As the EB-5 industry expands and matures, it continues to face several serious challenges that threaten the integrity of the program as a whole. These concerns include fraud, misuse of investor funds, and other improper actions undertaken by regional centers and developers—which, in turn, might lead the U.S. Securities and Exchange Commission (SEC) to investigate. But not all of the current challenges are related to legal and ethical violations. EB-5 investments involve general investment risk, so projects have the potential to fail without any fraud or impropriety. And Congress continues to pass stopgap extensions of the EB-5 Program with potential changes looming.
All of these factors create a level of uncertainty and require EB-5 regional centers and other stakeholders to take extra care, especially as it relates to offering documentation and project development.
EB-5 Risk Overview
The two primary risk factors for investors in EB-5 are related to immigration and finances.
Immigration – At its core, the EB-5 Program is a visa program through which foreign nationals gain permanent resident status contingent upon the successful creation of jobs. If a project runs into problems or a regional center is terminated, a foreign national’s EB-5 investment may be unable to create the necessary number of jobs, which could have a direct and substantial impact on the investor’s immigration status.
Finances – Because visa eligibility through the EB-5 Program requires foreign national’s to make qualified, at-risk investments, the return of capital is contingent upon the success of the project. If a project fails to achieve profitability, EB-5 investors may experience significant loss of capital.
The risks involved for investors and the responsibility of regional centers to carefully handle EB-5 investor funds requires careful planning and execution. Regional centers and investors alike should consider these risks before any agreements are signed. If these risk factors aren’t carefully considered and problems arise after agreements have been executed and petitions have been submitted to United States Citizenship and Immigration Services (USCIS), the ability to course correct may be extremely limited and will likely require third-party professional services.
Even with experienced EB-5 professionals, some problems won’t be easily solved—if at all. Which is all the more reason to avoid pitfalls in the first place. The risks of EB-5 are not inconsequential. Foreign investors stand to lose a substantial amount of capital as well as their immigration status if an EB-5 project fails.
And the risks and challenges related to EB-5 are generally knowable and preventable. Below, we’ll consider some of the various challenges an EB-5 project might face and how to handle such situations.
Specific EB-5 Challenges
The EB-5 process is complex and necessitates a strong understanding of the program and its requirements, such as compliance with Matter of Ho. USCIS will not approve an I-829 Petition if the details of the investment have materially changed from what was submitted with the I-526 Petition. This makes EB-5 projects somewhat inflexible, and this factor should be considered carefully before submitting anything to USCIS.
If a project runs into trouble, then, making any changes to salvage the project prior to the final adjudication of all EB-5 investors’ I-829 Petitions may result in their denial. A qualified EB-5 professional should be consulted before any changes are made to the original business plans to ensure any such changes would not be considered material in nature.
The corporate structure of each entity involved in an EB-5 offering—and these entities’ relationships to one another—is a vital consideration as it relates to decision making. For example, if a new commercial enterprise (NCE) is formed as a limited partnership, the limited partnership agreement needs to take into consideration how decisions will be made if the project runs into trouble.
If troubles do arise, the general partner or NCE manager will need to become highly engaged in order to address problems and save the EB-5 investment. If the partnership or operating agreement does not adequately account for potential problems, decision-making authority might be vested in the limited partners rather than the general partner, which could prove problematic and time consuming. This is why care must be taken—and qualified professionals consulted—when drafting agreements. If the agreement has already been executed, it will need to be reviewed in order to determine what constitutes a majority vote for a particular decision.
Beyond this, a qualified professional may be needed to help the general partner make the right decision and implement it effectively.
For EB-5 investments that employ a loan model, the loan documents must be carefully prepared to ensure enforceability. The NCE needs to be able to take whatever legal actions necessary to protect its interests and execute on any pledged collateral.
Troubled EB-5 projects often need additional capital to complete the project and create the jobs required by the EB-5 Program. Since job creation is typically tied directly to capital expenditures, insufficient capital can adversely impact the immigration success of the project’s EB-5 investors. Finding additional capital within the necessary timeframe may prove challenging—for EB-5 investors awaiting final adjudication, timely job creation is absolutely paramount.
