By Christine Chen and Walter S. Gindin
The concept of redeploying, or reinvesting, capital following the realization of the original EB-5 investment was already on the minds of many EB-5 stakeholders by the time that retrogression for Chinese nationals was announced in May 2015. And while there was ample discussion within the industry about what redeployment would or should entail, it was not until June 2017 when USCIS updated its policy manual that we received formal guidance regarding both the capital at-risk requirement of the EB-5 program and redeployment of capital.
First, USCIS provided an important clarification that EB-5 capital is required to be sustained at-risk only during an investor’s “sustainment period” – that is, the initial two years of conditional lawful permanent residency – and that an investor “does not need to maintain his or her investment beyond the sustainment period.” Second, USCIS introduced, and articulated some criteria, for effectuating the “further deployment” of capital, including the requirement that any such further deployment must continue to satisfy the capital at-risk requirement consistent with the underlying EB-5 documents. USCIS also provided two examples of permissible further deployment investments – an investment into another construction project or new issue municipal bonds, such as for infrastructure spending.
Unfortunately, USCIS has not provided any additional written guidance or clarification on further deployment beyond its initial pronouncements in the policy manual. There is little prospect of timely feedback on any implemented further deployment strategy in the form of favorable I-829 petition adjudications, given that I-829 petitions are taking more than 3 years to process. Accordingly, the industry’s initial foray into redeployment investments has not looked markedly different from the undertaking of the original EB-5 investments. But with more than two years having passed since USCIS provided its guidance, it is time to closely examine the current state of redeployment across the EB-5 landscape and consider some alternatives and best practices.
Redeployment can yield returns
The structure of EB-5 investments has long been premised on the need to price EB-5 capital below traditional bank financing to incentivize well-established job creating businesses to accommodate the additional oversight and reporting required by USCIS. And while EB-5 investors are typically willing to accept lower returns on their capital during the 5-7 years of the initial EB-5 investment, fewer investors are willing to continue to do so for another 5-10 years during redeployment. Frankly, there is no need to lock in capital for another period of five or more years with minimal returns. Redeployment investments can be structured in ways that provide investors with opportunities to invest in a myriad of options that can yield market rate returns.
In practice, redeployment funds have been directed into new issue municipal bonds, mezzanine loans, and/or preferred equity real estate investments. Nevertheless, it is possible to expand the menu of investment options to include pooled capital redeployment funds covering multiple projects to diversify investors’ market exposure. So how does a regional center select the right redeployment investment(s) for its EB-5 investors?
With different countries retrogressed for different numbers of years, a single redeployment investment alternative is not going to work for everyone. Investors with relatively short redeployment terms (for example, 2-3 years) may not want to stay in a longer-term redeployment investment suitable for investors subject to a longer than 10-year visa backlog. Also, the length of the redeployment term will affect each investor’s goals in terms of expected returns, liquidity needs, and risk tolerance. Finally, the possibility of backlog relief that shortens redeployment timeframes could factor into an investor’s decision making when considering redeployment alternatives.
As with any investment decision, it is critical that EB-5 investors assess the suitability of a particular redeployment investment. As such, regional centers should offer EB-5-compliant redeployment investments suited to the needs and objectives of their investors.
Redeployment is an investment, subject to investment oversight
EB-5 investments are regulated securities subject to SEC oversight. Redeployment investments are no different. Most EB-5 investors subscribed for the original EB-5 investment based on an offering that described the specific EB-5 project, but most likely did not contain details regarding a redeployment investment. And even if the original offering generally allowed for other investments to be made after the original EB-5 investment, the process of investors actually choosing a subsequent investment may require investor consent for any such subsequent investment. Most investors who wish to continue pursuing their EB-5 visa would feel compelled to approve a reasonable investment that suits each investor’s individual circumstances. In such cases, it would behoove a regional center to engage an SEC-registered advisory to provide consultation to ensure that SEC and FINRA’s suitability rules are being met.
Understandably, USCIS’ policy guidance on redeployment may be outside the expertise of most financial advisors or wealth managers. With 792 USCIS-approved EB-5 regional centers currently operating in the United States, it is clear that not all regional centers have the experience, capabilities, and/or resources to sufficiently accommodate all redeployment investment options. In some instances, many regional centers only have a handful of investors and providing a range of redeployment solutions to its investors is simply not a viable option.
There are other, less intensive ways that regional centers can provide redeployment investment alternatives that take into account an investor’s individual situation consistent with SEC and FINRA suitability rules. For example, for investors whose regional centers do not offer any redeployment solutions, or the options offered are not appealing to investors, regional centers could consider allowing investors to vote to redeploy their capital into redeployment investments structured by another regional center, provided that the governing documents allow for it.
The bottom line
Per USCIS policy, investors need to sustain their capital “at risk” through the reinvestment of capital following the realization of the original EB-5 investment for at least the duration of their sustainment period. As with any investment, when redeploying EB-5 capital, investors are exposed to market risks. However, that does not mean that redeployment is or should be a risky investment, nor should the only “safe” option be another EB-5 project.
In fact, all redeployment offerings should undergo detailed project screening and proper due diligence performed by all regional centers. Well-rounded projects with sound financials will generally come with sufficient documentation to explain and evidence the capital stack, the investment strategy, and any exit strategies. Those are the qualities that regional center operators should look for in evaluating a possible redeployment investment.
Engaging a registered investment advisor is also advisable. With proper due diligence, redeployment investments can fulfill investors’ immigration requirements while producing solid returns.