While the Regional Center program is in limbo, direct investment is alive and well, and making the switch might be a wise move.
In Part 1 of our “Ask the Experts” series on the recent changes to EB-5, we discussed how the industry was thrust into chaos when the Regional Center program lapsed. Some industry stakeholders are hoping reauthorization will happen before the Modernization Rule is reinstated, as discussed in “Ask the Experts” Part 2.
While it’s smart to prepare for the future (no one really thinks the Regional Center program is done for, just on hiatus), some Regional Centers are looking to offer EB-5 direct opportunities in order to capitalize on the current openings for non-Regional Center I-526 petitions, the return to pre-2019 requirements, and rising investor interest.
The process of offering direct EB-5 investment differs greatly from that for Regional Center investment, but it can be done. JTC has a wealth of experience in all aspects of private equity fund administration and can help those offering direct investment projects navigate the administrative complexities of a true equity offering, especially where multiple assets are contemplated.
Many industry stakeholders are unfamiliar with the intricacies of direct investment because the Regional Center program made achieving an EB-5 visa so much easier, and direct offerings couldn’t compete. It’s been estimated that 95% of all EB-5 visa applications involve a Regional Center, and there are a lot of reasons why. With a Regional Center project:
- Investors don’t have to live in the area where the investment is made
- The Regional Center is responsible for compliance and ensuring the project follows all regulations
- Funds can be pooled and deployed through a loan model with a defined exit strategy
- While each investment must create 10 jobs, those jobs can include any indirect or induced jobs stimulated by the job-creating enterpris
Because they are more hands-off, Regional Center projects are popular with investors less interested in running a business and more interested in obtaining U.S. residency.
Many EB-5 investors are looking for the simplest way to satisfy the USCIS, and as such, some of that 95% may bow out completely because they deem direct offerings too complex.
That said, immigrant investors still want to take advantage of EB-5, and right now they can’t do so in the way they were planning. Any issuer who’s able to make the direct investment process manageable and easy to understand could be very successful during this time.
Right now, thanks to the US District Court ruling that invalidated the EB-5 Modernization Rule, the minimum investment amount within a Targeted Employment Area has returned to $500,000, and states and localities are once again able to certify what constitutes a TEA.
If that wasn’t incentive enough, while the Regional Center program remains lapsed, all the backlogged I-526 petitions tied to Regional Center offerings will be held in abeyance, clearing a path for new direct I-526 petitions to skip to the head of the line. Investors will want to take advantage of these perks while they last.
Direct EB-5 investment has several advantages over Regional Center investment:
- Applications do not need to be sponsored by a Regional Center
- The program is permanent, so it’s not affected by ever-looming Regional Center sunset dates
- Instead of navigating the uncertainties of processing times and permitted returns in a loan model, the way in which funds are deployed and returned is like any other private equity investment
- Investors have more day-to-day involvement with business operations, providing greater control for those who wish to take an active role in their investments
Although there are a lot of strong selling points for direct EB-5 investment, there are reasons why they are less popular. The biggest downside to direct investment, one that can scare off both investors and issuers who lack experience, is the job creation requirement.
Direct investment requires the hiring of 10 full-time employees on the EB-5 project’s payroll for each EB-5 investor who subscribes, and the enterprise “must directly create the full-time positions to be counted.” This definition is strict, and means the jobs created will be of a specific type and of a limited number, since the workers must be employees of the enterprise.
For investors, that means these are much more likely to be operating businesses as opposed to real estate development projects. Those who had hoped to take a hands-off approach may be wary of the active role they’ll now have in the enterprise.
For issuers, it means they may have to source additional (likely more expensive) capital to complete projects because there are a finite number of direct jobs that can be created, which will cap the number of EB-5 investors that can be accepted.
How should issuers prepare to accommodate these investors, given the additional requirements?
Issuers need to show investors how clear the process can be made, and how much of the additional responsibility can be managed with the right team. Just like you, they desire confidence in their partners’ expertise and for the process to be made as smooth as possible.
It’s true the fund accounting process and tracking of investments will now be more complex, but dealing with complexity in reporting and compliance is what JTC is all about. We utilize industry-leading technology to help our clients stay on top of all necessary data for reporting, and help them offer unparalleled transparency for investors so information is shared quickly and openly.
As a specialty fund administrator with decades of experience in niche markets, JTC stands ready to help issuers make the transition to direct EB-5 offering. If you’re thinking about offering direct investment and want the best administration and reporting tools at your disposal, we can help.
If you’re interested in learning more about your regional center can offer direct EB-5 investment, read more here.
