With the expiry of the Regional Center Program, a new kind of EB-5 investment is gaining ground: direct investments into established, growth-stage businesses that can potentially generate market rates of return and the ability to exit an investment on the investor’s terms. Direct investments face the challenge of creating actual headcount jobs, as jobs can't be determined the way they can with a USCIS-approved regional center project that uses economic modelling. But careful evaluation by investors willing to put in the work can lead to an EB-5 investment — at $500,000— with a lot to like.
Direct investments potentially offer investors private-equity rates of return
As a registered securities broker working exclusively in EB-5 since 2013, I’ve reviewed about two hundred EB-5 investments; so I’m very familiar with what regional center offerings look like. And as far as rates of return, they often offer less than one per cent per year.
Why such low rates of return? Let’s take a look.
1. Regional center investments need to be structured so that all investors will qualify for all EB-5 requirements. To properly structure an EB-5 offering, the new commercial enterprise will hire an immigration lawyer, a business plan writer, an economist, a securities lawyer, and often an agent or broker. The Manager will also earn a fee in return for their investment of time and capital. All these costs come out of the returns available to the investor.
2. Commercial real estate projects have traditionally made up a majority of regional center investments, so EB-5 investment capital is often competing with low-cost bank financing.
3. Capital comes in sporadically from EB-5 investors, making it difficult, if not impossible, to be counted on. This means EB-5 regional center projects generally need to raise all the capital they need to ensure success before they’ll be able to attract EB-5 investors. An undercapitalized project involves much bigger risks than a well-capitalized one does.
For these reasons, and the fact that the primary goal of EB-5 investors is to get their Green Cards —not earn high returns on their investment — regional center investments have generally offered investors marginal rates of return. In some cases, regional centres have even offered negative rates when administration and filing fees are considered.
Direct investments into growth-stage businesses are a very different animal. These investments are made into businesses planning to add employees over the next two to three years. These companies can use EB-5 capital to further accelerate their growth prospects.
As these growth-stage businesses are often in capital-raising mode, from sources like crowd funding or Reg A or Reg D offerings, the prospect of receiving $500,000 equity investments from EB-5 investors can be appealing. The fact that the firm’s job creation can potentially qualify investors for permanent U.S. residency is a very happy coincidence.
EB-5 direct investors are being offered equity opportunities similar to those offered to private-equity investors. Costs to put together a direct EB-5 investment are generally much less than the costs associated to raise capital for a regional center offering.
In a direct investment, investors are purchasing a piece of a business potentially poised for significant growth. This leads to the possibility of earning sizeable returns. Done right, it can produce not only Green Cards, but a family nest egg.
Direct investments don’t have the exit-timing challenges of regional center investments
A direct investment must by rule be an equity investment, and investors might have their EB-5 petition denied if their investment is structured too much like an artificial loan — offering a fixed repayment rate over a fixed time period. And while a fixed repayment period offered by a regional center may appear to offer more predictability, arcane redeployment rulings by USCIS have created a slew of challenges for many regional center investors.
One challenge is retrogression, over-subscription by certain countries to EB-5, thus causing significant processing delays. Another is unpredictable adjudication timelines in general. These issues have left regional center EB-5 petitioners uncertain as to when they should target repayment of their investment. This makes structuring a repayment schedule that suits all investors nearly impossible.
For example, a regional center investor from Canada might expect to reach the I-829 stage within three and a half years, and thereby desire a very different repayment term than an investor from Vietnam. The Vietnamese investor might anticipate delays to their petition processing, and therefore might be subject to redeployment if the job-creating entity were to repay their loan before the end of conditional permanent residency. And to accept early repayment without redeployment will jeopardize immigration benefits.
So for regional center investments, the solution has often come in the form of the NCE’s Manager being given more flexibility to make decisions than investors would normally give a Manager or General Partner. Additionally, loans made to the job-creating project often allow for multiple loan-extensions. If this sounds like a recipe for shenanigans, EB-5 has offered many such examples over the years.
Another issue is that in a regional center investment, the Manager of the new commercial enterprise whose funds are prematurely returned from the job-creating entity will typically reinvest the funds into a previously unexamined investment. It’s not unheard of to see older investor funds get reinvested into a more risky investment position then new EB-5 investor capital.
For all of these reasons, redeployment has been a huge issue in the EB-5 industry the past few years and has been the focus of many investor lawsuits.
Thus, regional center investments that deal with many — perhaps dozens — of EB-5 investors, present challenges that smaller and differently structured direct investments simply won’t have.
Redeployment isn’t much of a factor with direct investments
Contrast that complex situation of a regional center investment with a direct EB-5 investment; the investor owns a percentage of the business, so for the most part, the repayment of invested capital is a negotiated event that takes place after the investor has the right to sell their equity in the business (which is immediately after they file their Form I-829).
Selling one's equity in the business could be made to someone looking to buy equity in the business, or to the business itself which might be interested in repurchasing their own equity, or the investor might decide to hold their equity as a long-term investment. And there is the possibility that the company will be successful enough to be acquired, leading to a potential win-fall for the investor.
Direct investments are far more simple than regional center ones: a direct EB-5 investor must maintain their equity in the business until they reach the end of their conditional permanent residency period. After that they can do with it as they wish.
So a direct equity investment offers the advantage of virtually no threat of redeployment except in the case of the business being acquired before the investor has reached the requisite immigration stage. But even this will result in the investor taking some or all of their proceeds and finding another “at-risk” investment.
