EB-5 Investor Funds - Merits of Early Release and Related Issues
It has become quite obvious that the early release mechanism for escrowed funds is becoming the norm and not an exception. The whole concept of early release arose at the end of 2011 when it became apparent that USCIS was not going to undertake premium processing for I-526 Petitions. I was one of the initial architects of the early release concept when it became obvious the developers could not wait one and half to two years to receive funds after I-526 approval given the substantial time delays in receiving adjudication.
Since that time, the industry has evolved and come up with may complicated options related to the early release concept which will be discussed below.
- Holdback Concept. Rather than having a complete early release of funds, a portion of the capital contribution of an investor would be held back in an account and serve as a pool to cover all denied investors so that if only a smaller percentage of investors were denied [assuming no project denial], then the held back fund would be able to fund a refund to an investor in a timely manner. This concept has taken hold with escrow holdbacks ranging typically from 20% to 50%.
- Interim Escrow Funding Requirements. Many escrow agent banks require a certain minimum amount of capital be funded in order to ensure that there is a sufficient amount of proceeds to fund denials based upon a percentage of the total capital raise so that there is at least few million dollars more in escrow to cover refunds to a sufficient number of investors.
- Investor Substitution Concept. Documents are now containing language which typically provide for a time period for the new commercial enterprise (NCE) to substitute denied investor with another investor in order to avoid having to use escrowed funds and to refund the investor except to the extent the specific investor’s holdback amount that may be maintained in escrowed. The concept would be that if the project is otherwise successful, it should not be difficult to find a substitute within a reasonable period of time (typically anywhere from three to six months).
- As a fallback to not having sufficient funds in escrow and not being able to substitute an investor, the backup is a developer guaranty of refund so that the loan proceeds are effectively refunded. In many cases the developer guaranty of refund is further supported by the principals or the holding company of the developer likewise guaranteeing the refund payment if it is not otherwise made by the holdback account and/or NCE based upon obtaining a substitute investor. In connection with that, escrow agents are examining the financial statements of the developer and/or of the guarantor in order to gain comfort that the ability to refund is available.
A whole new industry arose based upon the early release concept involving I-526 insurance which in a nutshell provides the immediate refund of a denied investors capital contribution amount by an insurance company who in effect takes the place of the investor in the NCE by providing funding for the investor as well as enabling the developer to receive all escrowed proceeds without any holdback fund. Of course, this insurance comes at a cost which may vary depending upon who is the provider. Typically, these insurance policies have three outs which include the following:
- Voluntary withdrawal of the petition
- Change in the law subsequent to the filing of the I-526 petition the otherwise results in the I-526 being denied due to such change.
Another seldom used concept of overcoming extensive time review process is the seeking of expedited review, which is rarely granted but has been utilized in certain cases. Click here for an article addressing one such case which had a significant governmental benefit that supported the expedited review petitions filed in order that the developer can access to funds in a much quicker basis without needing to address the early release concept.
This area has and will continue to evolve as new financial models are developed.
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