Hi, everyone. Thanks for joining us for today’s webinar. This is Mike Schoenfeld, one of the managing partners of EB5AN, and I’m joined today by Reed Thomas and also my partner, Sam Silverman. And today, we’re going to be discussing EB-5 general partner management and best practices and also layering in how NES Financial provides a lot of the solutions that assist with these practices. So, additionally, today, we’re going to start by going through who we are and a little bit more about our company. Then, we’re going to go through the overall scope of work that a general partner performs and then discuss a little more on the financial and immigration management details of what you have to do as an EB-5 general partner. I’ll dive into some of the services and assistance that NES Financial provides and then go through a question-and-answer session. And I apologize in advance if there’s any background noise from any of the speakers—working from home always comes with challenges with some nearby construction. So, appreciate you bearing with us.
So, on the next slide, one of the things that we’ve recently done is launched an all-new TEA map. This is a fully automated map where you can check if an EB-5 project qualifies as a targeted employment area (TEA). You add in your address, and our tool automatically calculates whether it can qualify through any of the approved methodologies. So, it’s a really cool tool, and I highly recommend checking it out. Additionally, we have a completely free guidebook that’s available for download online as a PDF. It compiles all of the information we’ve learned and put together in the EB-5 space and is a great resource to get started. Additionally, if you prefer a hard copy, you can buy it on Amazon, and they’ll ship out a print copy to you. So, now we’re going to speak a little bit about who we are and our guest speakers.
So, I’m Mike Schoenfeld, in the middle of the slide there. I’m joined by my partner, Sam Silverman, and as you can tell—our backgrounds are all on the slide—and we come from more of an institutional side of finance, big law, and also real estate development. We launched EB5AN almost eight years ago, and what we wanted to do was bring more of our institutional background into the EB-5 space and build up a best-in-class operation to assist developers and investors and finding the right project and for them and helping them structure EB-5 investments to be suitable for the developments that they’re working on.
So, we were started in 2013, and since then, we’ve become one of the leaders in the EB-5 industry, with over 14 approved regional centers that we operate. We’ve had over 1800 investors submit their EB-5 applications across all of our regional centers, with an extremely high success rate for I-526 petitions and over $4 billion of real estate development projects, along with some other types of deals that have been created underneath all of our regional center licenses. So, to give you an idea of the regional center coverage that we have—and for context, for anybody that doesn’t know what a regional center is, it’s a license that the government, United States Citizenship and Immigration Services (UCSIS), approves that can sponsor EB-5 projects in certain geographic areas, and with a sponsorship you’re allowed to calculate job creation using a more favorable methodology that’s easier to track and leads to higher job counts. So, a vast majority of EB-5 applicants do go through regional centers, and we’ve built a regional center network that covers a majority of the country and are able to sponsor high-quality projects that meet our immigration and risk criteria.
And one of the things that we are most proud of is that we have EB-5 investors that have come from over 60 countries around the world. EB-5 investors consistently find the value in the solutions that we provide and the type of projects that we structure. So, we hope to continue to grow the number of countries where investors have come from over the next several years. And now, I’ll turn it over to Reed so he can introduce himself—he’s our guest speaker from NES Financial today.
Thanks, Mike. It’s good to be here. I’m Reed Thomas, the chief revenue officer and managing director for a company called JTC Americas, formerly NES Financial. We were recently acquired. So, as I talk about some of the capabilities we have today, I’ll cover a little bit of both. We’ve been, as a company, active in the EB-5 business since 2010. We got started with this idea that we could build technology to help well-intended investment initiatives ultimately do the good that they’re intending to do. And so, EB-5 is focused on both job creation and helping potential investors or immigrants pursue the American dream. Both those are good causes, and we wanted to be part of it. So, what we did was built a purpose-built solution specifically to help EB-5 issuers and regional centers and general partners manage the operations to help ensure success for their investors.
So, our company has been recognized for quite a few technology awards over the years, you can see there. We build our own technology—we call it eSTAC, which is a technology platform that stands for security, transparency, audit, and compliance. And as I mentioned before, it’s been purpose-built, or purpose-configured, to work specifically with EB-5. So, you can see that as we go through time, we’ve had quite a bit of success in EB-5, and we’re fairly well known. We’ve been contracted on over 700 EB-5 projects to provide our solutions and services like we do for EB5AN. And that by far makes us the largest provider of these kinds of services. We’ve found that investors in many cases look at the regional centers or projects they’re considering invested in investing in and take note of the fact when NES Financial, or JTC Americas, is involved, as we have been in, like I said, over 700 projects. We currently still have over 190 of them active at some stage of the EB-5 life cycle. And overall, as a business, we’re administering over $130 billion in funds.
