A Guide to How the EB-5 Repayment Process Works

By investing in U.S. projects that create jobs, foreign nationals can secure the right to apply for permanent residency for themselves and their families. While the immigration benefit remains the central focus of EB-5, investors also care about the financial side of their commitment. As such, they want to understand how their capital will be returned.

In most cases, EB-5 investors are repaid through a redemption. A redemption gives you a structured way to exit the fund and receive your capital back. Rather than waiting on asset sales or profit distributions after a project has succeeded financially, the redemption agreement sets out when repayment will take place and how it will happen.

In this article, we will walk through how redemptions function in the industry so you know what steps to take to secure your capital repayment.

An Overview of How EB-5 Capital Works

To understand repayment in the EB-5 program, you first need to understand how EB-5 capital flows from the investor to the regional center, then to the EB-5 project and back. You should also keep in mind that regional centers are USCIS-licensed entities that sponsor EB-5 projects and manage the EB-5 capital related to these projects. That said, here is the basic flow of EB-5 funds:

1. Wire investment funds into escrow: You transfer your EB-5 capital into an escrow account controlled by the regional center’s investment fund.
2. Form the new commercial enterprise (NCE): The investment fund, created for each EB-5 project, is called the NCE, which is usually structured as a limited partnership or limited liability company (LLC). In both cases, the regional center’s principals act as the general partner or managing member.
3. Establish the NCE legal structure: If the NCE is a limited partnership, each EB-5 investor purchases partnership interests and becomes a limited partner in the fund. If the NCE is an LLC, each EB-5 investor purchases equity interests and becomes a member of the LLC.
4. Release escrow funds: At that point, the funds are released according to the terms of the offering documents signed by the EB-5 investor and the loan or equity agreement between the NCE and the EB-5 project entity.
5. Invest in the JCE: The NCE then either loans the funds to a job-creating entity (JCE) or makes a direct equity investment into it. The JCE is the entity that uses the capital for the actual project.
6. Collect evidence for USCIS: The NCE monitors the project and collects documentation to prove job creation for the immigration process.
7. Repayment from JCE to NCE: If the project succeeds financially, the JCE repays the NCE. Repayment terms depend on the structure, which could be loan maturity, revenue from operations, or the sale of the business.
8. Execute exit strategy: The exit strategy for repayment also varies. In some cases, investors may sell their ownership interest in the project at its fair market value. Alternatively, especially with equity-based investments, they may receive ongoing annual distributions from project profits that match their share of ownership.
9. Redemption to Investors: After the project has succeeded financially and the JCE has repaid the NCE, the NCE holds the EB-5 investors’ funds, plus any accrued returns, and redeems the investor’s capital, completing the cycle.

Understanding Redemptions in the EB-5 Industry

Redemption involves the EB-5 investors giving up their partnership unit in the NCE and receiving their repayment in exchange. As stated earlier, for you to recover your funds from the NCE, the EB-5 project must first have been financially successful and repaid the funds to the NCE. The redemption process begins when the investor and the NCE’s general partner sign a redemption agreement.

Here, the investor resigns from their status as a limited partner or member, and the NCE confirms its authority to redeem the interest. Moreover, this agreement requires the NCE to return capital under the specified terms. From the moment the agreement is executed, each step of the redemption process is carried out to ensure the investor is repaid and the NCE’s records are updated promptly.

Below is a more detailed description of the process, with the assumption that the NCE has been repaid:

1. Signing the Redemption Agreement

Once both parties sign the redemption agreement, it becomes effective, and the commitments are locked in. This document specifies the redemption amount, usually a fixed sum, so neither side needs to renegotiate later. It also sets the repayment deadline. Before the NCE can release funds, investors generally provide identifying documents, wire transfer instructions, and proof that they have no pending I-526E petitions.

2. Setting the Redemption Date and Payment Timeline

The redemption agreement identifies the “redemption date,” which is the deadline for the NCE to deliver payment. On this date, the investor’s partnership interest is automatically and permanently cancelled. The NCE updates its records, and the investor no longer has ownership rights, a capital account, or any claim to future distributions.

The agreement calls for a flat purchase price with no proration or post-closing adjustments. Also, the NCE wires the stated sum in U.S. dollars to the investor’s designated account. Since the amount is fixed, both parties know exactly what to expect.

If withholding is required by law, such as for taxes or partnership audit liabilities, the NCE notifies the investor and deducts the appropriate amount before sending the balance. Under U.S. tax rules, the investor bears liability for income tax on any gains or preferred returns. As such, the NCE may withhold and remit sums as required by the IRS.

3. Legal Protections

Redemption agreements include several legal protections to safeguard both sides, and they usually fall into three categories:

• Warranties: Both the investor and the NCE give warranties to protect against hidden claims. The investor warrants that they own their interest free of liens, have the authority to resign, and are not bound by conflicting obligations. Similarly, the NCE warrants that the redemption agreement is valid and enforceable, and that repaying the redemption amount does not breach other agreements.
• Release: When the investor accepts the wire, they provide a full release of all past, present, and future claims against the partnership and its managers, affiliates, and advisors. This release formally ends the investor’s financial and legal relationship with the NCE.
• Indemnification: If the investor violates any term, such as failing to withdraw a petition or improperly returning confidential materials, they must indemnify the partnership for any resulting losses, expenses, or attorneys’ fees. Likewise, the NCE may indemnify the investor for certain obligations, depending on the agreement.

4. Confidentiality and Final Closing Actions

Finally, most redemption agreements include confidentiality obligations. Aside from legally required disclosures, neither side may publicize the agreement’s terms. If further documents are needed to complete the redemption, both parties agree to cooperate and execute them promptly.

Get Timely Redemption With EB5AN

Getting money back in the EB-5 program requires a structured process, and redemption is one such process. Understanding the steps involved in redemption helps you approach EB-5 with confidence because you know your repayment follows a clear and fair structure.

At EB5AN, we structure our EB-5 deals in a way that mitigates uncertainty as much as possible for our investors. Schedule a free consultation with us today to enjoy the peace of mind that comes with a clear path to your capital redemption.