Regional Centers EB-5s: Gold Mine or Fools Gold?

The EB-5 Reform and Integrity Act of 2022 brought many changes to the EB-5 program. For the latest information, please click here.

The Regional Center EB-5 program is one of the hottest topics in U.S. immigration.  The number of Regional Center EB-5 petitions has increased well over 100% in the last 24 months.

Whereas there were less than 25 approved regional centers as recently as 2 years ago, there are presently over 80, with the number increasing at a rapid pace.  All of this is not surprising since it is a win win-win government program: Capital is provided for construction projects during a time when capital availability is a serious problem; jobs are created during a time of critically high unemployment; and high net worth individuals who otherwise might not have an opportunity to obtain U.S. permanent residence are able to do so.

For the foreign national, regional center EB-5 has a number of advantages:

• There is presently sufficient visa availability.
• There is no requirement of a sponsoring family member or employer.
• The amount of investment required (usually $500.000) is not prohibitive for many foreign nationals, especially with today’s exchange rates.
• The foreign national is not required to work in the U.S. and, should she decide to work, is able to work anywhere she chooses.
• The investor can be geographically mobile and is not tied down to any specific business location.
• The investor is not required to start a business or create direct employment.
• The investor’s children can be educated in the U.S. and receive in-state tuition benefits.
• It is often the only permanent residence option for a retiree.

However, there are many misconceptions regarding regional center EB-5s.  The fact that USCIS has approved a regional center does not mean that a particular project undertaken by the regional center will be approved by CIS.  The regional center designation is merely a designation by CIS that pooled investments in a certain geographical area in designated industries can utilize indirect employment creation in addition to, or instead of, direct employment creation.  In fact, as of the writing of this article, of the more than 80 approved regional centers, a small percentage actually have had investors obtain I-526 petition approvals and far fewer have had investors who have successfully removed conditional permanent residence following approval of the I-829 petition.

What should be the role of counsel in advising a client in which regional center to invest?  The authors subscribe to a middle ground.  While some attorneys advise clients exactly which regional center to invest in, this has serious potential liability issues and requires the attorney to make an assessment regarding financial risk, rate of return, security of investment, redemption possibilities and timing, likelihood of job creation and other issues for which the attorney does not generally have an appropriate level of expertise.  Other attorneys provide a list of all approved regional centers and leave it up to the client to select the one in which to invest.  We believe that the immigration attorney acts most appropriately by providing a list of regional centers that the immigration attorney knows have had a high success rate of approved I-526 petitions and, in some cases, approved I-829 petitions, with a caveat that the client should conduct her own due diligence and employ experts of her choosing to assist with this process.

The immigration attorney might want to provide a list of due diligence issues to aid in this process.

So what could go wrong if an investor invests the required amount of capital in an approved regional center?  In addition to issues particular to the investor (inability to document lawful source of funds; inability to trace funds from various accounts through to the regional center), there are many regional center-based issues that could result in the investor not obtaining permanent residence status or not being able to remove the conditions to obtain unconditional permanent residence status.  A non-exhaustive list follows:

1. Even though the regional center is approved, a particular project within the regional center in which the investor invests may not be approved.  As of the date of submission of this article, USCIS has just developed a new procedure to have regional center projects pre-approved, which could alleviate this problem.  However, absent such pre-approval, each adjudicator reviewing an I-526 petition filed by an investor must make his or her own determination as to whether the project qualifies.
2. Regional center designation can be re-visited by CIS when the business assumptions utilized in the econometric model are not realized.  An I-526 petition may be approved based upon an economist’s report using a recognized econometric model to predict the number of indirect and induced jobs that will be created based upon a specific dollar investment in a specific project in a specific geographical area in a specific industry in a specific timeframe with a specific number of tenants and other specific foundation facts.  Although CIS should not second guess the econometric report at the I-829 stage, CIS will want proof that the assumptions relied upon in the report have actually occurred.  If they have not occurred because of economic conditions, change of plans, construction delays, etc., the investor is at risk that the condition removal petition will not be approved.
3. Regional center designations are based on the full investment of many different investors in a single project.  Although some regional centers’ projects are in great demand and even have waiting lists, that is not the case with all regional centers.  If a regional center project does not attract a sufficient number of investors, the project may not happen or may be delayed, which could result in the original investors being unable to remove conditions.
4. A regional center may lose certification.  CIS is in the process of developing standards to review regional centers.  The results of any review process could lead to regional center decertification.
5. In order for an I-526 petition to be approved, the investor’s investment must be “at risk.”  If an adjudication is made that the funds are not truly at risk at either the I-526 or I-829 stage, the petition will be denied.  At a minimum, the investor’s commitment is a 5 year commitment.  Although there can be no guaranteed right of redemption or specific return, some regional center investments are more risky than others; some have a greater chance of the investor getting his money back after 5 years with some rate of return; and some are more speculative investments.  While the investor is allowed to have a guaranteed right to return of the investment money if the I-526 is not approved (and some regional centers place the investment money in escrow pending the I-526 approval), CIS’ position is that there can be no guarantee of redemption of the investment if the I-829 petition is not approved.
6. The entity into which the investor invests may go bankrupt.  The results could be not only the inability to remove conditions on permanent residence but also a loss of the investment money.
7. There are serious, largely unexplored securities law issues involved in this process.  It is generally accepted that an investment in a regional center project is a securities transaction subject to federal and state securities laws.  Any violation of securities laws could have a serious impact on the investor and her counsel.
8. Even if none of the contingencies occurs, the investor is subject to the risk inherent in the nature of the adjudicating agency.  It is not unusual for there to be contradictory adjudicatory results on identical projects.  Often very complicated financial transactions are being adjudicated by immigration examiners with little or no financial background and with relatively minimal training.  This can lead to – and has lead to – decisions on individual petitions that may be difficult to comprehend.  In addition, the agency has been known to adopt restrictive positions and change those positions without notice in the EB-5 area.