And now, we’re about to dive into the meat of the presentation. Please note that we will have these slides available for email afterwards, and if you have any questions, please put them in the chat box, and we can cover some of them at the end of the presentation.
So, to lay the groundwork of what we’re going to discuss today and how to frame the general partner role, I think it’s helpful to look at a typical structure chart for EB-5. So, if you’re looking at the slide—so, in the top row, you have the EB-5 investors are in the middle. Those investors all invest in the box below where it says “Partnership Name,” and this is typically structured as a new limited partnership, where the EB-5 investors all buy a unit historically at $500,000—now it’s at $900,000. This limited partnership is sponsored by a regional center, and the regional center’s job is to report to United States Citizenship and Immigration Services annually on the investors in the project and on the project status. Now, in the top left box, this is where we’re really going to be focusing on today, and that’s the general partner.
So, this is the manager of the limited partnership. In a typical private equity deal, this is the entity and the people making the investment decisions and managing the funds. That’s also the case in EB-5. But in addition, the general partner is also typically responsible for a lot of the immigration side and keeping track of all of that information. In some deals, the general partner is the same as the regional center and it’s the same group of people, and in other deals, they’re separate parties. And then, in some deals, the developer is also part of these two. In a little while, we’ll go through pros and cons of each of those structures. So, if we move down to the bottom half of the chart, this isn’t as critical for what we’re going to be discussing today, but you can see how the different funds flow from the limited partnership down into a borrower that contributes it to a development company, which is where the real estate development is actually happening. And in that company, there’s typically many equity partners, a senior lender, and potentially other sources of capital that all build up to being the project itself.
So, what does an EB-5 general partner actually do? The key roles that the EB-5 GP has are twofold. One is on financial management, and the second is on immigration management. On the financial side, the general partner is involved in the same way they would be with a typical investment limited partnership. There’s administration. If it’s an EB-5 loan, the GP needs to administer the loan and ensure everything’s in compliance. If it’s an equity agreement, they’re still administering all of that component of it. They take care of all of the record-keeping needed on behalf of the investors and the capital that’s contributed and the returns that are generated—annual accounting, annual tax filings, financial reporting, and all of the duties that general partners should serve in terms of overseeing the investment and keeping the investors updated on what’s happening. The second piece is on the immigration side. This is where it’s a little bit more specific to EB-5. The GP is also quite often the one running the immigration side. Sometimes the regional center can do this, but in this case, we’ll discuss it as a GP role, where there’s record-keeping involved with these investors when their capital is contributed, such as proving that it remains at risk. The GP deals with all of the relationships of dealing with these investors and the EB-5 compliance at the end of the immigration process.
So, the things to dig into include loan administration. The key components of this involve collecting interest and payments, monitoring the progress of the project and the loan draws, and making sure that the loan stays in each of the covenants and that you’re enforcing your rights. Ideally, in a good deal, nothing goes wrong, but especially, as we’ve seen with the recent pandemic and historical recessions, things can change, and the job of the GP is to administer the loan and ensure everything stays in compliance. Additionally, there’s a lot of mid- and back-office documentation, which includes the record-keeping of all of the flow of funds and making sure that everything is being recorded the right way so that you can follow the breadcrumbs for exactly how money has been invested and what it’s been spent on. In addition to that, there’s also escrow accounts that are quite often managed by NES Financial, where capital initially comes in.
There’s also the fund management side of managing the limited partnership—making the distributions and splitting up and according to the waterfall how things are going to flow. And then, there’s the standard accounting of having the accountant step in to prepare all the returns, issue the K-1s, and all of those components that the general partners are responsible for. So, the general partner is really responsible for managing the limited partnership and has a duty to do that. That’s what it’s signed up for, and there’s a lot of moving pieces in terms of general partner management. I’ll let Reed jump in here, if there’s anything that I’m missing here of why you see it as a typical GP role.
