Direct EB-5 Investments: An Overview
Since 1990, the EB-5 Immigrant Investor program has enabled foreign nationals to relocate lawfully to the United States along with their immediate family members and enjoy the benefits of permanent resident status. To qualify for the employment-based fifth preference (EB-5) visa, foreign nationals must invest in a new commercial enterprise (NCE), create at least 10 full-time jobs, and comply with all United States Citizenship and Immigration Services (USCIS) regulations. The EB-5 program has benefitted the U.S. economy since its inception, and thousands of foreign nationals have fulfilled their dream of obtaining U.S. green cards.
Foreign nationals planning an EB-5 investment are given two options: they can either make an indirect investment through a regional center or invest directly into an EB-5 project.
Differences Between Direct and Indirect EB-5 Investments
All EB-5 investments, whether direct or indirect, must create at least 10 jobs and comply with USCIS’s minimum investment amounts. Still, there are several significant differences between direct and indirect EB-5 projects. These include the employment creation process, the structure of each investment type, and the intermediating role of a regional center in indirect EB-5 projects.
Direct EB-5 projects are allowed to count only directly created jobs toward fulfilling the employment creation requirement. These direct jobs must be full-time (at least 35-hour) positions filled by qualifying U.S. workers. Additionally, direct jobs must be created by the NCE and appear on its payroll. In most cases, direct employment consists of operational positions associated with day to day operation of the NCE.
On the other hand, EB-5 regional center projects enjoy much more flexible employment creation criteria. Foreign nationals who invest indirectly are allowed to count indirect and induced employment in addition to direct jobs. As a result, it is typically easier for regional center projects to fulfill the job creation requirement. Unlike direct employment, indirect jobs are not created by the NCE itself—rather, they are a result of the EB-5 project’s positive economic impact on its area. For example, the regional center project may purchase construction materials, equipment, and supplies from local companies, thus indirectly creating jobs.
Induced employment is generated by the employees’ spending in the local community. When the employees of a regional center project spend their wages in the project’s area, they induce jobs by strengthening the local economy. Since calculating indirect and induced jobs is complex, an economist must usually generate a detailed report outlining the project’s impact on the community.
At the same time, indirect and induced jobs can make up no more than 90% of a regional center project’s total job creation. This means that regional center projects must create at least one direct job. And if a regional center-sponsored construction development lasts less than two years, then the cap on indirect employment becomes 75%.
Regional center EB-5 projects usually involve multiple entities. Since these projects are allowed to calculate induced and indirect employment, the jobs created by each entity can count toward fulfilling the total requirement. Moreover, the NCE and the job-creating entity (JCE) are typically separate. On the other hand, the NCE and the JCE in a direct EB-5 project are usually the same. Further, each direct EB-5 investment must be made into the NCE, which is responsible for creating the 10 required jobs per EB-5 investor. Since the NCE of a direct EB-5 project must receive the investment, loan models are rarely a viable option because both a lender and a borrower must be involved.
Still, direct EB-5 investors are allowed to invest their capital into a subsidiary owned by a parent company. For such investments, the parent company would be considered as the NCE due to its ownership of the subsidiary. In this case, the subsidiary that received the EB-5 capital is responsible for generating employment. If the investment is split among several subsidiaries, each one of them will have to create jobs as well. Further, if the parent company is located in a targeted employment area (TEA) and thus qualifies to receive a lower investment amount, the subsidiary must also be located within the TEA—if not, the investor will not be allowed to invest at the reduced amount.
Dependence on a Regional Center
To make an indirect EB-5 investment, foreign nationals must look for projects associated with a USCIS-approved regional center. Since the regional center program relies on periodic government renewal, indirect EB-5 investors should keep in mind that the success of their visa petitions partly depends on the reauthorization of the program. Further, approved regional centers are subject to losing their USCIS designation if they cease to comply with the latter’s guidelines. Direct EB-5 investments do not depend on such authorization.
Requirements for Direct Employment Creation
Foreign nationals planning a direct EB5 investment should note that USCIS has set out numerous regulations for calculating employment creation. For instance, direct jobs must be continuous, permanent positions. Also, employees must be hired by the EB-5 business in question for at least two years. The position itself needs to last two years, but it can be filled by multiple employees; USCIS will review the duration and nature of the position but does not require it to be filled by only one worker. Due to this policy, EB-5 businesses are allowed to use a job-sharing agreement and have several part-time workers fill a full-time position. However, individual part-time jobs cannot be totaled together as a full-time position. To prove that these criteria were met, EB-5 investors should submit their business’s payroll and tax records to USCIS.
In addition to regulating the nature and duration of direct EB-5 employment, USCIS also requires that the positions be filled by qualifying workers. On its website, USCIS states that employees must meet the following criteria:
A qualifying employee is a U.S. citizen, a lawfully admitted permanent resident, or other immigrant lawfully authorized for employment in the United States including, but not limited to, a conditional resident, a temporary resident, an asylee, a refugee, or a noncitizen remaining in the United States under suspension of deportation.
