An EB-5 investment can take one
of two forms. The investor can invest in
a free-standing project, often termed as "the stand-alone EB-5"/ "Direct EB-5"
or the investor can make his/ her investment through a "regional center", which
is an economic unit, public or private, that has economic development impact to
a designated geographic area.
Recently, there has been a surge of direct or "stand
alone" EB-5 petitions. There have been
many factors attributing to this, including USCIS delays, tenant occupancy
issues, the expense of putting together a regional center, collapse of A
Chicago Convention Center (ACCC) project and its negative publicity associated
with the regional center, etc. Traditionally, as regional centers had the
approval of USCIS, direct projects were distrusted, particularly after the
Mamtek scandal.  However,
as regional center project preapprovals became unreliable coupled with instances
of large regional center project failures the market in China began to swing
towards direct petitions.
Other than market forces, some projects are better suited
to the traditional direct or stand-alone approach rather than as a regional
center project. This article analyzes the difference between a traditional
stand-alone EB-5 petition and a regional center EB-5 petition and the cost, the
benefit and risk analysis for the two approaches.
What is a stand-alone EB-5 investment?
Prior to the Regional Center Pilot
Program, the traditional method for EB-5 investors was through the stand alone
investment (INA Section 203(b)(3)). A stand-alone EB-5 investor would have to
invest in a new commercial enterprise which may take any lawful business form,
including a limited partnership, and must both benefit the US economy and directly created not fewer than 10
full-time permanent jobs for qualifying employees.
What is a regional center EB-5 investment?
Pursuant to the Regional Center
Pilot Program, regional centers as we know them today were born. Regional
center EB-5 investors would have to invest in a new commercial enterprise. The
investment must be utilized to promote economic growth, including improved
regional productivity, job creation, and increased domestic capital
Minimum Investment Amount
Whether the investor decides to invest
in a stand-alone project or in a regional center program, the minimum
investment amount does not change. The minimum investment is $500,000 if the
EB-5 project is located in a high unemployment rate area, also known as
"targeted employment area" (TEA) or rural area.
employment area is an area
that, at the time of investment, is a rural area or an area experiencing
unemployment of at least 150 percent of the national average rate.
area is any area outside a metropolitan
statistical area (as designated by the Office of Management and Budget) or
outside the boundary of any city or town having a population of 20,000 or more
according to the decennial census.
If either the RC project or the
stand alone project is not located in a TEA area the minimum investment amount remains
$1,000,000. The investment capital should be invested or is actively in the
process of being invested into the new commercial enterprise. The investor must
also show that the required amount of capital is "at risk" for the purpose of
generating a return.
Job Creation for Stand-Alone and Regional
The most important difference
between the two forms of EB-5 investment is the manner in which the jobs
created are counted by United States Citizenship and Immigration Service (USCIS).
Stand-alone investors make an investment into a new or existing business
venture in the U.S. and can do so individually or with other investors. In
stand-alone petitions, only direct jobs are counted. The most important
advantage of investing through a regional center is that indirect and induced
jobs are counted towards the job creation requirement. In regional center-based
investments, depending on all input/output model is used to calculate the jobs,
the number of jobs created is usually almost three times greater than those
created by stand-alone investments.
The difference between a
directly created job and an indirectly created job is easy, but important, to
understand. Direct jobs are those that establish an employ-employee
relationship between the commercial enterprise and the persons that they
employ. For example, if an EB-5 project builds a hotel that is open after a
year, the receptionist position would be considered a directly created one. Indirect jobs are held by people who
work for the producers of materials, equipment, and services that are used in a
commercial enterprise's capital investment project, but who are not directly
employed by the commercial enterprise.
Construction jobs are often considered indirectly created jobs. A final
category of jobs created by EB-5 ventures, which can be counted for regional
center-based investments but not stand-alone ones are called induced jobs. Induced jobs are those jobs created
when direct and indirect employees go out and spend their increased income on
consumer goods and services.
In a regional center context,
the investors' investment money is "pooled" or combined and invested. In a stand-alone project, the investment can
also be pooled, or invested alone. If there are multiple investors in a non-regional
center project, the corporate structure must be carefully crafted. The job creation element also becomes more
defined. In both cases, there must be a
clear nexus between the investment and the job creation.
There have been several
misconceptions in this area. Several
immigration practitioners have advised that only investors in regional center
programs are allowed to be involved in the "policy formulation" activities and
indirect management; further advising that for the stand-alone program the
investors must be involved in the daily management of the business. Careful reading of the regulations denotes
that this approach is not correct.
A stand-alone investor may also be involved in the "policy formulation"
activities and indirect management. Please refer to 8 C.F.R. 204 6(j)(5).