Well, I think the important part, Mike, you touched on it—while it sounds like traditional fund administration, because it does really look like a private equity fund in many ways, the EB-5 elements add an interesting twist. And I know we’ll talk through some of the other points, but those are really critical and very important to have made right. Because at the end of the day, being a fiduciary to the limited partners—the limited partners or investors, their motivations might be a little bit different. Well, I think they’re definitely a little bit different than in a traditional private equity fund in that there’s this very desired immigration component.
Perfect. That’s exactly right. All right. So, then, the second piece of the GP scope moves on from that financial aspect to more of the immigration area that Reed was discussing, where there is a whole host of things that, as an EB-5 general partner, you need to do that’s much different than a typical general partner in a limited partnership. So, these things focus on the raw record-keeping on the EB-5 side—subscription agreements, the source-of-funds documents, all of the USCIS correspondence and ensuring you’re fully up to date on where different investors stand in the immigration process. And NES has great tools that assist in this record-keeping. On the compliance side, whether the GP is the regional center or there’s a separate regional center involved, the GP has to coordinate all of the information to get to the regional center and ensure the proper reporting is being completed.
On the I-829 petition side—so, this is the form that is filed towards the end of the immigration process after the investor has had a conditional green part for two years. So, the GP needs to help coordinate the documentation backup required to be able to submit these I-829s and ensure that all of the EB-5 investors have a favorable immigration outcomes. And then, lastly, GPs must manage all of the investor relations and provide quarterly reports and updates and transparency on what is going on in the investment. I know EB-5 investors want to be treated the same way as an investor in any other deal. So, you should be focused on providing the reports and treating them similarly to how other general partners would treat their limited partners. And I know Reed mentioned somebody, but is there anything else you’d like to highlight on the immigration side?
Well, I think the key thing to keep in mind is that this is, in terms of best practices, at least, a good area where outsourcing to a third party might be something to consider because most general partners or developers are coming out of the private equity space, and this type of detail is all new, and it’s high stakes for the investor. So, it’s a good opportunity to consider outsourcing this element of it.
Exactly. So, now we’re going to dive into each component that we’ve spoken about on the financial and the immigration side, and this is a relatively long slide deck. So, we may not cover every single bullet point on here, but we’ll go through that. The most important thing is on each of these sub-components. So, on the financial management best practices, we’re first going to dig into ensuring the proper flow of funds. This is critical for two main reasons in EB-5: first is for USCIS purposes. You need to show directly that the EB-5 funds went into the new commercial enterprise, which is the limited partnership, and was then contributed or loaned to the job-creating enterprise and ended up in the entity that’s directly responsible for creating the jobs.
This is important on the immigration component because if you don’t track this accurately or the funds don’t flow the right way, the immigration status of all the investors could be jeopardized. So, that’s why it’s critical to know how to manage the flow of funds, keep all of the information, and have all of the backup. And the key sub-components of this are moving the money into the project in a timely fashion; if you’re repaying a bridge loan, making sure it’s done on time and in the fashion that’s described; and keeping all of the backup documentation for every transfer—you would be surprised at how big of a stack of paper you need for these immigration filings at the end. So, keeping everything properly organized and annotated for the flow of funds for every investor is absolutely critical. Additionally, with some of the smaller developers out there that are used to operating as a family business, we’ve seen where they move funds from one fund to another and use it as if it’s their personal bank account, which is absolutely not allowed.
So, the general partner’s role is to oversee the developer and ensure that the funds are being used exactly as anticipated and as described in the offering memorandum. A lot of times, it’s not with bad intention developers that do this, but people are just used to their business practices that do not work with EB-5 and do not work with the securities documents and compliance that are needed. And lastly, the “at risk” rule—so, as the general partner, it is your role to ensure that the EB-5 investor funds stay at risk throughout the entire immigration process. And this has been a sticking point—historically, USCIS has said that the funds needed to stay at risk until final I-829 approval, which can be many years after the I-526 is approved and the investor gets their conditional green card.
There’s a two-year conditional period at that point, and investors allowed to submit their I-829 application at the end of that, which could still take several years to adjudicate. So, if you’re an investor that’s from a backlogged country, let’s say, your funds may have to be at risk for a period of five, six, seven, eight, nine years. And just because the funds are at risk does not mean that it has to be risky. So, once the primary investment is done that creates the jobs, it’s up to the regional center and the general partner—primarily the general partner—to find a suitable investment to keep those funds at risk, to meet USCIS requirements, and to minimize the risks on the investor’s behalf. So, there’s lots of different key components to making sure that the funds flow in the right direction and stay at risk in the right manner, and all of that is managed by the general partner. And I know Reed has worked on several solutions for all of these pieces, and maybe, Reed, you can touch on a few of the solutions that you have to monitor the flow of funds and the “at risk” requirement and all of these different components before we go to the next slide.
