What are the EB-5 rules on equity versus a loan?

For EB-5 purposes, a loan to the NCE does not constitute an investment. 8 CFR 204.6(e).

All EB-5 investments must be equity investments. The regulations define "invest" to exclude any debt arrangements. A permissible arrangement in some cases may be for the EB-5 investor to make an equity investment into the new commercial enterprise (NCE) and then the NCE can make a loan to the job creating entity (JCE). This is acceptable in regional center EB-5 cases where indirect job creation is allowed. For direct EB-5 cases, the NCE consists of the company that receives the equity investment and its wholly owned subsidiary, so technically, the company could make a loan to its wholly owned subsidiary; this would still qualify as an investment for EB-5 purposes as the jobs created would still be attributable to the NCE.

Both equity and loan models are used in funding EB-5 with separate and distinct features. Equity involves a situation in which investors have ownership or shares in the EB-5 project, while a loan is a situation where investor funds are borrowed for the development of a project. Regional centers may utilize investor funds under either of the two models for EB-5 purposes. There is no unison on what an EB-5 project may or may not use. The best way to gain an understanding of what a regional center will use for a specific project is to look at at least three things associated with a project, depending on the regional center in question, namely: 1) the partnership agreement/contract; 2) exit strategies for the project as enumerated in the agreement; and 3) the type of business involved in this regard make sure if the business is appropriate for your investment and exit goal(s). Advisably, before proceeding further, consult an EB-5 attorney to discern and understand the investment goal(s) you can afford.

Whether it is a regional center or a direct EB-5 project, the EB-5 investment has to be transferred to the new commercial enterprise. In an EB-5 regional center structure the investment is in the new commercial enterprise, then the new commercial enterprise can loan the funds to the associated job creating entity. Alternatively, the investment funds can be an equity investment in the job creating entity. While in a direct EB-5, the investment can be in a holding company that 100 percent owns a subsidiary, and then the holding company can loan the funds to the subsidiary company.

There is presently no requirement that the investment must be an equity investment. As for making an investment other than through a regional center, this may be another issue. The key aspect of the regional center is that it allows indirect job counting as opposed to actual jobs.

You may use either equity or loan. The main reason for going through a regional center is to provide for indirect jobs. If your project can provide 10 new jobs, then you need not go through a regional center and you may make a direct investment into the NCE.

An investor cannot loan funds to a new commercial enterprise. That is indeed part of the regulations. The source of those funds can be from a loan, and the NCE can loan funds to a job creating entity.

Where the USCIS EB-5 rules use words like "at-risk," that means "equity" investment is required. The EB-5 program does require by statute that each investor's capital contribution is at-risk in the form of equity no matter whether the investor invests through a regional center or direct investment no exceptions, unfortunately, so a loan will not work.

8 C.F.R. 204.6(e) provides: Invest means to contribute capital. A contribution of capital in exchange for a note, bond, convertible debt, obligation, or any other debt arrangement between the alien entrepreneur and the new commercial enterprise does not constitute a contribution of capital for the purposes of this part. So the answer is yes, the regulations do prohibit the investor from making a loan to the company. The reason we can do it in the regional center context is because the investor is making an equity investment into the NCE, which is then making a loan to another entity. The investor him/herself is NOT making a loan. Also, by investing through a regional center, investors are able to count indirect jobs, so the NCE (or its wholly owned subsidiary) does not have to be the direct employer in respect to the jobs created, which means we can count jobs created by the borrowing entity.

Yes, you can invest funds obtained from a loan; however, you must meet strict requirements regarding the loan. First, the loan has to be secured by an asset owned by the EB-5 investor; the asset securing the loan must have a value the same as, or greater than, the amount of the loan, and the lender's security interest must be perfected, i.e., the mortgage must be recorded in the government's property records. Second, the EB-5 investor must be the principal borrower on the loan and must be personally liable for repayment of the loan. Third, the EB-5 investor cannot offer any assets of the EB-5 investment entity as security for the loan, nor can he offer his ownership share in the EB-5 investment entity as security. Also, a private loan can be used, but, in addition to the strict requirements mentioned above, it is necessary to document how the lender earned the loan funds legally, and trace the funds from the legal source to the borrower/EB-5 investor, and then from the EB-5 investor to the EB-5 project. The requirements for documenting the source of the lender's funds are the same as for an investor. It is very important to note that any loan that is used as a source of EB-5 investment funds must be secured.

EB-5 can take the form of both equity or a loan model. I do recommend you consult with an experienced investment immigration attorney for clarification on this question. There are many variables you need to consider.