation is paid and there is not otherwise a reliance upon an issuer exemption, then broker-dealer registration would be required under the Securities Act of 1934 (the “1934 Act”). Any violations of this condition could impose a right of rescission by investors.

    3. Investment advisor registration. Similar to the broker-dealer registration requirements of the 1934 Act, there is also registered investment advisor registration requirements under the Investment Advisers’ Act of 1940 for providing investment advice in connection with the trading of securities, which needs to be addressed in the offering documents.

    4. Registration of securities. There are typically two exemptions from registration of securities in offerings. Regulation D applies to an exemption for domestic sales and Regulation S applies to an exemption for offshore sales. Each of these exemptions should be disclosed and a determination should be made as to whether the EB-5 offering entails both exemptions.

In connection with all of the above, there should be clear disclosure as to the total amount of potential compensation paid and a description as to what parties will be sharing in such compensation so that there is proper disclosure as required under the 1934 Act.


Risk factor disclosures in an offering are complicated and, as demonstrated above, not uniform in EB-5 offerings. Great care must be taken to properly analyze the unique factors of each EB-5 offering, with proper disclosures and independent verifications obtained to support the factual positions taken in the offering.

Ronald R Fieldstone

Ronald R Fieldstone

Ronald R. Fieldstone, chair and partner of Saul Ewing Arnstein & Lehr LLP’s Global Immigration and Foreign Investment Practice, routinely serves as corporate/securities/real estate counsel in EB-5 immigrant visa investor offerings for an array of industries. Both developers and regional centers rely on his advice in these deals, resulting in his track record of handling more than 400 EB-5 projects with a combined capital raise in excess of $8 billion. He is chair of the firm's Opportunity Zones and Qualified Opportunity Funds Practice. Fieldstone received his undergraduate degree and his MBA from the Wharton School of Business and his law degree from the University of Pennsylvania.