While most news surrounding the EB-5 investor visa program focuses on projects sponsored by regional centers and large U.S. developers, we regularly advise our clients to consider raising funds through or investing in an EB-5 direct (as opposed to the regional center-sponsored) project.
The biggest difference between direct and regional center sponsored projects is the way jobs are counted. Both direct and regional center projects must create 10 jobs for U.S. workers per investor. In the direct context, the investment must create 10 jobs for identifiable individuals. The developers must prove up direct job creation by submitting I-9 and W-2 Forms, payroll records and proof of employment authorization for the U.S. workers. In the regional center context, there are relaxed job creation requirements. Project developers may count direct, indirect and induced jobs. They demonstrate job creation with econometric projections that are typically based on projected construction expenditures and operations revenues. Most large real estate-based projects are constrained to raise funds under the auspices of a regional center because there would be insufficient direct job creation.
There are a number of reasons for developers to consider raising funds under the direct EB-5 program. The requirements, other than job creation, are the same. Investors can invest either $1,000,000 or $500,000 if the development project is located in a targeted employment area (TEA). Investors’ funds can be pooled for larger businesses and development projects with clients maintaining valuable equity. Developers can market projects to investors virtually immediately without the constraints imposed by agents marketing large regional center projects. The offering documents are typically less complicated (and expensive) than those required for larger securities offerings. There is no need to commission an economic report to project indirect and induced jobs or to address many of the issues that arise such as tenant occupancy, guest expenditures and NAICS codes.
From the investors’ perspective there are other important considerations. In the regional center context, investors typically make an equity investment in a special purpose vehicle that makes a loan to the developer. The loans typically have a term of 5 years, which is about the time it takes for investors to receive their unconditional green cards. In contrast, in the direct EB-5 investment project, the investors must make an equity investment directly into the job-creating enterprise. The investment could be in the form of common shares or preferred equity. The projected return may be higher in the direct context, but the exit strategy is usually less certain. Investors in direct EB-5 projects sometimes have a more active role in managing the job creating enterprise but not always. They must have at least the responsibilities typically assigned to limited partners under the Uniform Limited Partnership Act. As mentioned above, the most critical difference between direct and regional center projects arises at the I-829 stage. The investors must file their I-829 petitions 21 months after approval of their initial petitions. At that time, the developers must count actual full-time employees in the job creating enterprise and document employment through Forms I-9 and W-2 and quarterly tax returns. They also must demonstrate that each employee is a U.S. citizen, 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. There is a risk that the new commercial enterprise cannot maintain the jobs created for a sufficient amount of time or properly document employment authorization.