Raising valuable investment capital through the EB-5 visa program is a complicated, multi-year process that requires early planning and professional execution
Since its creation in 1990, the EB-5 visa program has seen tens of thousands of foreign nationals apply for U.S. permanent resident status and billions of dollars of capital deployed into job creating enterprises. Applying for an EB-5 visa is a complicated, multi-year process that requires early planning and professional execution. The successful structuring and subsequent funding of an investment project with EB-5 capital depends on the careful preparation of all required documentation as well as the marketing strategy of the project sponsor. Developing comprehensive and compliant economic, business, and legal documentation is a critical step that is often underestimated by EB-5 applicants and project sponsors. In this article, we aim to briefly explain the EB-5 visa investment process, the main parties involved, and some of the most common mistakes made along the way.
Main Parties Involved in the EB-5 Capital Process
USCIS-Approved regional center: The USCIS-designated regional center required to raise EB-5 capital and count direct, indirect, and induced job creation that occurs as a result of EB-5 projects. The vast majority of EB-5 projects take place using USCIS-designated regional centers (vs. direct investments) because the indirect and induced job calculation methodology is an effective and proven way to demonstrate job creation to the USCIS that reduces uncertainty, increases transparency, and is more scalable.
New commercial enterprise (NCE): The entity in which the EB-5 investor will make his/her capital investment. Typically, this is structured as a newly formed partnership entity with each investor subscribing as a limited partner and the project sponsor as the managing general partner.
Job creating entity (JCE): The project development entity that will actually create the minimum required 10 jobs per EB-5 investor.
EB-5 investor: Accredited foreign national investor who is seeking to deploy a minimum of $900,000 in investment capital, typically over a five-year time period, in a qualified EB-5 project in the United States. To qualify as an EB-5 project, the investment must create at least 10 jobs that last a minimum of two years.
Required Paperwork for the New Commercial Enterprise and Job Creating Enterprise
Once the NCE is formed, it will typically oversee a private, offshore securities offering with a private placement memorandum (PPM) that details the terms of the EB-5 project investment. EB-5 investors will subscribe as limited partners by signing a subscription agreement. Once funded with EB-5 investor capital, the NCE will then make an investment (debt or equity depending on the project structure) into the JCE through which the required 10 jobs per investor will be created.
The NCE and JCE are each required to submit several documents to the USCIS as part of an EB-5 investor’s application.
The NCE is required to submit the following documents:
- USCIS letter of regional center approval designation
- A detailed USCIS Matter of Ho-compliant business plan
- Verifiable third-party evidence with supporting data that the project falls within a targeted employment area (TEA) if the investment is $900,000 and not $1.8 million
- An economic/job creation analysis showing how the required jobs will be created
- Legal offering documents
- Private placement memorandum (PPM)
- Articles of entity formation and certificates of good standing
- Partnership agreement
- Subscription agreement
- Escrow agreement with capital release terms
- Investment/loan agreement between the NCE and JCE
- Collateral agreement for the investment/loan
- Additional supporting documentation
The JCE is required to submit the following:
- Title deed (if the investment is a real estate transaction)
- Credible and recent market analysis or feasibility study
- Bank loan commitment
- As-built, third-party appraisal
- Proof of the developer’s capital commitment to the project
- Proof of any other capital or lending instruments to be used in the transaction
- Information on the project developer’s track record
- Exit strategy for the investment (loan repayment, refinancing, sale, etc.)
These lists are not comprehensive. Each EB-5 investment project is unique and requires a custom set of documents for the project sponsor to accomplish its goals and for each investor to successfully receive the USCIS approval of his/her I-526 immigration petition.
Step-by-Step Process for Documenting an EB-5 Project
As noted above, each EB-5 project is different, and no universal solution fits all projects. However, the procedure for assembling a comprehensive and USCIS-compliant set of documents for any EB-5 project is essentially the same.
Step 1: Determine TEA qualification. Since the primary motivation of most EB-5 investors is to receive U.S. green cards—not necessarily to achieve a high return on their investment—the overwhelming majority of investors prefer to invest the minimum amount of $900,000 in an EB-5 investment project as opposed to $1.8 million for projects not located in a TEA. Therefore, selecting a project located within a TEA is critical in the marketplace today. TEAs are designated areas either located in (i) high unemployment areas with at least 150% of the national average unemployment rate or (ii) rural areas.
Step 2: Determine job creation. Since the primary aim of the EB-5 investor visa program is to provide economic growth in the form of new job creation, the first step in the process is to determine the potential job creation from an investment project. Under the regional center investment model, direct, indirect, and induced jobs will count toward the 10 required jobs per EB-5 investor. This means that job creation will be derived from cost expenditures, project revenues, and the direct employment of workers (W-2 jobs).
For real estate projects, the real estate developer will provide the EB-5 project sponsor with a detailed cost and revenue pro forma for the development of the project. The EB-5 economist will then determine the number of jobs that the USCIS will attribute to the development of the project. As pointed out above, for each EB-5 investor that the EB-5 project accepts, at least 10 jobs must be created that last a minimum of two years.
Step 3: Determine target EB-5 capital raise. Once the total number of potential jobs has been determined, that number can be divided by 10 and then multiplied by $900,000 (for EB-5 projects located in TEAs) or $1.8 million (for EB-5 projects not located in TEAs). For example, if a project is located in a TEA and creates 180 jobs, the project can support a maximum of 18 investors (who each invest $900,000) or a total of $16.2 million in EB-5 capital investment. The math is relatively simple: 180 jobs created / 10 jobs required per investor = 18 investors x $900,000 per investor = $16.2 million in total EB-5 capital investment. In this example, the target project can support a total of 18 investors who will all initially receive temporary and eventually permanent green cards, assuming that the project actually does create the required 180 jobs.
