On May 04 2015 by Daniel B. Lundy

Why Does EB-5 Compliance Matter?

With all the regulations, policies, and nuances in the EB-5 program, almost all new regional centers and first-time EB-5 project sponsors experience some growing pains while they learn the ropes.

Many go on to be well-oiled and highly professional operators, but there is a lot to figure out at first. Probably the first thing that everyone who enters this industry learns is that there is a lot of paperwork, including forms for projects and individual investors. EB-5 is a unique mixture of private equity and development rolled up into an immigration program. As such, there are many rules to comply with, and many documents to collect to demonstrate compliance with those rules.

While there are clearly securities laws and regulations that project sponsors and regional centers need to comply with, the focus of this article is immigration compliance. After all, the driving force for EB-5 investors is the immigration benefit they receive from participating in the program, and as such, the immigration rules are of paramount importance. There are two main measures of compliance for a regional center or an EB-5 project, and those are the Form I-829, which is used to demonstrate that the investors have met the requirements to have the conditions on their residence removed so they can obtain permanent green cards, and the Form I-924A annual reporting form, which must be filed each year by regional centers wishing to maintain their approval with USCIS. We refer to the practice of meeting these requirements as part of EB-5 compliance.

What is EB-5 compliance?

At its most basic level, EB-5 compliance is simply a system or set of procedures for collecting and preserving documentation evidencing compliance with the EB-5 program rules and policies, both in general and for reporting purposes. This includes tracking the offering process, the flow of investor funds, the deployment of EB-5 capital into projects, tracking domestic investment in EB-5 projects, and ultimately proving job creation. Compliance is more than just preparing an I-829 or I-924A, however, and should be performed on an ongoing basis. While it is entirely possible hold off on assembling the necessary documents to prove investment and job creation until 90 days before the first I-829 needs to be filed, it is also an extremely stressful and unpleasant experience for you and your investors, and is likely to lead to requests for evidence and delays. Quality EB-5 compliance, on the other hand, means documenting as you go. Such a practice allows you to maintain vigilance over the progress of a project and spot trouble early on. It also gives your investors a measure of confidence that they will get their conditions removed because of this extra layer of scrutiny. And, not least of all, it allows you to avoid expending excess time, effort, and money in the immediate lead up to filing.

When should you start an EB-5 Compliance Program?

Ideally from the very beginning. Regional centers should start an EB-5 compliance program as soon as their regional center is approved, if not earlier. Project developers or sponsors should ideally have a plan for compliance before they go to market with a project. Investors investing directly in a business and not through a regional center should have a compliance plan from the time they choose and make the investment. If you are already past these points, the answer is as soon as possible.

How do you start?

Make a plan. Sit down with your team of professionals, including your immigration attorney, economist, securities attorney and accounting professionals, and figure out what information and documents you will need. Once you know what you will need, establish a system for collecting, organizing, and storing documents. There are various software solutions and service providers on the market that offer fund administration and accounting solutions, but your system can be as simple as maintaining spreadsheets, logs, and file folders (physical or digital, and have a backup in case of fire or other disaster). Establishing a procedure then sticking to it goes a long way.

What do you need to collect and maintain?[1] Fortunately, the information needed for the I-829 petitions and the I-924A filing is essentially the same (although the information on the I-924A is limited to a specific fiscal year rather than the life of a project). The types of information required can be separated into a few broad categories.

Investor Information:

There is a fair amount of information pertaining to the investors and their family members that needs to be collected and maintained. Typically this includes, but is not limited to the following:

  • Passports, conditional residence cards, approval notices, receipt notices and copies of filings for investors and their families;
  • The contact information for investors and their spouses; and
  • Notices, status reports, or other communications with investors.

Flow of Funds:

At the I-829 stage, the investor must show that he or she invested, that the capital was deployed into the job creating enterprise, that the investment was maintained at risk, and that at least ten jobs were created. Documenting the flow of funds from the investor, to escrow, to the new commercial enterprise, to the job creating enterprise, and not back to the investor is critical to proving that these requirements have been met. It is extremely helpful to have an escrow agent that maintains subaccounts for each investor so that each investor’s funds can be traced individually. Documentation must be provided by the project developer, the regional center, the escrow agent and the new commercial enterprise, and includes, but is not limited to the following:

  • Escrow account statements and confirmation letters;
  • Bank statements for accounts of the new commercial enterprise;
  • Records showing the transfer of funds to the job creating enterprise;
  • Tax returns, including schedule K-1, financial statements, and cash flow statements; and
  • Evidence that the job creating enterprise has spent the money.

Job Creation:

How you document job creation depends greatly on whether the investment is a direct investment or a regional center investment. In the direct context, only actual W-2 employees of the new commercial enterprise (or its wholly owned subsidiary) can be counted. Investors in a regional center are able to count indirect jobs through the use of an economic model. However, W-2 employees can still be used as an input into the model to calculate indirect job creation. The other two most common inputs used by economists in EB-5 economic models are construction expenditures and revenue. Most EB-5 economic models are input/output models based on multiplier tables. The way these models work is that for every unit of input, i.e. one employee or $1 million of construction expenditures or revenue, a certain number of jobs are predicted to be created. The number depends on the multiplier, which is calculated from vast sets of government data. For example, in a particular region, 11 jobs might be created as a result of $1 million of construction expenditures, or employing one person might create 0.9 indirect jobs.

Employees:

When counting employees, only full-time, permanent, qualifying U.S. workers can be counted. Multiple part time positions cannot be combined to create one full time position. The investor and his or her immediate family members do not count. Only U.S. citizens and lawful permanent residents, asylees and refugees, and aliens granted suspension of deportation qualify. Employees come and go, so it is important to document at least ten full-time, permanent positions, as well as employees. Documentation includes, but is not limited to the following:

  • Payroll records, quarterly tax filings, and similar documents; and
  • I-9 forms, copies of passports, birth certificates, green cards, or other documents proving status.

Construction Expenditures:

In real estate development projects, construction expenditures are often the single most common input into EB-5 economic models. The good news is that most developers are already in the practice of maintaining detailed expenditure records. The bad news is that they usually are not separating out eligible and ineligible costs for EB-5 purposes, and the documentation is voluminous. Typical successful I-829 packages are more than 2,000 pages. It is possible to replace a large portion of this pile of documents with audited expenditure reports, but hiring an independent CPA firm to perform an audit is not inexpensive. Documentation includes, but is not limited to the following:

  • Contracts, invoices, and paid checks;
  • Full copies of all construction draw packages; and
  • Spreadsheets of construction expenditures.

Revenues:

When the job creating enterprise is an operating business, one of the most common inputs into EB-5 economic models is revenue. Nota Bene — if revenue is an input for the model, a project must meet its revenue projections in order to create sufficient jobs. It is important to be conservative with revenue projections in the EB-5 context, and to always have a margin between the projected number of jobs and the number of jobs required to enable all investors to have the conditions on their residence removed. Documentation includes, but is not limited to the following:

  • Tax returns of Job Creating Enterprise;
  • Balance sheet, P&L, and cash flow statements (preferably audited);
  • Detailed reports of revenues; and
  • Other evidence of revenues, as applicable and available.

Documenting compliance with the EB-5 requirements can be a daunting task, and the success of your regional center and your investors’ immigration goals depend on doing it right. With a good compliance program, managing this burden can be made easy and a matter of routine rather than a source of stress and potential problems.

[1] Please note that this article does not describe the information and documents that need to be collected and maintained for securities purposes.