One of the requirements of a successful EB-5 visa investment is that the investment capital be at risk for the duration of the investment.This does not mean that EB-5 investors are required to invest in “risky” projects. Quite the contrary—EB-5 investors are strongly recommended to conduct thorough due diligence to minimize their exposure to financial and immigration risk. The “at risk” requirement is in place to ensure investors actually invest their capital in new commercial enterprises (NCEs) that can create jobs and boost the economy and not simply “buying” a U.S. green card. The EB-5 investment must incur a risk of loss as well as a chance of gain.
To be eligible for an EB-5 visa, investors must also demonstrate in their I-526 petition that their investment is at risk according to the requirements of the EB-5 program. Investors must make the investment prior to submitting their application, as intent to invest or prospective investment arrangements are not sufficient to prove an at-risk investment.
Matter of Izummi
Matter of Izummi and provisions in the USCIS Policy Manual 6(G)(2)(A) that cite Matter of Izummi lay out many of the details related to the EB-5 “at risk” requirement. Factors to consider include contractual obligations, the ownership and use of assets, and the transfer of investment amounts.
Any guarantees on the part of the project developer are prohibited—for an EB-5 investment to be at risk, there must be a chance of financial loss. The financial resolution of the investment cannot be artificially determined before the investment. Contractual rights to repayment are not allowed, and the investor must acknowledge the potential of significant financial loss. Profit distributions are permitted, but only if they are not guaranteed and not a portion of the investor’s minimum investment amount.
If an EB-5 investor is guaranteed eventual ownership or use of an asset, the expected value of the asset will be subtracted from the minimum qualifying EB-5 investment. Thus, such guarantees are permitted, but only if the investor transfers more capital than necessary and the value of the asset does not cut into the minimum required EB-5 investment amount.
Investors must also transfer the EB-5 investment amount to the NCE in full. Partial investments or installments are not permitted.
Matter of Ho
Matter of Ho lays out an additional rule for the “at risk” requirement.
For an EB-5 investment to be considered at risk, the investor must provide evidence of the project actually undertaking business activity. Without proof of actual business activity on the part of the project, United States Citizenship and Immigration Services (USCIS) cannot know whether the entity is bona fide and whether the investment will be used to stimulate the economy as intended.
The “At Risk” Requirement in Practice
The following are real-life examples of USCIS enforcing the “at risk” requirement.
Funds Not Made Available to the Job-Creating Entity
It’s not enough to prove the transfer of EB-5 capital in full—the invested funds must also be demonstrated to be fully available to the job-creating entity (JCE). One EB-5 investor found her I-526 application denied after transferring her investment capital to an escrow account for the NCE to loan to the JCE. The problem was that the program description memorandum and loan agreement did not mandate the NCE to loan the amount to the JCE. In this particular case, construction on the JCE was also completed while the applicant’s funds were still in escrow, pending her I-526 approval. Based on the JCE’s lack of reasonable need for the investment capital and the lack of obligation for the NCE to loan the amount to the JCE, the investor’s I-526 petition was denied.
Lack of Demonstrable Business Activities
If a project cannot prove the commencement of business activities, its EB-5 capital is not considered at risk. One JCE landed itself a denial for an application for exemplar status because USCIS could not determine that the entity was conducting business activities. When USCIS visited the project site and found no construction activities, they doubted the legitimacy of the project and issued a denial. The applicant then filed a repeal, providing construction contracts, building permits, inspection records, and other evidence of business activities. The new evidence was sufficient, and USCIS then approved the project’s request for exemplar status.
No Chance for Profits
EB-5 investments must, by EB-5 rules, offer the investor a chance at profits. One EB-5 investor’s petition was denied because the contract she signed with the NCE did not grant her rights to the entity’s profits. Interest payments upon maturity of the loan were optional, at the discretion of general partner, and would come from unspecified sources. The contract did not satisfy USCIS’s requirements for an at-risk investment, resulting in the denial of the applicant’s I-526 petition.
As long as an EB-5 investment offers a chance of profit, there are no rules for how good the investment must be. USCIS once tried to deny an I-526 petition because the investment terms would make it extremely difficult for the EB-5 investor to break even on the investment. However, the Administrative Appeals Office (AAO) disagreed, finding that the investment still incurred the chance for profit and the risk of loss, even though it was a poor investment in terms of financial risk.
Conducting Due Diligence for the “At Risk” Requirement
In addition to evaluating a potential EB-5 project’s financial and immigration risk, EB-5 investors should consider provisions or circumstances that could violate the “at risk” requirements of the EB-5 program. Below are some questions to ask to determine whether the “at risk” requirement will be met.
- Are there any terms in the investment agreement that are similar to an equity interest?
- Are the chances to both profit from and lose money on the EB-5 investment evident in the business plan and offering?
- Are there any guarantees from the NCE for a rate of return or the ownership of an asset that could be subtracted from the qualifying EB-5 investment amount?
- Is the NCE obligated to make the EB-5 capital available in full to the JCE, and are there any fees in place that could impact the amount of funds that the JCE receives?
- Does the business plan stipulate the time and manner in which the JCE will deploy the invested EB-5 capital in full?
- Does the business plan indicate ongoing business activities?