Yeah. I can go into some detail on that. I think at this point, maybe it’s helpful just to really focus on one, which is the documentation piece. You just gave a perspective for the listeners, Mike, that the typical process might take seven or 10 years to ultimately complete, but the audit trail, from a documentation perspective, starts on the very first day and ends at the very last day. So, there’s documentation all the way along. So, it’s critical to have the right procedure in place to collect those documents so that, at the end of the day, the audit trail and evidence is there, and it can be per investor—something like two to 3000 pages of documentation—to ultimately comply with all the immigration requirements.
Exactly. And I think a lot of people stumbling into the EB-5 space and just getting started don’t realize how much compliance there is. A lot of the historical operators that were smaller didn’t realize everything that they needed to do and didn’t have a clear picture on that then would have been much better served by working with a company like NES to provide these solutions. Right. So, the next piece of this involves more of the general partner getting involved to ensure funds are being spent the right way. There’s going to be lots of different covenants in the loan agreement and the way that funds should flow and what they need to be used for, but it’s always helpful for the general partner to serve as that double-check in ensuring with the financial records that all the funds are being done. If it’s a loan-style project, the general partner is the lender in the deal and needs to do everything that a lender would in terms of keeping compliance on ensuring that all the loan covenants are met.
Additionally, you can ask for all the documentation that you’d like. So, we think that a best practice is doing site visits to ensure that construction is going on and making sure that things are being done as being said. One of the things that happens quite often is you’re able to piggyback off the senior lender that’s involved in the deal that is doing very frequent inspections, and being able to get on that distribution is very helpful to be able to double check that EB-5 is being spent correctly. And lastly, something you never want to talk about, but there has been fraud, not just in EB-5 but all across the financial industry. So, as the general partner, your job is to make sure there’s no fraud and that the money is being spent as it should and the project’s moving along as it should. So, you are the general partner and should treat it as if you were managing not EB-5 money but any other limited partner’s money, and I’ll let Reed jump in here as well.
Yeah, on that point, I think it’s important. There are a lot of related projects within the EB-5 community, and that enables fraud to be easier to get done then otherwise. But just like any sort of financial fund transaction, the best practice here is really to have an independent third party involved in doing the administration of the funds. The most famous case, of course, was the Bernie Madoff case, which had nothing to do with EB-5, obviously, but at that time, only 5% of hedge funds outsourced the administration of the fund. After that, now 95% of them do, to help prevent fraud. So, it’s a best practice, certainly, in the fund industry, but in particular, it’s very, very important in EB-5, and limited partners are looking for this to be part of this solution.
So, one piece that is unique is that EB-5 needs to be used directly in the project. So, we often get the question, “Can I use EB-5 funds to pay for EB-5 documentation or to pay other EB-5-related costs?” And the best practice is the money should go directly from the NCE into the job-creating enterprise—every penny of the $900,000 needs to go in, and you should be able to show exactly how it’s going into the job-creating enterprise and being spent out of there. So, so as you can see, there are certain pieces of this—the administrative fee, the different interest rates, the eligible expenses—and all of those things need to be tracked and ensured that EB-5 is being spent directly on what it’s supposed to be.
And then, lastly, just follow the accounting best practices. You are a general partner here managing the funds. You should be following all best practices in terms of the financial accounting, tax compliance, and all of the reporting requirements for the IRS. We have a whole separate webinar on this that you can view, and I’ll let Reed jump in to round out any other takeaways that he has on the financial side of general partner best practices on everything financial.
Well, in EB-5, it’s a little bit unique in that each investor’s on their own journey with their own timeline, and each investor has an obligation to provide the evidence that would support their final immigration benefit. And to that end, it can be tricky because you have a fungible, if you will, fund level in an investment that you need to track. But from an, from a tracking and accounting perspective, as well as a compliance perspective, it comes back down to every individual limited partner, which creates some interesting complexities in terms of the overall process and reporting. So, in terms of best practices, the thing that I think we see EB-5 issuers and general partners do is provide a ton of transparency to their investors in terms of what’s happening with their individual investment, the status of their immigration process, et cetera, all along the way.
