The Pros and Cons of Direct EB-5 Investment

Non-pooled standalone EB-5 investment without a Regional Center is possible, but it isn’t right for everyone.

More than 95% of all EB-5 petitioners invest through the Regional Center Program. For the vast majority of immigrant investors, pooling their capital with that of other EB-5 investors under the guidance of a Regional Center is the right choice.

But what about the ones who don’t use a Regional Center? There is another way to invest in EB-5 that involves greater control. While it may not be right for everyone, the direct EB-5 path can give certain petitioners more peace of mind about their likelihood of success.

How is direct EB-5 investment different from Regional Center investing?

You’re probably familiar with the basic requirements of EB-5: each investment must be put at risk for at least two years and used to create at least 10 full-time jobs. Immigrant investor capital is invested with a business known as the New Commercial Enterprise (NCE).

As explained by U.S. Citizenship and Immigration Services (USCIS), “A new commercial enterprise means any for-profit activity formed for the ongoing conduct of lawful business.” There are many types of business structures that can fall under this umbrella, and many types of business activities that qualify.

Under the Regional Center Program, investor funds are deployed to a Job-Creating Entity (JCE) either through a loan or equity stake. Pooling investor capital expands the types of business activities available to EB-5 investors, including large-scale construction and development projects, and it is the JCE that actually carries out these activities.

With direct (non-pooled) EB-5 investment, there is no NCE-JCE relationship. Instead, investor capital is used by the NCE to operate a business, in which the investor is given an equity stake. Instead of the large-scale development, hospitality, housing, or health care projects favored by Regional Centers, standalone EB-5 investments are often used for restaurants, retail stores, gas stations, manufacturing, software development, or any business that can utilize the invested capital to create ten full-time jobs for at least two years. I-526 applications must include a business plan that explains the EB-5 investor’s stake in the company and how the investment will be used to create the requisite jobs.

The business doesn’t necessarily need to be “new,” as it’s also possible to invest in a “troubled’ business that is being significantly reorganized. There are specific rules for investing in existing businesses regarding how they are restructured and the growth that must result from the investment. You can’t just purchase a stake in an already-successful company and claim your investment was used to create that company’s jobs.

The EB-5 at-risk requirement is the same for all investors, regardless of whether they invest directly or through a Regional Center, and investors can’t be guaranteed a return of capital. The minimum investment amounts are also the same for all investors. It’s possible to invest directly in either a rural or urban high-unemployment area to qualify for priority processing and set-aside visas, but direct investors don’t have a Regional Center’s help in selecting the location for the NCE.

It’s also important to understand the difference between EB-5 and the Regional Center Program. EB-5 is a permanent fixture, while the Regional Center Program requires periodic reauthorization by Congress. If the program isn’t renewed on time, it can expire. When this happened in 2021, it took eight months before the program was reauthorized; during this time, direct investing was the only way investors could still participate in EB-5.

How jobs are counted differently for standalone EB-5 investments

One of the most important differences between direct and pooled EB-5 projects is how job creation is calculated. As USCIS explains, “For a new commercial enterprise not located within a regional center, the new commercial enterprise must directly create the full-time positions to be counted. This means that the new commercial enterprise (or its wholly owned​ subsidiaries) must itself be the employer of the qualifying employees.”

When investing through a Regional Center, “the new commercial enterprise can directly or indirectly create the full-time positions. Up to 90% of the job creation requirement for regional center investors may be met using indirect jobs.”

Indirect jobs are those “created as a result of the new commercial enterprise.” This can mean positions created through the purchase of materials for construction or the use of outside vendors and contractors for services. Another possibility is induced jobs, which are created by the economic impact of the project on the local area. Unlike direct jobs, indirect and induced jobs are calculated using economic models rather than employment records.

Direct projects require greater involvement by the investor in the day-to-day operation of the business, but the investor’s position at the business does not count toward the full-time jobs required, nor does any position held by “their spouses, sons, or daughters; or any alien in any nonimmigrant status (such as an H-1B nonimmigrant) or who is not authorized to work in the United States.”

There are additional requirements for created jobs, including that they must last for at least two years and not be temporary or seasonal. The employee must be directly employed by the NCE, and the job must be a natural extension of the business activities; creating meaningless positions and paying employees to fill empty roles can result in petition denial.

