How can an EB-5 investment be insured considering the at risk rule?
I want to make an EB-5 investment. I know it is supposed to be at risk, but I really do not want to commit funds without some kind of security. I have read that some EB-5 investors purchase insurance from a third party on their investment. Can this actually be done? Wouldn't it violate the at risk requirement?
The law requires that the investment fund be 100 percent at risk. So long as there are no guarantees from the EB-5 project for the return of the fund, you may consider purchasing insurance from a third party; however, it does not mean you will necessarily gain your investment fund back. Insurance that eliminates risk may make the transaction ineligible to participate in the EB-5 program.
This is a matter of unsettled law; so any answer is really just speculation. There seems to be some controversy within the bar as to whether the insurance negatives the "at-risk" requirement. Insofar as it has not been ruled on by the CIS or a court, there is a possibility. Most of my colleagues seem to think that if the immigration service finds out that you have this type of insurance, they will deny the removal of conditions application. I tend to agree. But there have been no formal adjudications on this issue.
Your personal investment funds will have to be 100 percent at risk with no guarantees for the return of principal. There can be no insurance company policy guaranteeing the redemption of the personal investment funds.
I do not believe that third party insurance for EB-5 capital exists, or if it does, it is not worth it. The premium payment would have to be extremely high, thus making it not worthwhile. For the record, if it did exist, and it was a true third-party arrangement with costs paid outside of the EB-5 investment capital, I do not believe it would violate the at-risk requirement.
Funds need to be 100% at risk. The project cannot guarantee a return of any amount of investment proceeds or an asset (like real estate). Most projects have repayment provisions if the immigration process results in a denial.
Yes, any guaranteed payback on the failed project will not be considered at risk. However, if you purchase insurance that is not part of the EB-5 investment, you should be fine. But I still would not mention it in the petition so as to not confuse the adjudicators.
Theoretically, if you purchase 3rd party insurance in a transaction unrelated to the EB-5 transaction, and not arranged or paid for by the project sponsors, regional center, or any other party to the deal, then the insurance would not defeat the at-risk nature of the investment. The investment must be at risk of partial or total loss. Usually the insurance will not cover 100% of the loss (and even if it does, the cost of the insurance policy would prevent 100% recovery unless the policy covered the investment amount plus the insurance purchase price, and I have never heard of any insurance product that works this way). Keep in mind though, I have yet to see a credible insurance policy being offered to cover EB-5 investment losses. I have heard rumors of such policies, but never seen one, let alone evaluated the likelihood of being paid on a claim if there were one. Further, I have never heard of a case in which USCIS has directly addressed this issue and made a decision. If USCIS learns of the policy (discuss with your immigration attorney whether you have an obligation to disclose this and what the consequences of a material misrepresentation or omission are), you can expect RFEs or other challenges while they figure out if they think that it complies with the program rules. The bottom line is that any insurance policy would involve risks of its own that you need to consider.
You should check to see if the project sponsor and fund manager have E&O/D&O insurance, as well as a fidelity bond against theft. You could certainly reach out to a financial institution (someone like BNP Paribas, CSFB, UBS, Societe Generale, etc) to see if they would underwrite a swap on the investment, or approach a monoline insurer (XL, Ace, etc) to construct some sort of policy or product that would at least have some mechanism to provide some equivalent of your capital back. I would think such things would be incredibly cost prohibitive, but such things may be worth exploring. I would think any insurance you take out on your own would be apart from the investment you have made "at risk." If the investment fails and you do not get your requested immigration relief, you have lost out, and the policy would pay out separate and apart from the investment.