EB-5 Overview 2022

Emily Zhu 9/27/2022

EB-5 Program

The EB-5 Program allows foreign investors to invest in a qualified project for permanent residence in the United States. There are two ways, generally, to raise money under EB-5. The first, is to establish a business that creates 10 “direct” jobs (W-2 employment). For example, the investor can invest in a restaurant that hires 10 W-2 employees. The second, is to affiliate the project with a “regional center.”

The regional center is an entity designated by USCIS to promote economic growth in a region. EB-5 projects affiliated with a regional center can create jobs through an economic formula rather than through W-2 employment. For example, the economic formula will account for the hard cost of a construction project—which is a non-operating business—to generate jobs that qualify investors for the EB-5 program. In effect, this allows traditional private placement syndication structures to incorporate EB-5 capital.

Investors under the EB-5 program must invest a minimum of $1,050,000 into a qualified project. If that project is geographically located in a target employment area (“TEA”) which is an area with higher unemployment rates, or a rural area, the investment minimum is lowered to $800,000. Because the EB-5 program was promulgated under the intent of economic stimulation, the new EB-5 rules provide further incentives for foreign capital to flow to TEAs and rural areas.

When it comes to permanent residence (green cards), the U.S. government limits the number of EB-5 visas that can be issued per year investors of each country. This means investors from key EB-5 markets (i.e., China & India) are subject to long wait times because of the limited number of visas available (10,000 EB-5 visas per year). Under new EB-5 rules, 10 percent of the total EB-5 visas per year are “reserved” for projects in TEA areas, and 20 percent of the total are reserved for projects in rural areas. Investors investing in a TEA or rural area can, in effect, jump the line and not be subject to the typical waiting periods.

Calculating the waiting period (or retrogression) can be complicated and there is uncertainty with its practical application under the new rules. It can, however, be presumed at this time that new investors from China will benefit significantly from the new reserved visa scheme. In particular, rural projects under the new rules will be most helpful for Chinese investors. This is because TEAs make up only 10 percent of the visa reserves which is expected to fill up quickly as most EB-5 projects today are located in TEA areas. The market for rural EB-5 projects is still in nascent stages, and few qualified projects are available at this time. Furthermore, rural area projects allow investor petitions to be processed faster (by how much is still unclear at the moment). Therefore, rural projects are expected to the focus of investment for investors from key EB-5 markets like China.

The EB-5 regional center syndication structure will generally include two distinct entities known as the “New Commercial Enterprise” (the “NCE”) and the “Job Creating Enterprise” (the “JCE”). The NCE functions much like a special purpose vehicle, where its purpose is to pool funds from foreign investors and invest those funds in the project entity (the JCE). The JCE will own/develop/operate the underlying project and undertakes the activities required for EB-5 job creation.

Below is a typical EB-5 syndication structure:

A typical offering will have the following:

• Private Placement Memorandum

• Subscription Agreement

• Corporate Governance Documents for NCE and JCE

• Loan agreement between NCE and JCE (if applicable)

• EB-5 Business Plan (Matter of Ho Compliant)

• Economic Report

• Regional Center Affiliation Agreement (if the project uses a third-party regional center)

• Form I-956F (this is a project filing with USCIS that must be done prior to investors filing their petitions)

It costs about $100K to conduct the typical EB-5 offering. USCIS charges $17,795 filing fee for the Form I-956F. The business plan and economic report done cost about $20,000, and the remaining corporate/securities documents cost about $40,000. If a third-party regional center is used, the affiliation fee is around $30,000 (not including ongoing admin costs billed per annum). It is possible to apply for a regional center, but it will take quite some time (though, it may be possible to request expedited processing by arguing that the projects undertaken are of national interest).

Marketing EB-5 Offering

EB-5 marketing strategy mainly depends on the size of the offering. For larger projects, intermediaries like foreign immigration agencies can be used to obtain investors. There are new rules that must be followed for engaging intermediaries in addition to U.S. securities laws. Generally, these intermediaries will want exclusivity to sell certain number of subscriptions. For smaller projects, the process would be more “grass roots” where the project sponsors will consider their personal network and capacity to syndicate the funds required.

Under the new EB-5 rules, investors who are in the United States have a significant advantage due to being able to submit the green card application along with their EB-5 petition. Under U.S. immigration law, individuals who submit a green card application can receive lawful status and be allowed to work freely in the U.S. for the period that the green card application remains pending. This means that an international student, for example, who wants to remain in the U.S. after graduation, can make an EB-5 investment and immediately be able to live like a green card holder. Therefore, any strategy for syndicating EB-5 capital should have a focus on prospective investors who are already in the United States.