What changed for direct EB-5 investment projects with the RIA?

The most recent reauthorization of the Regional Center Program came with the passage of the RIA in 2022. An important change made by the RIA was the elimination of pooled direct investments. Pre-RIA, it was possible for two (or more) EB-5 investors to combine their investments and put them toward the same NCE. This is no longer possible. Now, all pooled investments must go through a Regional Center.

Along with reauthorizing the RC program, the RIA also established record-keeping rules for NCEs. These apply to any NCE, not just those established by Regional Centers. Direct investors and their companies must establish policies to comply with the rules of the RIA in order to avoid penalties.

Pros and cons of direct EB-5 investment

There are many reasons why someone might choose to invest directly rather than through a Regional Center. These include:

1. No Regional Center fees. Regional Centers have their own operating expenses, along with fees they must pay to USCIS. On top of that, they have to earn a profit. These costs mean investors will have to pay fees in addition to their EB-5 investments, while with standalone projects, they don’t.
2. More control. Regional Center investors aren’t involved in the day-to-day operation of the business. With a direct investment, the investor will potentially have a leadership position at the company. This allows the investor to have more say in how the business is run. An investor with business experience might feel they have a better chance of success (and of turning a profit) with this greater control.
3. Simpler projects. Because of the amount of investment involved, RC projects are often big and complex in terms of scope and structure. A direct business might be something easier for investors to understand because it is closer to what they know.
4. Potential for capital to be returned faster. While there are some RC projects that promise to return investor capital in close to the minimum of two years, most quality projects have a four-to-seven-year timeline. A standalone NCE could potentially be sold or wound down as soon as EB-5 requirements are met, at the investor’s discretion.
5. Ability to grow your own business. Those in the United States on E-2 visas who wish to transition to an immigrant visa category can potentially continue the same business and expand their reach with an infusion of capital while also facilitating an EB-5 petition. Not every situation will allow this, but the possibility is worth considering for E-2 holders.
6. Greater flexibility of location. Regional Centers operate in specific areas; if there isn’t an RC or project in the investor’s area, they won’t easily be able to visit or monitor the progress. A direct investment can be done anywhere, and the investor will be there to oversee what goes on.
7. No sunset dates. The RC program is currently set to expire on September 30th, 2027, but the option for non-pooled investment has no sunset date. That means investors won’t have to race to get investments in before a deadline: they can do what is best for them and their businesses.

While all that may make direct investment sound appealing, it’s important to remember the potential downsides as well:

1. Job creation is more difficult. Because direct investors can’t count indirect or induced jobs, it could be harder to create the requisite EB-5 jobs, especially if the business doesn’t grow at the expected rate. With a Regional Center, investors are given job creation information by the RC based on economic models, data that can be accessed online at any time if the RC uses JTC for fund administration. Direct investors have to prove job creation through extensive payroll and W-2 documentation.
2. Lack of redeployment options. When investing through a Regional Center, if the project fails or finishes before the end of the minimum sustainment period, investors can redeploy their capital to another project with the help of the Regional Center. With a direct project, investors won’t have this help, and may have to keep a company going past its profitability date or when it would otherwise have been prudent to sell.
3. No backup projects. If a Regional Center project fails to raise enough capital, the RC can guide investors to another project. Investors can choose from many Regional Centers and many projects. With direct investment, all responsibility for the business plan falls on the investor.
4. Lack of experience. Good Regional Centers are operated by professionals with experience in EB-5. Investors who are learning about the program for the first time can’t replicate that level of understanding.
5. Business knowledge required. Ultimately, direct investing is for those who understand the industry, area, and business model of the NCE with which they are investing. Those without business experience who don’t wish to be tasked with creating an EB-5 business and operating it successfully while also complying with all EB-5 rules are usually better off going with a Regional Center.

There is a reason why 95% of investors work with a Regional Center: most people who are new to America would rather entrust their immigration status and EB-5 capital to experienced professionals with a history of successful projects. There are successful direct EB-5 projects and successful Regional Center projects, and there are also failures in both categories. It’s ultimately up to the investor to decide based on their own experience, financial situation, comfort level, and risk tolerance.

If you’re having trouble deciding what kind of investment you want to make, check out JTC and CanAm’s white paper about balancing immigration priorities and investment concerns in EB-5.