Excellent. So, now we’re going to move into the immigration side. So, overall, there’s several different components on the immigration side, which is different from the financial side. First is having all of the records for the immigration component. Next is knowing the investor’s immigration status, tracking that, tracking the job creation, and, if redeployment is required, getting all of that lined up ahead of time. So, let’s dive into the details here. On the complete records portion, you want to have everything related to that investor, including their subscription agreement, their passport, their source-of-funds information, and everything that would be required both for U.S. Securities and Exchange Commission (SEC) compliance and also for U.S. immigration compliance. This includes all of the correspondence with USCIS, the I-797 notice that USCIS has received the application… all of the backup of the source of funds is going to be kept with the immigration attorney, but the GP and regional centers should understand a general sense of the source of funds.
And also, it’s critical to keep contact information. People change email addresses and phone numbers, but staying current with all of that is good so that you can always get in touch with the investors and there’s never any issues with not being able to reach them. And one thing to note here is that a couple of years ago, USCIS started doing compliance reviews on regional centers—going in and checking all of the processes in place. So, it’s important to have all of this backed up. Reed, what else do you think we should add about maintaining these records?
Well, I think the key thing is that there should be a periodic audit that the general partner or regional center is doing to identify documentation that might be missing along the way. That’s another thing that we’ve seen as a best practice as well.
Exactly. Next slide. And this component is where having a good tracking tool like NES is really helpful in knowing the immigration status of each investor. So, as the investor files their I-526 and moves through the process, they could be in different stages, including having filed an I-526 but not being approved or having an approved I-526 but not yet obtaining the temporary green card, having the temporary green card but not filing the I-829, having filed the I-829 but still having the temporary green card because it isn’t approved yet. All of those types of things need to be tracked, and having an overall view of this is extremely helpful. NES has an immigration workflow, which helps deduct where everyone is in this life cycle. And additionally, when investors are going through, they will get some requests for evidence (RFEs) and notices of intent to deny (NOIDs), and the GP must be able to provide all of the backup information that’s critical to help answer these different pieces. So, the best practice as the GP is to be able to provide the immigration attorney and the regional center with a full package of information at the time of I-829 filings.
So, being organized and record-keeping is definitely a good best practice. And Reed, can you jump in and tell us a little bit more about the immigration workflow and some of the unique things that it provides to sponsors?
Right, the immigration workflow is a product capability that we developed, as Mike said, to really help manage all of the complexity associated with this. So, as I said before, each investor is on their own journey and own timeline. There may be different issues that come up along the way for them, such as requests for evidence, as an example, on a specific application or petition that’s unique to that individual investor, but there’s many other things that are common to the investors that are important to capture as evidence along the way. And I think that the tool we’ve created is really helpful to help flag key critical items for a general partner. So, it tracks the timing between different events in each individual investor’s process. So, it can highlight whether there’s something that the general partner needs to pay attention to or take care of, because the timing on responses, et cetera, to the immigration service really, really matter, and mistakes here can ultimately adversely affect the investor’s immigration status, which, as we said upfront, is really the primary motivation for making the investment, right? So, I can’t underestimate how important it is to have the sort of dashboard which this tool provides so that general partners can stay on top of this stuff.
Exactly. At the end of the day, these investors care most about ensuring they get their green cards and they’re made permanent. So, you have to keep all those records to ensure that, right? And one component of ensuring that each investor does get their green card is job creation. This is a job creation program—every investor needs to create 10 new jobs. Projects should be structured appropriately at the start, although obviously conditions change. So, for example, if you were operating a hotel during the start of the pandemic, revenue would have gone way down, and if you were relying completely on the revenue for job creation, you’d be in a bit of a challenge. So, part of what the regional center will be doing and what the general partner needs to do is stay on top of the job creation, ensure everything is on track for investors to earn their permanent green cards, and adjust accordingly. So, part of the annual filing on the [inaudible] is estimated job creation. So, you are recording this yearly, but where this is most important is at the I-829 stage, where you need all of the detailed backups to prove that 10 jobs were created for each investment.
