The evolution of the EB-5 market has encouraged investors to undertake increased levels of due diligence prior to committing to projects. Aside from assessing whether a project will remain financially viable throughout the visa application period and beyond, investors have been encouraged by recent actions concerning EB-5 projects by the Securities and Exchange Commission (SEC) to further investigate which financial controls and immigration compliance strategies each project has adopted to encourage approval of the I-829 petition for removal of the conditions of an investor’s permanent residence in the United States.

As such, investors have turned a more critical eye on project structure. The following are two key areas requiring due diligence of investors who consider funding EB-5 projects:

Security of the Investment Funds 

Management of investment funds is a key area of concern for investors. Use of funds must be transparent so as to guard against mismanagement or fraud, and investors benefit from working with projects that make use of an established and credible third-party administrator to set up an escrow structure compliant with EB-5 requirements. A qualified fund administrator will also track and provide an auditable record of all uses of the investment to facilitate a review by United States Citizenship and Immigration Services (USCIS) if necessary.

After an investment is released from escrow, projects must ensure funds are used as outlined in the materials provided with the I-526 petition. Namely, the investment amount must be used for job creation. In regional center projects where the new commercial enterprise and job-creating entity are managed by the same actors or some of the same actors, the opportunity for mismanagement increases. Investors must remain aware of this risk and thoroughly review projects’ financial plans to safeguard their investments.

As such, investors should be provided with ongoing accurate information on the use of their investment funds. These funds must be linked directly to job creation under EB-5 requirements, and as this element of the project is crucial for the success of the I-829 petition, continual information provides an additional level of confidence for investors. Similarly, investors should seek out projects that retain part of the investment in escrow in the event the initial I-526 petition is denied. However, this holdback structure must also be in compliance with the requirements of the EB-5 Program.

Lastly, investors must have a viable exit and repayment strategy. Recent increases in visa application processing times for foreign investors from China have illustrated the importance of properly managing investment funds until the conditions of permanent residence have been removed. Projects must set up concrete timelines for the use and repayment of investment funds within the confines of the program. Proper security of investment funds and oversight of their release from escrow are crucial considerations for foreign investors considering making an otherwise risky EB-5 investment.

Project Management and Documentation 

The first area of concern for investors in this regard is that the project has secured a capital stack sufficient to ensure its completion. Some EB-5 projects involve multiple senior loans, and investors in these projects must carefully review any subordination agreements to ensure their investments are protected. Especially in cases where the EB-5 investment is released from escrow prior to a senior loan, investors must ensure funds are used as required by the EB-5 Program and as laid out in the project offering.

Regional centers and other project managers should additionally demonstrate a willingness to work with investors and provide the documentation necessary to submit a successful I-829 petition to USCIS. By working with immigration attorneys and other professionals experienced with the requirements of the program, regional centers can better track and report on the use of funds and proactively ensure any points of concern for USCIS adjudicators are addressed and remedied.

In this regard, some regional centers undertake compliance reviews to identify such potential problem areas and devise strategies to rectify them. The following are two key points investors should look into when reviewing a project’s compliance with EB-5 Program requirements:

• Are regional center staff aware of which information should be retained for review by auditors or later submission to USCIS with the I-829 petition materials? Removal of the conditions of an investor’s permanent residence hinges on proper documentation of how investment funds are used throughout the residence period, and regional centers must thus institute protocols for organizing and retaining relevant information to support investors’ residence petitions.
• Are documents reviewed by a third party on a regular basis? Whereas regional centers should be experienced in project management, meaning the management of new commercial enterprises, they should also work with third parties to audit records often and pinpoint any areas of concern that would otherwise be identified during the adjudication of investors’ petitions.

Investors must additionally conduct due diligence by verifying the backgrounds and industry experience of project management teams, meaning principal actors within the new commercial enterprise and the job-creating entity alike. Before entering into any financial agreements, investors should be satisfied of the integrity of all those who will have access to the investment funds. It is worth keeping in mind that an experienced financial advisor can assist in identifying risks and project structures conducive to mismanagement in this regard.

Increased competition in the EB-5 Program brought about by Chinese retrogression quotas and further USCIS oversight of regional centers has encouraged investors to be more selective in their investment commitments. In adopting the strategies outlined above, investors can therefore take the necessary steps to protect their investments and make a successful visa adjudication more likely.