EB-5 Process Management, Investor Safeguards and other key considerations when selecting a Regional Center

EB-5 Process Management, Investor Safeguards and other key considerations when selecting a Regional Center

Nicholas Mastroianni III, President of U.S. Immigration Fund, LLC


The U.S. Congress created the EB-5 Program in 1990 in order to enable high net worth foreign investors to obtain a U.S. Visa by investing in a U.S. business in a manner that will benefit the economy by creating jobs. To qualify under the EB-5 Program, the foreign investor must invest$1 million in a qualified new commercial business. That amount is reduced to $500,000 if the new commercial business is located in an area with high unemployment. Each investor must also create 10 or more permanent U.S. jobs through his or her investment. The benefits ofthe EB-5 Program are simple and easy to see. U.S. businesses receive much needed capital at competitive rates and the foreign investor receives an ownership interest in a U.S. business that will make a loan or investment that affords them an opportunity to qualify for an expedited U.S. green card. The EB-5 program has already attracted billions of dollars into emerging and expanding American businesses, and continues to provide a low cost, viable source of business financing.


Prior to selecting a Regional Centre with whom to invest, an investor should do their due diligence.  An investor should ensure that a Regional Centrehas in place formal policies and procedures to ensure compliance with applicable rules and regulations, including those promulgated by the Securities and Exchange Commission and the U.S. Citizenship and Immigration Services.  Taking such action will significantly improve an investor’s probability of success in obtaining permanentcitizenship through the USCIS Immigrant Investor Fifth Employment-based Visa Preference Programand getting repaid in full. A Regional Centre should employpolicies and procedures such as use of industry-leading, third-party experts;project, developer, investor and foreign partnerdue diligence;mechanisms for tracking and safeguarding investor funds; complianceand project-specific training/education; and control of project marketing process


Let us review them one by one. As the typical EB-5 transaction involves complex and ever-changing aspects of securities, immigration, and real estate finance components, it is imperative for a Regional Centreto utilize industry-leading legal and financial advisors who are not only experts in their respective fields but also have strong knowledge of the EB-5 Program(and its many nuances).Having such representation will ensure that a Regional Centre is, at all times,operating in accordance with all applicable laws, rules and regulations, and is acting responsibly to protect the investor. Moreover, because the EB-5 Program is currently in the crosshairs of legislative reform, it is imperative that a Regional Centreemploy and/or engage legal and financial experts to help navigate this ever-evolving industry and best protect investors.


A Regional Centre should perform independent and detailed diligence of all aspects of an EB-5 project.  This includes performing diligence with respect to the project, developer, the foreign partner and each investor to ensure the viability and timely success of an EB-5 project.Examples of actions that should be taken by the Regional Centre include firstly, a review of a project’s business plan, financial projections, construction budget and timeline, sources and uses of financing (and actual commitments with respect thereto), governmental approvals, permits and licenses, and market studies and feasibility reportin order to evaluate a project for its fitness under the EB-5 Program. Secondly, a review of financial statements, tax returns, organizational documents (including a structure chart), and “know your customer” type information for the purpose of verifying that the developer has the experience, resources and acumen to successfully develop the project.Thirdly, a review of the Regional Centre’s business model, track record on completion of projects, delays and failures if any along with covenants in place to maximize capital preservation. The strongest and most successful Regional Centreoperators secure completion guarantees, inter-creditor agreements and scrutinize oversight on capital structure and allocation over the developer. Fourthly, a review of the Regional Centre’s foreign partner’sreputation, operations and track recordto ensure there is strong compliance with laws in the relevant jurisdiction (e.g.compliance with US and local securities laws, as applicable) and confirmation that the arrangement with the foreign partner does not violate U.S. broker-dealer laws.Fifthly,a review of various information submitted by each investor to ensure their ability to qualify under the EB-5 Program (including source of funds).


It is also important that aRegional Centre should implement mechanisms for tracking and safeguarding investor funds to prevent misappropriation of funds and commingling of assets amongst investors and/or across multiple projects.To prevent misappropriation a number of different protections should be implemented.  First, the Regional Centre should have an escrow arrangement in place for the receipt by and distribution of investor funds to the Regional Centre.  Second, the Regional Centre should negotiate and verify the satisfaction of stringent conditions precedent by the developer prior to advancing any loan proceeds.  Third, the Regional Centre should have a multiple signature requirement (creating internal “checks and balances”) prior to authorizing the movement of any investor funds so that no single individual has the ability to unilaterally effectuate a transaction. To prevent commingling of assets, a Regional Centreneed tomaintain each investor’s funds in separate bank accounts (or, if this is not, possible, track an investor’s funds by way of a separate entry in the Regional Centre’s books and records).


To ensure compliance with applicable laws, rules and regulations (mentioned above), a Regional Centre should conduct regular project-specific and compliance training of its employees, consultants and foreign partners. Project-specific training, including with respect to the underlying project and any related financing, will decrease the chances of any fraudulent activity vis a vis the investor.  Compliance training is important because the legal and regulatory landscape impacting the EB-5 Program is in constant flux and varies from country – to – country.


Last but not the least, aRegional Centreneed to have complete and total control over the marketing of its projects to potential investors.  This can be accomplished through t preparation of all materials (e.g., marketing materials, offering documents and translations, if necessary) and a close partnership with its foreign partners (e.g., attendance at “road shows”, and skilled and responsive investor relations professionals).Having such control will increase the likelihood that investors have made an informed investment based on accurate and pertinent information.


While the policies and procedures discussed here are by no means exhaustive, an investor should use this information as a guideline to select the right Regional Centre.  While not a guaranty of a project’s success (there are many more impacting factors not discussed herein), the more policies and procedures are implemented by a Regional Centre and the more transparent it’s operating practices are, the greater the likelihood that the goals of the EB-5 Program (and the investor) will be achieved.





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