And lastly, one of the other points is redeployment. So, towards the end of the investment, redeployment might be needed because individually, EB-5 investors are all on different timelines, as Reed mentioned. So, some of them may be finished in time, but for others, the project may be completed and sold prior to them earning their permanent green card. So, then you have to redeploy their funds depending on how the documents are set up. So, there’ve been new rules implemented recently from USCIS that the funds do have to be redeployed in a relatively short timeframe, within 12 months, into the same geography of regional center coverage where the initial funds were deployed. And tracking all this is also important to have the backups showing the government that the funds were at risk all the way through the process. So, redeployment is a very sticky issue. A lot of it’s governed by the investment documents and the limited partnership agreement, and it’s important to stay on top of this and keep investors informed as well. So, there’s lots of moving pieces in redeployment, and we have a webinar on that by itself because it is such a thorny topic. And I know Reed has a lot to say about redeployment and tracking different solutions they’ve worked on and tried. So, I’ll let him jump in here and really go through what they’ve seen with redeployment and what some of the best practices are that they’ve noticed from their overview.
Yeah, this is a really tricky part of it. And in some ways it’s unfortunate that redeployment is really even a topic, right, Mike? Because the initial idea was that the immigration process itself should occur within a time period where only one deployment of capital is necessary. However, with the long wait lines that now exist and the slow processing times, in order to maintain capital at risk, it’s often necessary to redeploy into a second project, if you will, or into a second investment, to maintain the “at risk” status. And so, in some ways, that’s not ideal, obviously because the investor did all of their due diligence on the first investment, and that’s what was the best understood, and five years or seven years later, the capital needs to be redeployed after the investor may have already created the jobs that were necessary.
So, the investor went through, let’s say, a risky investment and now has to do it all over again. So, it’s unfortunate. I think that in terms of best practices, the most important thing is transparency—making sure investors are well aware of what’s happening. So, Mike’s advice about acting early is super smart, but keep in mind that the best interest of the investor is really something that, obviously, meets the standard of “at risk” but also recognizes the fact that they may have already achieved their desired investment outcome, which was to create the jobs required for permanent residency or, ultimately, U.S. citizenship. So, trying to find the right balance in terms of risk and compliance is critical.
Exactly. And the last piece of the immigration component—and this also is related to the financial component—is just communication. EB-5 investors are limited partners—they’re investors in the deal, they want to be kept up to date. So, being able to provide regular and transparent communication is very helpful to ensure investors know what’s going on, have an idea of where they are in the process, how the deal is going, if the jobs are being created, and all of the typical things that they may be reaching out to ask about. A good way to get ahead of investor questions is to issue quarterly or semi-annual reports that give all the updates they may want to ask about. This saves everybody time—the investors don’t have to reach out and they’re able to stay updated on everything. Additionally, sometimes it’s helpful to provide these updates to the immigration attorneys as well, so that they know where things stand in the process on the project.
So, now I’m going to turn it over to Reed for a little while to run through all of the different solutions. And as you’ll see, the NES solutions map up pretty well to the key components that we’ve discussed, and it adds a technology layer, which helps to be a best practice in the organization of the fund’s full life cycle both on the financial side and on the immigration side. And with that, I’ll turn it over to Reed.
Thanks, Mike. So, the EB-5 process, as we discussed, in some ways is just like any other private equity fund, where you would go out and raise capital in step one, step two, and then you deploy it. And then, step three is ultimately benefits from the distributions or the return on investment, so in that sense, it’s exactly like any other sort of real estate fund or private equity fund. However, it’s really more complex because there’s these different administrative processes that have to go on that Mike’s talked about. And so, really, it’s a mashup. The way we look at it is that EB-5 is a mashup of a private equity fund with an immigration program and a job creation program all rolled into one. And so, when you think about the administration or the back-office requirements as a general partner or regional center for this, you have to think about addressing all three of those, ultimately, if the limited partners are going to get the benefits that they’re looking for.
And so, we approached it by developing solutions in the three areas shown here. There’s the capital administration of how money moves when it moves, that part of the EB-5 process, because that’s very, very important to ultimately not only the project being successful in terms of getting capital when needed but also in terms of complying with the immigration rules to ultimately be successful in the EB-5 program. Then, there’s the administrative processes related to the fund itself and tackling all the documentation associated with that for both the support for job creation that Mike just talked about as well as immigration, which we also talked about. And then, finally, of course, it’s a typical fund.