EB-5 investors are an unlikely source of additional capital, and so third-party funding will almost certainly be required. An experienced EB-5 professional should be consulted to determine what options would be best for both saving the project and ensuring the immigration success of the EB-5 investors.
Inappropriate Regional Center Actions
EB-5 regional centers are responsible for overseeing and monitoring ongoing EB-5 projects, carefully handling investor funds, conducting all necessary due diligence, and reporting to USCIS. USCIS holds regional centers accountable for their actions, and if a regional center is deemed to compromise the integrity of the EB-5 Program in any way, USCIS is likely to issue a Notice of Intent to Terminate (NOIT) the regional center.
The purpose of a regional center is to stimulate the regional economy through the infusion of foreign capital in projects that create jobs, particularly in areas of higher-than-average unemployment. If USCIS determines that a regional center is not actively engaged in this mission, USCIS may issue an NOIT. For example, an NOIT might be issued if a regional center fails to conduct sufficient oversight of the EB-5 capital it invests into sponsored projects or if it fails to properly document and report job creation.
The key issue is whether or not the regional center remains compliant with all EB-5 requirements and actively promotes economic growth within the constraints of the EB-5 Program. As a result, inactivity may also lead to a regional center receiving an NOIT.
If a regional center misappropriates EB-5 investor funds—for example, by funneling those funds to expenses not related to the job-creating entity (JCE) as described in offering documents—investor I-526 and I-829 Petitions would be placed at risk and the NCE and JCE would open themselves up to investigation for fraud.
The SEC is the U.S. federal agency tasked with protecting investors, keeping markets fair, and otherwise enforcing federal securities laws. If the SEC receives information suggesting inappropriate activity, it will begin an investigation to determine whether any misrepresentation, fraud, misuse of funds, or other violations have been committed. The initial fact-finding investigation is confidential to protect evidence and prevent unnecessary damage to an entity’s reputation. The investigation will become public if the SEC files an action in court.
If any fraudulent or other unlawful activity is discovered, the SEC will step in. For instance, it may appoint a receiver to take control of an asset, freeze assets, or initiate a change in management. Because the SEC is primarily concerned with the financial protection of investors, EB-5 projects facing some level of SEC involvement run a much higher immigration risk. Any action by the SEC is likely to delay the project and may, as a result, adversely affect job creation. In turn, EB-5 investors may not meet the requirements of the EB-5 Program and be denied permanent resident status. Depending on the details of a case and the SEC personnel involved, immigration issues related to EB-5 projects might be considered in SEC actions, but they might not.
When USCIS becomes aware of an SEC investigation, it may withhold the adjudication of I-526 or I-829 Petitions until it more fully understands the facts of the case and what the SEC plans to do. Even before the SEC has made a final decision, however, if USCIS sees evidence that EB-5 capital was used for any purpose not stated in the project’s business plan, it may deny all I-526 and I-829 Petitions associated with the project or regional center under investigation.
Legislative Action & Regulatory Changes
The EB-5 Program was enacted by Congress in 1990 and since then has been renewed several times. Most recently, the program was renewed as is through September 30, 2017. Prior to the latest renewal, an EB-5 reform bill, the American Job Creation and Investment Promotion Reform Act of 2016, was passed. While the bill took a step in the right direction, critics argue it didn’t go far enough to help protect investors who are victims of fraud.
Although little has been done to change the EB-5 Program, a variety of changes to modernize the program, whether through legislation or regulation, remain a priority for USCIS and Congress. While changes to the program are likely unavoidable, what those changes are may be influenced by input from stakeholders. For now, the challenge is operating in an industry facing likely but unknown changes and planning for the future accordingly—while at the same time executing current projects in such a way that immigration and financial risks remain low.
EB-5 stakeholders should be aware of these challenges and how they impact investors’ immigration and financial risk—as well as the broader implications they have on the industry. These challenges should be anticipated in project documentation and handled carefully throughout the life of an EB-5 project. One of the best choices a regional center can make is to engage the necessary EB-5 professionals both preemptively and whenever they run into problems to ensure proper procedures and sound decision making.