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What Does Indirect Job Creation Mean in the EB-5 Program?

What Does Indirect Job Creation Mean in the EB-5 Program?

The EB-5 Immigrant Investor Program represents one of the most popular ways for foreign nationals with the financial means to gain permanent residency in the United States, offering permanent resident status in exchange for a substantial, lawfully sourced, job-creating investment in a qualifying EB-5 project. But it is simultaneously demonized in the press and branded a “citizenship-by-investment” scheme, with opponents hurling commonly cited criticisms left and right. The problem is that most of these criticisms are, in fact, misconceptions.

EB-5 applicants have two choices to make an EB-5 investment: either directly in the new commercial enterprise (NCE) or indirectly through a qualifying EB-5 regional center. The regional center route is selected by the overwhelming majority of EB-5 investors for a number of reasons, not least the relaxed job creation rules that allow investors to count indirect jobs toward the EB-5 job creation requirement. “Indirect job creation? Why, how can we be sure real jobs are truly being created?” the critic may protest, but only because they don’t understand how EB-5 indirect job creation works.

EB-5 Regional Center Legal Structure Renders ALL Jobs Indirect

In EB-5 law, an indirect job is defined as a job created by EB-5 investment capital but not a W-2 job at the particular business entity where the EB-5 investor holds equity membership. This makes it different from the definition of “indirect job” as used by both economists and everyday people, as it can very well include direct payroll jobs registered at the job-creating entity (JCE).

The difference between the EB-5 definition and the economist definition of “indirect job” is best illustrated through an example. Say a foreign national makes an EB-5 investment in a hotel development project. Various construction workers and hotel employees may actively work at the hotel site, but if they are listed on the payroll of contractors or a hotel management company and not the NCE itself, they are considered indirect jobs for EB-5 purposes. However, given that they are dedicated jobs served at the hotel in question, they would be considered direct jobs from an economist’s perspective.

In direct EB5 investment projects, the investor makes an investment directly in the NCE, which doubles as the JCE. Thus, when employees are hired, they are listed on the payroll of the NCE, in which the EB-5 investor is a member, and therefore can be counted as direct jobs. Conversely, a regional center investor makes their EB5 investment through a regional center, which pools the funds of its various EB-5 investors into a dedicated EB-5 fund, structured as a limited partnership, which serves as the NCE. This NCE then funnels the EB-5 investment capital into the JCE. As a limited partnership EB-5 fund, the NCE cannot create any direct jobs, and all jobs listed on the payroll of the JCE are considered, for the purposes of the EB-5 program, indirect jobs.

This means that effectively all regional center jobs are classified as indirect, even if a common-sense definition would see them as direct. The misconception that indirect jobs are solely those on the payroll of NCE suppliers is so pervasive that even government officials subscribe to it, and some politicians even draft anti-EB-5 proposals based on this misunderstanding.

EB-5 Regional Center Investors Cannot Fall Back on Direct Job Creation

Supporters of the abolishment of the EB-5 Regional Center Program—or at least the ability of EB-5 regional center investors to count indirect jobs—often believe that regional center investors could simply fall back on direct job creation to support their U.S. green card eligibility if they were to lose EB-5 regional center sponsorship. After all, that would simply put them on the same playing field as direct investors and constitute proof of real job creation… right?

What these critics don’t understand is the specific wording of EB-5 law and the structure of regional center EB5 investments, as elucidated above. The strict definition of “indirect job” in EB-5 law effectively prevents regional center investors from counting any direct jobs, so if the regional center program were to be discontinued, the thousands of EB-5 investors yet to receive I-526 petition approval would suddenly find their job creation counts drop to 0, even if the JCE has hired a number of payroll employees.

With the EB-5 Regional Center Program’s legal status set to expire on June 30, 2021, the entire EB-5 industry is rallying together for reauthorization. Industry leaders suspect only far-reaching reform will achieve reauthorization, and with a proposed EB-5 reform bill on the table, it is likely that the popular program will ultimately be extended. Reauthorization of the program is critical to the thousands of investors with pending I-526 applications and the millions of EB5 investment capital they have injected into the U.S. economy—termination would effectively result in the nullification of these EB-5 applications. The U.S. government would surely be flooded with lawsuits from rightfully disgruntled EB-5 investment participants, and Congress would have killed a lucrative tool for economic stimulation that created countless new jobs for U.S. workers, whether they were officially counted as direct or indirect.