Contrary to a common misconception — direct investing does not require active management
In the past, the majority of direct investments were sole-proprietorships, sometimes in the form of a franchise. This seems to have caused many investors, and even many EB-5 professionals, to believe that a direct investment requires the petitioner to actively operate the business. This is not a USCIS requirement.
Veteran immigration lawyer, and former Acting Director of USCIS, Robert Divine, tells us that the management requirements for a direct investment are identical to those for a regional center investment:
“The requirement in the statute to engage in the enterprise is the same in a direct investment and a regional center investment; there is no difference,” Divine declares. “Whatever was passable in the Regional Center Program is also passable in the Direct Program. So language in the operating agreement, or whatever type of agreement for the enterprise, that the investor has the right to provide policy input is likely to be sufficient. It’s not an issue that the Immigration Service has chosen to make a big deal of.”
Keep in mind, however, that while an investor doesn’t have to actively operate a direct EB-5 business, he or she may want some oversight of the business to ensure their capital is used properly. Rupy Cheema, founder of EB5 Diligence advises, “To be prudent, an investor should have some oversight of the business, which could involve a seat on the board that meets quarterly, and approves budgets and reviews performance and operating results.”
The price for direct investment benefits — more homework to ensure sufficient job creation
The potential for earning market rates of return, maintaining control of when and how to exit an investment, and mostly avoiding redeployment, makes direct investing a serious alternative to a regional center EB-5 investment. But the price comes in the form of more due diligence of potential job creation.
Regional centers have a much easier time counting jobs created because indirect jobs (supplier employees) and induced jobs (local-economy jobs) along with direct jobs are all counted toward EB-5 investor job requirements.
Also, regional center projects use economic modelling, not just to estimate their job count, but to provide projections that can be relied on with much confidence. So investors can know that if the project spends its budget, the project should be deemed to have created the jobs. That’s a nice safety blanket for EB-5 petitioners.
What to look for in a direct investment
Evaluating EB-5 direct investments depends a lot on the goals and the background of the investor. An investor with a broad familiarity with technology might find it easier to evaluate a growing tech business; having a medical background might make evaluating a health-related product and service easier.
I personally prefer businesses that have made significant progress, have completed a recent funding round, have a proven concept, and are clearly preparing to add employees. When reviewing the business plan, I like to be sure sales projections are sensible and that management is experienced and capable of executing the business plan.
While regional centers usually engage a firm to develop a market feasibility report as evidence of their viability, smaller direct EB-5 investments are advised to retain the services of an experienced due diligence reviewer to verify the claims being made, that a market exists for their products or services, and that job-creation expectations are reasonable and credible.
Also, a direct investment business doesn’t typically engage third-party oversight of a fund administrator or an audit of the financials; therefore, look for an investment with, at a minimum, financial statements that are prepared by an independent CPA firm.
When to make a direct investment: earlier is often better
In the past when we were evaluating regional center investments, I counselled my customers that it was preferential to invest later in the deal, because progress is positive and risks are reduced.
But when investing in a direct EB-5 offering, the opposite may be more true because investors are typically credited with jobs on a “first-come, first-credited” basis. Therefore the first EB-5 investor has the advantage of getting credit for the first 10 jobs created and the seventh investor would get credit for jobs 61-70. So investing early in a business can offer better immigration-compliance protection.
Most investors won’t be first, so you’ll need to determine just how far down the line you’re comfortable with. Much is riding on job creation, so be sure to have a high degree of confidence in the businesses ability to meet its hiring targets.
Direct is the only game in town right now — at $500,000
Summer has brought us what could be a sizzling economy and a new EB-5 landscape. With the expiry of the Regional Center Program, direct investments are the only option for investors right now. And with a court decision rendering the Modernization Rule of 2019 invalid, the minimum investment number is back to $500,000 — but many are predicting this window to be open for just a short time.
So if you really want to invest at $500,000 (or perhaps that’s all you can afford), making an investment now could make sense. Because of job-creation estimates, most direct investment opportunities only have room for a few EB-5 investors. And if and when USCIS announces that the minimum investment amount is increasing back up to $900,000, scrambling for an early position in a quality investment may be difficult.
Summary: if you’re comfortable with job creation prospects, a direct investment can make a lot of sense
I personally love the opportunity that direct EB-5 investments offer investors. As with all investments, you need to do your homework; to make this exercise easier our team of analysts at eb5Marketplace have done a lot of the heavy lifting in the way of research and analysis on an assortment of direct EB-5 investments.
The potential to not only get your Green Cards but earn similar returns as offered to the private-equity market can make an informed and qualifying EB-5 direct investment a double win.
Direct EB-5 investments may still be a new concept even for some experienced immigration lawyers, some who may feel that because the direct EB-5 program has had a higher rate of failure in the past it’s too risky to pursue. But direct EB-5 businesses of the past were usually owner-operated businesses, sometimes in higher-risk businesses like restaurants, and the investor was often required to invest more than a year before being able to enter the U.S. These are just some of the hurdles these investors have contended with.
But the time may now be right for direct investments to shake off the “little brother” label it’s worn for years and become a viable force in EB-5 going forward.
Registered securities broker & eb5Marketplace Founder
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This content does not function as legal counsel. You are advised to seek your own legal advice.