So, you have to do the financial reporting at the fund level. Most EB-5 investments are set up as loans. And so, there’s a loan administration component to it as well. And so, we’ve developed solutions for all of these different areas. We haven’t talked a lot about escrow, and I’ll talk about that more in a second, but the escrow component is a lot more complicated than it might seem in other circumstances. So, let’s jump into the next slide, please. This is a helpful diagram I’ve found to articulate what has to happen in the EB-5 process. We’ve said, “Look, at the end of the day, the investor’s primary motivation is a successful immigration result.” And so, general partners need to keep that in mind and make sure that the appropriate audit trail is captured.
And in order to do that, there’s a balance, right? The sort of documentation and evidence that investors are going to require needs to be lined up with what the job-creating entity or the developer requires in terms of ultimately creating a successful project and creating the jobs. And so, it starts with a subscription to escrow. Money typically flows into an escrow account, which is really an aggregation account for the limited partners’ subscription funds. And as Mike pointed out, it’s very important to track subscription funds separately from administration funds. So, there’s some complexity there. The escrow can be also very complicated because there are very few banks in the United States that want to do EB-5 escrows, and the big reason for that is because it’s 100% foreign money.
There has been a history of fraud and abuse. The overall market is relatively small compared to some of the other things larger banks deal with. And so, it’s very sort of nuanced and requires some expertise. So, we took the approach of partnering with banks to facilitate the escrow solution and set it up. Once the escrow triggers are met, the money needs to move into the new commercial enterprise. And this is really important—how it moves and all that stuff—because the new commercial enterprise is, in fact, what the investors are making an equity investment into. But that new commercial enterprise is then usually making a loan to the job-creating entity, or the developer. Oddly, in many cases, folks didn’t set up a construction drawdown.
That’s obviously a best practice in the construction real estate industry and something that certainly is a best practice here—to flow those funds through a drawdown account so that the money can be deployed in time and as needed for the job-creating entity. Now, as the JCE, if you will, is doing what it’s doing, doing construction, the general partner regional center needs to capture necessary evidence to show that the money was spent and is creating jobs. So, that’s an important element. Then, ultimately, once all the jobs are created, the project’s complete capital needs to be returned. And then, that again is another opportunity for us grow. So, that’s how the money flows, over on the left there. At the end of the day, I try to simplify this down to the things that really need to be proven and the evidence along the way.
The audit trail for the I-829, which is the ultimate objective for the investor, starts at the very beginning, which is many, many years from when this project will be completed. So, along the way, you need to show that the new commercial enterprise was established. And so, there’s examples of the type of evidence that can be used to support that. And so, the next step is that USCIS is going to want to see that the full capital amount was invested. So, that’s the $900,000 or $1.8 million—it needs to be proven that that was actually invested. So, escrow is a great tool to help support that because we can monitor very closely the money in and money out.
And so, in fact, what we do is we actually track the wire confirmation receipts for each individual investor’s money in and money out. And that’s also why it’s very important not to track individual investors separately at this point—so you can make sure you can show per investor that their full investment was, in fact, made. And then, of course, there’s the creation of 10 jobs. So, these are the kinds of pieces of evidence that are often required to show that, in the case of things like construction jobs, how much money was spent on different aspects, different purchases, etc., because there’s different economic multipliers for that. The folks at EB5AN have a great tool for estimating that, but there might also be direct jobs, payroll employees, and so on. So, capturing all of that along the way is really the third key element. And then, finally, you have to show that the capital has remained at risk. And so, you can use ongoing statements, regular investment statements, progress reports—those kinds of things, which our system does produce automatically. That’s key to showing that the investment’s “at risk” status was actually sustained. So, if you can do all of those things, the investors will be successful.
Thanks, Reed. And as you can see by following that chart, it is a quite a complicated task, and that’s why having the right organization of the right tools in place is critical. You have to do your job as a general partner.
Yeah. Right. And so, this is just a helpful slide. I won’t spend a lot of time on it, but there have been cases of fraud in the EB-5 industry, and in most cases, it’s where you have related parties working the same roles… like, the developer is the same as the general partner, who’s the same as the regional center—that kind of thing. And there’s been no third party involved. So, you can see that the majority of fraud tends to occur between once the money has hit the new commercial enterprise—between that and the loan to the developer, which highlights the importance of third-party administration over that aspect of the fund administration policy. And investors are aware of this type of thing. So, as you structure your overall fund, I encourage you to think about the benefits of third-party administration here to provide confidence to investors.