In light of these guidelines, individuals who work at the EB-5 project site but are not hired by the project itself do not count as direct jobs. Jobs filled by the investor and their immediate family members cannot be counted, either.
Finally, if a direct EB5 investment is made at the reduced amount because the EB-5 business is in a TEA, all employees must be working within the borders of the TEA.
Bolstering employment creation is one of the basic objectives of the EB-5 program; therefore, direct investors must provide abundant evidence that they will fulfill the job creation criteria when they file Form I-526, Immigrant Petition by Standalone Investor. (Form I-526E is used by regional center investors.)
How Business Plans are Created for Direct EB-5 Investments
EB-5 investors must submit a comprehensive business plan with their I-526 petition. This business plan should provide an overview of the EB-5 business, a market analysis, and relevant financial data. Most importantly, the business plan must prove that the EB-5 project will indeed fulfill the job creation requirement. To provide such evidence, investors should include information such as the projected staffing needs, a description of each planned job, and a hiring schedule. All of these items should demonstrate that the required jobs will be created within 30 months after the I-526 petition is approved.
Of course, the nature of the planned jobs must suit the business’s needs, and the salaries for each position should be reasonable. Further, the jobs should be a result of the foreign national’s direct EB-5 investment into the NCE. Besides proving that the job creation will take place, the business plan must also indicate that the foreign national’s EB5 investment and the business itself comply with all USCIS regulations.
Types of Direct EB-5 Investment Businesses
Investors can choose between a wide range of projects to make their EB-5 investment. Still, certain kinds of businesses make it easier to create the needed jobs and meet the program’s other criteria. The most reliable direct investment projects are feasible, need the EB-5 capital, and will be able to meet the employment creation criteria. Instead of investing in an entirely new business, EB-5 investors may choose to open a new branch of an existing franchise or purchase and scale up an existing business.
Many direct EB-5 investors choose to invest in retail stores, wholesale businesses, or restaurants. Other less common kinds of direct EB-5 projects include manufacturing, service, and agricultural enterprises. USCIS also allows foreign nationals to invest in a troubled business; in this case, the created and preserved jobs must clearly be a result of the EB-5 investment.
Direct EB-5 Investments in Existing Businesses
Even though USCIS allows EB-5 investors to invest directly in existing businesses, doing so makes it harder to prove that the business is truly a NCE. Existing businesses only qualify as NCEs if they were created after November 29, 1990, and meet one of the following criteria:
- The EB-5 investment capital will result in a staff count or net worth increase of at least 40%.
- The existing business will be restructured or reorganized in such a way that a new business will result.
Given the second requirement, investors must thoroughly restructure or reorganize an existing business for it to qualify as an NCE. The resulting business must be different from the original—for instance, a small motel might be expanded into a large luxury hotel, or a bookstore might be converted into a restaurant. Superficial changes such as remodeling or rebranding would not make the existing business qualify as an NCE.
The job creation criteria are also met differently by existing businesses. For the most part, existing employment cannot be counted toward creating the needed jobs. To count previously created jobs, an investor would have to prove that they did not acquire any existing branding or other assets and that the business had folded before the EB5 investment was made. An investor could also show how many employees worked in the business prior to the EB-5 investment and explain how the business will generate the required number of new positions while preserving all existing ones.
An investor would also be allowed to count existing employment if the EB-5 project qualifies as a troubled business. A troubled business is an enterprise that has experienced a net loss of at least 20% in the 12 or 24 months prior to the filing of the I-526 petition and has existed for a minimum of two years.
How Involved Are Direct EB-5 Investors in Their Businesses?
The EB-5 program requires investors to have at least some involvement in the management of the NCE into which the investment is made. The extent to which an investor will be involved in managing the business usually depends on the nature of the investment and the management structure. For instance, foreign nationals who make an indirect EB-5 investment can choose to be less involved in day-to-day operations.
Direct EB-5 investors must have some decision-making involvement in the management of the businesses to satisfy the EB-5 program requirements. The level of involvement usually depends on the management structure of the EB-5 business.
Can Multiple Investors Invest in a Direct EB-5 Project?
No. Direct EB-5 projects are not allowed to pool funds from multiple investors. Only regional center projects can accept EB-5 funding from more than one investor.
How to Choose Between Direct and Indirect EB-5 Projects
Due to their flexible employment creation criteria, indirect EB-5 investments have usually been more popular than direct ones. However, the regional center program’s recent temporary expiration motivated many interested foreign nationals to look into direct EB-5 investments.
As mentioned previously, there are several key differences between indirect and direct EB-5 projects; investors should look into each option and choose the one that suits them best. Experienced immigration attorneys and EB-5 consultants can help foreign nationals to identify the most suitable EB-5 investment opportunities.
We thank Suzanne Lazicki of the Lucid EB-5 Blog for her work in the direct EB-5 investment industry.