Menu open icon Search icon Close icon facebook twitter youtube instagram linkedin Butterly graphic Facebook share icon LinkedIn share icon Email share icon Twitter share icon Download Icon

EB-5 Explained: What Does it Mean for an Investment to be “At Risk?”

31st May 2024
Requirements for EB-5 investments and what to expect when you invest capital in an EB-5 project.

To help investors better understand the EB-5 process, JTC presents “EB-5 Explained,” a new series covering the terminology, rules, and common pitfalls of the EB-5 Immigrant Investor Program.

To qualify as an immigrant investor under EB-5, there are three essential elements:

  1. An investment of capital
  2. Engagement in a new commercial enterprise
  3. Job creation

In this blog, we’ll discuss the first of these. As stated by United States Citizenship and Immigration Services (USCIS), “to qualify as an investment, the immigrant investor must actually place his or her capital at risk.”

But what does “at risk” mean? What kinds of investments qualify? Is it enough just to create the ten jobs? How can you determine if your investment is at risk? Let’s take a look at how USCIS has defined this term and why it matters.

What USCIS says about an EB-5 investment being “at risk”

For an investment to be considered “at risk” according to USCIS, “there must be a risk of loss or a chance for gain.” This means that “if the immigrant investor is guaranteed a return, or a rate of return,” then that amount is not at risk. You could make or lose money on your EB-5 investment, but have to be willing to accept the potential for loss.

EB-5 rules specifically state that this excludes “capital invested in exchange for a note, bond, convertible debt, obligation, or any other debt arrangement between the immigrant investor and the new commercial enterprise” or “capital invested that is subject to any agreement between the immigrant investor and the new commercial enterprise that provides the immigrant investor with a contractual right to repayment.”

All EB-5 investors must understand that by definition, there can be no guarantee that they will have their invested capital returned to them. You won’t be prevented from receiving large gains if your investment is successful, but there is also a chance you could lose some or all of your investment.

When is an investment considered to be at risk?

When making an EB-5 investment through a Regional Center, there are two important entities to understand: the New Commercial Enterprise (NCE) and the Job-Creating Entity (JCE). As an EB-5 investor, your capital investment is made in the NCE. That invested capital is then deployed by the NCE to the JCE for use in the EB-5 development project that creates the requisite jobs.

Regarding the deployment of capital, USCIS states the following:

Before the job creation requirement is met, a new commercial enterprise may deploy capital directly or through any financial instrument so long as applicable requirements are satisfied, including the following:

  • The immigrant investor must have placed the required amount of capital at risk for the purpose of generating a return on the capital placed at risk;
  •  There must be a risk of loss and a chance for gain;
  • Business activity must actually be undertaken;
  •  The full amount of the investment must be made available to the business(es) most closely responsible for creating the employment upon which the petition is based; and
  • A sufficient relationship to commercial activity (namely, engagement in commerce, that is, the exchange of goods or services) exists such that the enterprise is and remains commercial.

What’s important to understand is that your capital cannot just be invested anywhere, like in securities or commodities. The NCE must deploy the capital toward a business that creates jobs and engages in commercial activity. It’s also important that all of the investor’s EB-5 capital be deployed to the JCE – if any of it is merely held by the NCE in bank accounts for the duration of the project, then the full investment has not been put at risk.

To determine the date at which your investment was put at risk, USCIS has stated it will “use the date the investment was contributed to the new commercial enterprise and placed at risk in accordance with applicable requirements, including being made available to the job-creating entity.”

This wording, which can be found in USCIS guidance from October 2023, has caused some confusion among those in the industry. According to panelists at a JTC webinar, because of how EB-5 projects are structured, money is generally not sent to the JCE’s operating account until it is to be spent, and because investor funds are not kept separate at that stage, it may be difficult to pinpoint the exact date at which a specific investor’s funds were used.

It is unclear how USCIS may interpret this rule with regards to a specific investor petition, so to be on the safe side, it may be best to assume the investment is not considered to be at risk until all EB-5 funds (from all EB-5 investors in the project) have been deployed to the JCE and used for the project. The reason this matters is because of the required EB-5 sustainment period.

Want to know more? Watch the full webinar about the EB-5 investment sustainment period.

How long does my capital have to be invested?