Since many investment projects do not ultimately cost exactly the amount initially budgeted or generate exactly the amount of anticipated revenue, building a job cushion into the EB-5 project job calculations is important. By creating such a cushion, in the event the development of the project costs less than anticipated or generates slightly less revenue, all the EB-5 investors will still receive their permanent green cards without any issues. If the project did create less than the required number of jobs per investor, some of the investors would be at risk of not having their green cards become permanent at the I-829 stage of the EB-5 visa process.
So, what does all this mean for determining the EB-5 capital raise for a project today? EB-5 investors are very sensitive to receiving their permanent green cards and successfully demonstrating the required job creation. Therefore, in today’s market, EB-5 projects should have a job cushion of at least 20%. There is no restriction on the maximum amount of job cushion a project can have. A large project with a small percentage of EB-5 capital could have a job cushion in excess of 300%, which significantly reduces the immigration risk for any EB-5 investors since the project would have to go terribly wrong for the required number of jobs not to be reached.
Step 4: Finalize project documentation and open project escrow account. Once the EB-5 project is fully documented, the project sponsor is responsible for reviewing and approving the final set of investment documents that will be filed by EB-5 investors. After the documentation has been finalized, the project sponsor will work with a major U.S. bank to setup an EB-5 project escrow account for the NCE, to which EB-5 investors will wire their investment funds as they subscribe to the investment offering.
Step 5: Marketing the EB-5 project to investors. Once the escrow account has been opened, the NCE can begin to subscribe investors to the EB-5 project offering. At this point, the project sponsor has several options for successfully marketing the project to EB-5 investors: (i) engage in direct marketing to investors overseas, (ii) hire a registered U.S. broker dealer to manage the EB-5 capital raised, and (iii) work with foreign immigration/migration firms overseas in China and other countries that specialize in placing investors in EB-5 projects. Most EB-5 projects are presented and sold to investors in an informational seminar format, so it is important to develop a detailed set of attractive marketing materials (brochure/video/executive summary) and have them translated into the local language. Typically, a representative of the NCE will attend these seminars to present the EB-5 project, speak with investors, and answer questions.
Step 6: Subscribing EB-5 investors. Once a new investor decides to invest in a specific EB-5 project, he/she will typically sign the project’s subscription agreement and wire a deposit to the NCE project’s escrow account. Then, the EB-5 investor will work closely with an immigration attorney to prepare his/her I-526 investment petition, complete with legal source of funds documentation that traces the source of the required EB-5 investment funds.
Step 7: Release of EB-5 capital from project escrow account. Each EB-5 project will decide on its own escrow release structure, which determines when the investors’ EB-5 capital will be available to the NCE to invest in the JCE. Some EB-5 project sponsors choose to have investor capital released from escrow and available for investment upon submission of the investors’ I-526 immigration petitions to the USCIS. Other EB-5 project sponsors are more conservative and choose to have capital released from escrow upon the approval of each individual EB-5 investor. This more conservative structure provides investors with confidence in the subscription process and that the USCIS will approve their application for a temporary green card before their investment capital enters the EB-5 project.
Common Mistakes to Avoid
Below is a nonexclusive list of some of the most frequent mistakes we (as a regional center sponsor and as a consultant) see when reviewing EB-5 project documentation and assembling the full package of documentation for an EB-5 project.
Inconsistencies Across Documents Within the EB-5 Project Documentation Package
One common mistake is that job creation numbers, projected revenues, and development cost numbers do not match across the business plan, private placement memorandum, and other supporting documentation. This is a critical mistake because the USCIS will not approve a set of EB-5 project documents that is not completely consistent across all elements of an investor’s I-526 application. These types of errors are common when several different vendors (attorneys, economists, business plan writers, etc.) are involved in assembling the package of EB-5 documentation. We recommend working with a single company to complete the EB-5 project documentation package to minimize these types of critical errors.
Failure to Consider the Marketability of the EB-5 Project Given Current Market Conditions
EB-5 projects must be designed and constructed from the beginning with the EB-5 investor marketplace in mind. Since there are more projects on the market than there are investors, designing a project with a structure and a job cushion that will be attractive to investors today is vital. Having a current knowledge of attractive project structures, capital security, loan term, escrow release terms, and investment returns in the market today is critical for putting together an EB-5 project that will be appealing to potential EB-5 investors.
Attempt to Cut Costs by Engaging Unqualified EB-5 Vendors
Yes, many vendors and attorneys will claim to be able to provide the required documentation for an EB-5 project. Be sure to do your due diligence and speak with multiple vendors in the space to determine which EB-5 team will be the most effective at structuring your project and bringing it to market under an approved USCIS regional center. Ask about refund guarantees and check to see what types and how many EB-5 projects the team has been involved with.
Conclusion and Important Takeaways
Deciding to seek EB-5 capital is a significant business decision that should be carefully evaluated according to the size of the project, potential job creation, and EB-5 capital needed. Such a decision should also consider the amount of effort, cost, and planning required on behalf of the project sponsor to put together a successful EB-5 project. Project sponsors must be patient, but the rewards for long-term thinking can be significant. A successful EB-5 project will provide the project developer with valuable, below-market-rate investment debt/equity and will also directly result in new job creation that stimulates the project’s local economy.