Despite all of these potential issues, the regional center EB-5 option may be the best option for many clients.  Knowing of these issues, the prudent attorney will want to apprise his client in writing of the issues that could arise.  The authors suggest that an attorney should insist their clients sign a retainer agreement containing the following disclosures, confirmations, warnings and conflict waivers:

• We have not and will not advise you in which regional center to invest.  (We have and will advise, if requested, of information available to us regarding the immigration approval history (I-526 and I-829 petitions) for specific regional centers);
• We have not and will not advise you on rate of return of your investment, security of your investment, timing of return of your investment, or any tax or financial aspects of your investment;
• We have not and will not advise you on US, state, or foreign country securities law issues;
• We have not and will not advise you on foreign country currency laws and restrictions;
• We have not and will not advise you whether any regional center is a better investment than any other regional center or than another investment you might otherwise make;
• You agree that you have been advised to seek independent advice on these matters from a financial advisor, business advisor, business or securities lawyer or accountant and that you have sought such advice, or declined to seek such advice;
• The privileges of the lawyer-client relationship we have with you, such as our independent advice to you and the protection of your confidential communications with us, only extend to lawyers and staff of the firm and do not extend to services and communications you may receive from the regional center.
• A regional center EB-5 petition has certain inherent risks in addition to the risk that your investor petition may not be approved.  You confirm that you are aware of these risks, and you have chosen to accept these risks, including the following:
  • Risk of loss of some or all of your investment, or risk of delay in realizing any return of or on your investment, for which risks you certify that you have received advice and counsel from financial, tax, business, securities and/or other advisors, and not from our law firm;
  • Risk that a particular regional center project may be found not to qualify under the EB-5 regulations and guidance;
  • Risk that a qualifying regional center project may be found not to qualify for removal of conditions on your permanent resident status for any reason, including failure of the project for economic or other reasons to produce revenues, expenditures, employment creation or other predicted criteria on which the approval of the EB-5 petition was based;
  • Risk that a regional center may lose certification;
  • Risk that a regional center or a regional center project may file for bankruptcy or otherwise default on its obligations;
  • Risk that the regional center EB-5 program, which is a pilot program that must be periodically renewed, will expire; and
  • Risk that material deviations may occur between representations made in the business model forming the basis of the econometric report and actual business realities, requiring at a minimum the submission of an amended Form I-526, resulting in a new period of conditional residence.  Should this occur, dependent children may be too old to derive a benefit from the new petition.

Conclusion

The regional center EB-5 program has great benefits both to the country and to many foreign nationals.  However, every investor – and every attorney advising investors – should go into the program with eyes wide open.  Investors should understand the inherent risks in any securities investment regarding likelihood of return, timing of return and rate of return.  Some combination of Congressional and administrative action is necessary to provide greater certainty to investors that, if they do everything right and sustain their investments in an approved regional center, they have some assurance that they will not find themselves subject to removal from the United States because of issues outside of their control.

Due Diligence Issues

The following is a suggested due diligence list:

1. When was the regional center approved by USCIS? 

   Regional centers that have more recently been approved may have a minimal track record of successful immigrant petitions.  Some have been inactive.  Some have lost their regional center designations.

2. Has the regional center’s project that the investor is investing in to obtain conditional residence been reviewed and approved by USCIS? 

   USCIS has recently unveiled a new process where regional center projects can be pre-approved.  This pre-approval does provide an added level of security.

3. Is there any AAO decision addressing the regional center’s program?AAO decisions blessing the regional center’s project or business plan may provide an added level of security.
4. Is the regional center affiliated with any government entity?If so, an added level of credibility exists.
5. What experience does the general partner or principal in the investment project have in working with immigrant investor programs?An investor may want to invest in a regional center where the principals have experience in directing regional center projects and in creating jobs.
6. Does the regional center investment include direct job creation, indirect job creation or both?Although indirect job creation is acceptable for regional centers, projects with at least some significant amount of direct job creation may be safer.
7. How many I-526 and I-829 petitions have been filed by investors in the regional center?  How many have been approved?  How many have been denied?A substantial record of I-526 and I-829 approvals is a good indication of a successful regional center.
8. What is the amount required to be paid by the investor?Regional centers have additional costs besides the $500,000 investment.  What are these costs?
9. Is payment made into an escrow account?  Is the investment amount refunded if the I-526 is not approved? 

   The investor may want some assurance that should the I-526 fail, the investor’s $500,000 will be returned.

10. When will the investor be able to redeem his or her investment following condition removal and with what rate of return?A financial professional should be able to advise the investor regarding security of the investment, when the investor may be able to recover his investment and likelihood and amount of return on the investment.
11. What type of investment is being made with the investor’s funds? 

    Investments may be made in a wide variety of projects from construction to film production.  Certain investments may be better able to withstand economic downturns.

12. What type of reports does the regional center provide to investors and when are these provided? 

    An investor should be able to monitor a project to determine that progress of the project is in accordance with the business plan for the project.

13. What is the regional center’s plan for demonstrating direct or indirect job creation, and is this plan realistic?Various econometric models exist for demonstrating job creation.  It may be very difficult in some cases to show indirect job creation based upon certain models.
14. Who represents investors in the regional center?Some regional centers mandate the use of their attorney exclusively.  Others permit the investor to have his or her own private counsel, often partnering with the investor’s counsel.
15. Is the success of the regional center project dependent on bank financing, or the ability of the center to raise certain capital? 

    If so, the center may never get off the ground.