In addition to meeting job creation requirements, EB-5 investments have to remain at risk for a minimum period of time. It used to be the case that EB-5 investments had to remain at risk during the petitioner’s entire period of conditional residency, but that changed with the passage of the EB-5 Reform and Integrity Act of 2022 (RIA).

Now, according to USCIS, “For petitions filed on or after March 15, 2022, the capital must be expected to remain invested for not less than 2 years.”

This represents a major change for the industry, as was discussed at length at JTC’s webinar. While getting your investment back in two years might sound preferable to the 5-7 year deals that are common in EB-5, there are reasons to be cautious. As stated above, it’s difficult to know exactly when the sustainment period will be said to have begun, and you don’t want to fall short of the minimum.

It’s also been pointed out by many in the industry that short-term projects contain heightened risk. Two years might not be long enough to actually create the required jobs, and the investment itself may not be as financially sound as other available projects. Industry experts have predicted that the most reliable EB-5 real estate projects will continue to have 5-7 year sustainment periods, despite the change in USCIS rules. Just because you only need two years for an EB-5 petition doesn’t mean your preferred project will offer that option.

What happens if my investment isn’t sustained long enough?

If your invested capital is returned to you before the minimum required time period has passed, it must be redeployed so as to remain at risk. Redeployment was much more common before the passage of the RIA, when the sustainment period was the entire period of conditional residency. However, there are still rules regarding redeployment, which include:

  • Funds can be redeployed anywhere within the United States or its territories for the purpose of maintaining the investor’s capital at risk
  •  The NCE must have executed its business plan for the capital investment project in good faith without material change
  • The NCE must have created a sufficient number of new full-time positions to satisfy the job-creation requirement of the program by all investors in the NCE
  • The JCE has repaid the capital initially deployed in conformity with the initial investment contemplated by the business
  •  The capital remains at risk and is not redeployed in passive investments such as stocks or bonds

USCIS notes that the requirements for initial deployment of capital also apply to redeployment, meaning redeployed capital must again be placed at risk, including the potential for either loss or gain. Because the investment will still involve the potential for loss, most investors don’t like the idea of redeployment because it requires them to quickly reinvest in another project they may not have vetted, and there may not be much choice as far as which project to select. The safest way to avoid redeployment is to ensure the initial investment will remain at risk substantially longer than the minimum sustainment period.

What happens if the project fails? Could I lose my invested capital?

Yes, part of an investment’s being at risk is the very real possibility that you could lose your invested capital if the project fails. That’s why it’s important to vet the project and work with a reliable Regional Center and NCE/JCE that will manage your funds properly, create the requisite jobs, and complete the project so you can have your capital returned to you.

Finding the right EB-5 project

It is the nature of EB-5 investing that your invested capital will be at risk of losing value or being lost entirely. But there are things you can do to reduce your level of risk, specifically by finding and working with the right Regional Center and investing in the right project. Proper due diligence is essential to mitigating risk and avoiding fraud in EB-5.

For more on making an EB-5 investment choice, watch our free webinar.

One of the most important things you can look for is a project that retains a third-party fund administrator that will cosign on all fund transfers and monitor for any irregularities that could potentially harm investors’ visa petitions. An experienced administrator that understands the nuances of EB-5 is critical not only for project success, but for keeping you informed. An administrator that offers an online portal that provides real-time access to investment information is best.

At JTC, we work to protect investor funds throughout the EB-5 process. As an independent escrow agent and administrator, we utilize an independent banking solution that provides full FDIC insurance for investor funds before they are deployed to the project, and our secure web portal can be accessed at any time, from anywhere in the world, providing updates not only on project and investment status but also immigration milestones and important information necessary for visa applications.

JTC has been the leader in EB-5 administration for more than a decade, and our experienced team has pioneered best practices that have eventually become part of EB-5 legislation. We will continue to offer the utmost in security, transparency, and regulatory compliance to provide greater protections for EB-5 investors. When you invest in a project that works with JTC, you know you’re getting the best information possible about your EB-5 investment so you can feel confident in your decision.

To learn more about JTC’s commitment to EB-5 best practices,

Click here.

 

Website Survey - Please spare a moment of your time

1About you
2Purpose of visit
3Accessibility
4Features
5Feedback