The EB-5 Reform and Integrity Act of 2022 brought many changes to the EB-5 program. For the latest information, please click here.
Slowly but surely, there has been an increased interest in direct EB-5. By direct EB-5, I mean EB-5 investments outside of the context of a regional center.
Traditionally, the choice has been an investor investing in his own business, which requires producing 10 direct and full-time jobs for U.S. workers, or investing in a regional center, which allows for indirect and induced employment creation. Regional center investments have been of more interest to developers and businesses because far more investment capital can be raised based upon the increased employment numbers that come from indirect and induced jobs. Investors, too, and their agents, have preferred regional center investments because of the aura of government approval of a regional center and, in some cases, USCIS approval of an exemplar I 526 petition for the project.
So what changed? For the project developer and the business, it has become far more difficult to create a new regional center and even then only at great expense and great delay. If a regional center already exists, the timing to amend the regional center to add industry codes or geography may be unrealistic. The alternative always exists of having a business or project sponsored by an existing regional center, but that action comes at a cost that may be prohibitive and potentially a loss of control of at least some aspect of the project.
From the investor’s point of view, fewer and fewer exemplar I-526 “project preapprovals” are coming to market because the timeframe to obtain the project preapproval has become unrealistic. In addition, USCIS has backed off of the original concept of project preapproval and has stated clearly that it does not consider itself bound by such a “preapproval”. The net result is that regional center projects have lost some of their luster.
As a result, we now regularly factor into our advice to project developers and businesses seeking capital the option of the pooled investor direct EB-5. And, in our discussions with agents, we now see more willingness to consider the direct EB-5 option.
Obviously, the option only exists to the extent that direct W-2 jobs will be created through the investment. If so, the direct EB-5 option allows the business or developer to market the project to investors virtually immediately without having to obtain any USCIS preapproval. Another advantage is the elimination of the need for an economic report to project indirect and induced jobs. However, the need for a comprehensive business plan to present direct job creation projection in a credible manner is still critical.
There are some advantages and disadvantages from the investor’s perspective. Unlike with the regional center loan model, the investor must be an equity investor in the job-creating enterprise. This could be common shares or preferred equity. In either event, the investor’s chances for a more substantial return could be enhanced but at the expense of a less certain exit strategy.
Another issue is the need for an investor to be something other than a purely passive investor. This legal obligation is met in the regional center context by granting the investor all of the rights and responsibilities of a limited partner under the Uniform Limited Partnership Act. In the context of a direct EB-5 investment, if the investor is not going to be employed by the investment enterprise, at the very least the investor should be placed in an advisory capacity similar to the capacity he would have as a limited partner. The USCIS training materials for EB-5 make clear that USCIS is very flexible in adjudications relating to this requirement.
One of the attractions of the direct EB-5 is the elimination of the plethora of issues that have arisen recently in the adjudication of regional center applications and regional center project adjudications. Tenant occupancy jobs, guest expenditure jobs, NAICS codes, bridge financing…these are just some of the issues involved in regional center project adjudications that do not have to be surmounted with a direct EB-5.
However, while there may be fewer issues, the I-829 condition removal process may be more problematic. Whereas there may be no need to count actual workers in regional center I-829 adjudications, there is a need to do so with direct EB-5 adjudications. This means that the business or developer must document, through W-2 forms, I-9 forms and quarterly tax returns, the actual number of employees. In addition, unlike with indirect and induced jobs, there is a need to prove that each employee is a U.S. citizen or a permanent resident or other qualifying employee. This requires obtaining documentation not normally obtained in the I-9 process, which could put the commercial enterprise at risk of a national origin or citizenship discrimination charge if not handled properly.
In a number of our client representations, we have recently advised of the benefits of a hybrid solution. If there will be direct job creation, but insufficient direct job creation for the number of investors required, or if future projects are envisioned that would benefit from indirect and induced employment projections, the optimal solution may be to proceed concurrently with direct EB-5 for the first group of investors while concurrently filing a regional center application for future investors in the same project and/or for future projects. For example, if there will be 200 direct employees, the first 20 investors could invest $20 million (or $10 million if it is a TEA) before a regional center is approved, while the remainder of the EB-5 investment money will come along at a later date once the concurrently-filed regional center application is approved.
Of course, all of this may change if USCIS actually successfully implements its proposed new EB-5 office in Washington, DC and, in fact, adjudicates regional center applications in the targeted 90 to 120 day time period.