Interest in the EB-5 financing program has increased exponentially in the past year and is being explored by many developers and businesses in the United States as an alternative to traditional financing sources.
Congress established the Employment-Based Fifth Preference (“EB-5”) green card1 in 1990 to stimulate the U.S. economy through direct job creation and capital investment by foreign investors. Congress added a regional center pilot program to the EB-5 category in 1993 for pooling investor money in a defined industry and geographic area to create both direct and indirect jobs (“Regional Centers”). An EB-5 foreign investor must invest $1 million in a “new commercial enterprise” (as defined in the EB-5 regulations) in the U.S.; however, the requisite minimum investment is lowered to $500,000 if the investment is made in a high unemployment area or a rural area.2 At least 10 full-time jobs for qualifying U.S. workers must be created for each investment. Congress sets aside 10,000 immigrant visas annually for investors and their qualifying family members (spouse and minor children).
What is attractive about EB-5 financing?
The EB-5 investor visa program is an attractive source of financing because it offers developers relatively inexpensive borrowing costs; and, developers are not under pressure to produce high rates of returns on the EB-5 funds because the investors are more concerned with obtaining green cards than with the return on their investment.
What are your EB-5 financing options?
EB-5 Regional Centers
Most foreign investors choose to invest in projects sponsored by Regional Centers. Congress set aside 3,000 of the 10,000 visas for issuance to investors in Regional Centers. Regional Centers are attractive because the counting of indirect jobs created through the investment is allowed, which substantially increases the amount of capital that can be raised through EB-5 financing.
A Regional Center is any entity, public or private, that is formed for the purpose of promoting economic growth to a specific geographic region through increased export sales, improved regional productivity, job creation, and increased capital investment. There are currently 440 approved Regional Centers. However, less than 50% of these are regarded as fully operational. A business owner could establish its own regional center (but the processing time for Regional Center approval through the U.S. Citizenship and Immigration Services “USCIS” is currently 9 to 12 months), or the business owner could find and negotiate with an existing regional center to sponsor its financing.
Pooled investor direct EB-5
Direct EB-5 financing is available to foreign investors investing in their own business in the U.S., which produces at least 10 direct full-time jobs for U.S. workers. The direct EB-5 option allows the business or developer to market the proposed project to foreign investors almost immediately. The need for an economic report to project indirect and induced jobs is eliminated, but a comprehensive business plan projecting direct job creation projection in a credible manner is a necessity. Unlike the Regional Center loan model, the investor must be an equity investor and must be something more than a purely passive investor. Direct EB-5 investments are hot in the marketplace right now due to the quicker processing times.
How do Developers and Business Owners raise capital through EB-5 Financing?
First, determine if the project has the necessary characteristics to successfully raise financing through the EB-5 program. Will the project generate the requisite jobs? Is the project located in a designated “targeted unemployment area”?
Second, determine your Regional Center options (if not a direct EB-5 Project). Speak with one or more Regional Centers that are approved by the USCIS for the geographic area where the project is located, and discuss the terms upon which the Regional Center would agree to sponsor the project. Due diligence is a must – determine the Regional Center’s experience and reputation in the EB-5 investment community.
Third, speak with Marketing Agents in the foreign country you are targeting for investors. While China accounts for over 50% and South Korea accounts for over 20% of all EB-5 visas in recent years, foreign investors’ interest in the EB-5 program has spread to India, Iran, Russia, Mexico, Britain / Northern Ireland and Canada (among other countries). Some Regional Centers provide marketing as part of their sponsorship of an EB-5 financing project, but this is not always the case.
Fourth, have offering documents prepared for the EB-5 financing. Because most EB-5 financings are made through limited partnerships or limited liability companies, EB-5 financings involve the sale of securities. EB-5 offerings are generally made in reliance upon the Securities and Exchange Commission exemptions from registration set forth in Regulation D (for private offerings of securities) and Regulation S (for offshore offerings of securities outside the U.S.). Typically the business owner will need a private placement memorandum, limited partnership or limited liability agreement, and subscription agreement for the EB-5 offering.
Fifth, negotiate with other financing source(s) (Bank, private equity sources) any conditions that may be applicable to the EB-5 portion of the funds. Conditions typically pertain to the exit strategy for the EB-5 investor and security for the EB-5 financing.
Sixth, prepare the offering for sale to foreign investors. The Regional Center or marketing agent(s) generally will assist in the translation of the offering documents into the applicable foreign language.
Seventh, market the project in the targeted foreign country. The marketing agent(s) will coordinate with emigration agents in the foreign country to market the offering to investors. This process can take from 2 to 6 months, depending upon the specifics of the offering.
Eighth, obtain subscriptions for the limited partnership or limited liability company interests and commence the EB-5 visa process for each foreign investor. Generally, the investor will sign a subscription agreement, place the full amount of their investment in escrow, and commence the immigration process by filing an I-526 petition through a U.S. immigration attorney. In the past, investor funds have typically remained in escrow until the I-526 petition is approved; however, due to extended processing times (currently 18 months), other mechanisms pertaining to the timing of the release of the funds are now considered (e.g., bridge financing, release upon first I-526 approval, release upon I-526 filing with developer guarantee, etc.). Upon approval of the I-526 petition, the foreign investor qualifies for a conditional immigrant visa that is good for 2 years, after which the investor must seek to have the condition removed through the filing of an I-829 petition.
Ninth, once the project is completed, provide the requisite documentation for the investors to have the condition removed from their legal permanent residence status. This requires proof that the proposed project was completed in accordance with the business plan, and the requisite jobs were in fact created within 2 years following approval of the investor’s I-526 petition. If the project was not completed or the requisite jobs were not created, the investors will lose their conditional status and be forced to leave the U.S.
Last, but not least: reputation is everything in the EB-5 world. To attract foreign investors, the reputation of the developer is imperative – developers must demonstrate they have the means and track record for completing projects; and the reputation of the professional project team (immigration lawyer, securities lawyer, economist and business plan writer) is equally important.
The EB-5 financing program, if used properly and carefully, can be an important part of financing your new development.
1 Legal permanent residence (“LPR”) status in the United States is commonly referred to as a “green card.” After five years of residency in the United States as an LPR, the foreign investor (and any qualifying family member(s)) may apply for U.S. Citizenship.
2 Designated as a Targeted Employment Area (“TEA”).