We talked about the drawdown, so I think we can skip this over. I’ll be very brief, at least. This is commonly done in real estate construction and development, where there’s a drawdown request that comes, it’s verified, and then capital moves to meet the needs of the developer. So, us as a third party can help verify those draw requests. Surprisingly, in the early days of EB-5, this was not done very often, so definitely a best practice here.
So, just a quick screenshot, and our friends at EB5AN use this platform, but this is for a general partner. This is kind of the view that I was talking about, where you have a dashboard where you can know exactly what’s going on with the fund at all times. So, this dashboard points out where funding is, how much funding has been deployed, how much target capital has been raised, and how much is left to be raised. There’s an immigration dashboard that highlights critical items. So, you can drill into it and find information or solve issues for specific investors. Obviously, there’s tracking of where the cash is as it moves through the different processes. So, that’s the associated accounts section. And then, on a per-investor basis, where each investor is and where their money is at all times is is what’s tracked here. And so, this is a tool that’s available to general partners or regional center managers to do their thing, but there’s also a portal that’s available to investors so that they can see their own information pertinent to them, which gives them confidence in the overall EB-5 investment process.
I think this is important because one of the things that we’ve found is that a lot of investors have a lot of due diligence to do on the project and the regional center. And one of the aspects that’s often overlooked early on is the due diligence with respect to who the issuer that you’re investing in is. How are they actually administering the capital? What are they actually doing to provide the protections and collect the evidence and all the details that we talked about? So, we came out with this medallion partner program, and the idea here was that we would award projects as well as partners or companies in the EB-5 industry that we felt were advocates for best practices and embraced the best practices in everything that they did.
And so, we would award medallions to folks like that. EB5AN is a medallion platinum partner of ours. They have many medallion platinum projects or have been involved with many medallion platinum projects, and it includes not just the project itself, but it also extends to what advisors they are using, who they are working for in the industry, and what their experience is. And we did this as a way to really help investors ultimately recognize quickly who at least NES sees as embracing best practices in the industry. So, investors should look for these kinds of medallion awards and ask potential issuers about them, because it’s a way that hopefully will help speed up the due diligence process by providing some level of calm.
All right. Excellent. Thanks. Thanks, Reed. I think that’s a really helpful overview for everybody that was thinking about how NES fits into the picture. And with that, we’d like to open it up to couple of questions that we may have received during the presentation. We are coming up to the end of our time, so we’re probably going to answer just a few of these, but I would suggest that you reach out to us afterwards.
Then, on the last slide, we have our contact information so that you know where to reach out to—either NES Financial at email@example.com or our company firstname.lastname@example.org. Jeremy, if you’d like to read a couple of questions, we can answer one or two of these questions that we received during the webinar.
Okay. Hi Mike. We’ve got time for one question here. And that is, “What if the project is sold at a loss? What percentage of the investor’s capital is no longer available?” Great question.
That is, and there’s a few different aspects to that. I’d say one is on the EB-5 side, which is the key. And the question there on the immigration process is, was the money invested in the deal? Did it create all the jobs? And if so, is the investor allowed to be repaid? So, if you’re at the end of the process and unfortunately it was not a successful financial deal for whatever reason but all of the jobs were created and all the money was originally invested, the investor does still qualify to earn their permanent green card, although there would be a financial loss. You do have to separate out the financial side of the deal from the immigration side. On the immigration side, the focus is on creating those 10 jobs and putting the capital at risk. If you do that, that’s enough. Obviously, it’s great if the project is successful, but if you meet the requirements, the U.S. government does not penalize you if there was a financial issue with the deal and you did meet all the other requirements.
On the other hand, as an investor, obviously you’d like to get your money back with the end of the project. So, it’s absolutely critical to do due diligence on the deal and make sure you’re investing in a deal where you’re not likely to lose any of the principal. And with that, we’ve hit the hour. So, we’d like to thank everybody for your time in watching the webinar. There will be a recorded version, and please reach out if you’d like these slides sent to you. Additionally, for any other questions, you have our emails on the screen, and we want to thank you again for the time that you spent with us. Hopefully we’ll be hearing from you soon. Thank you.