Capital at Risk and Redemption Agreement
Both stand-alone EB-5 investors
and regional center EB-5 investors bear the business risk to make the
investment. That means the investor must have the chance to gain profits or
lose the investment. The business agreements for the new
commercial enterprise cannot contain a buy-back agreement, such as a redemption
clause guaranteeing the return of the alien investor's capital investment, then
the EB-5 investor's capital investment will not be a qualifying "at-risk"
investment for EB-5 purposes.
Cost, Benefit and Risks
The EB-5 stand-alone investors
and regional center investors need to retain attorneys specialized in EB-5
practice to prepare their petitions. There are two general stages: I-526 where
the investors obtained conditional permanent residency and I-829 where the
investors petition for removal of condition on their permanent residency.
The EB-5 petition includes two segments
of information: firstly that the evidence to prove the project is viable,
credible and secondly the evidence to prove the investors' capital is obtained
through lawful means. For the project information, the petitions cost usually
include costs to attorneys for the tailored EB-5 compliance comprehensive
business plan, cost to the economist for certifying the economic development
impact and job creation requirement, cost to securities/corporate attorney for
drafting and reviewing the securities offering documents, cost to market
analysis firm for certify the project is viable, feasible and credible, and
cost for filing the new commercial
enterprise to the State where the project is located and cost of filing the
regional center with USCIS.
For stand-alone EB-5 investors,
the principals of the project have to prepare to bear the cost. For regional
center EB-5 investors, the regional center will cover the costs to the project
portion of the I-526 petition. One distinction between the two is that
stand-alone projects require the petitioner to submit all of the evidence by
themselves, with the help of their immigration lawyer. On the other hand, investors who invest
through regional centers will have their petition join by material from the
regional center that certifies the investor and the regional center project
meets all of the criteria set by USCIS.
SEC Form D and I-924A
Two things are easily neglected
for the EB-5 projects: the SEC Form D and I-924A annual filing.
Any regional center or Direct EB-5 who solicited
investment from foreign investors via the private placement offering relies on
an exemption from registration pursuant to Regulation D. The securities law
requires the regional center and Direct EB-5 project to file a Form D - Notice
of Exempt Offering of Securities with the SEC within 15 days after the first
sale of securities in the offering.
A Regional Center which has
received USCIS designation must file the I-924A form on or before December 29
each year. The failure to timely file a Form I-924A Supplement for each fiscal
year in which the regional center has been designated for participation in the
Immigrant Investor Pilot Program will result in the issuance of an intent to
terminate the participation of the regional center in the Pilot Program, which
may ultimately result in the termination of the approval and designation of the
Most regional centers will require an investor to put the
investment funds into a specially-designated escrow account, usually with a
bank. There is no legal requirement that an escrow agreement ever be used in
EB-5 investments. It is simply a marketing tool. In
stand-alone projects, escrow arrangements have been utilized though for very
small projects, often there is usually no escrow arrangement at all and the
money is wired directly into the project in order to avoid delay. When an escrow agreement is in place, the
investment money will subsequently be released directly to the project when the
I-526 petition is approved. Both
stand-alone EB-5 investors and regional center EB-5 investors bear the business
risk to make the investment.
The EB-5 projects have to
follow a strict timeline under the immigration laws. The 10 full-time jobs for
each EB-5 investment will have to be created or will likely to be created
within two years. The two year clock starts kicking six months since the
adjudication of the I-526. The investors are requested to submit timeline and
cost estimates for the project based on reasonable analysis method. If the
project is subject to delays or other "material change", the investors bear the
risk that they might not be able to remove the condition on their permanent
residency. Though the draft policy memorandum released by the USCIS in February
2013 gives much flexibilities regarding material change.
Filing a stand-alone petition is certainly a lot faster
than filing for regional center status and waiting for a response from USCIS.
Whereas once upon a time, the majority of stand-alone investors would be investors wishing to expand or set
up their own business, more recently, project developers requiring less capital
and who could show a clearly defines are utilizing this route. The adjudication
time for stand-alone EB-5 petition is shorter in most cases.
A Direct EB-5 Project - a sugar factory in Moberly, Missouri turned out to be a
fraudulent scheme set up by the principal Bruce Cole. The project collapsed. At
least four Chinese investors lost their investment capital. The Chinese
authorities issued notice to the migration agencies to warn the risks involved
in the Direct EB-5 projects.
Mona Shah &
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reproducing, sales of this document. This article is a general summary of
complex securities law issues. No legal advice is provided in this
article. Please consult the securities attorney for advice applicable to
your particular circumstances.
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