Why You Need an EB-5 Cosignatory

The RIA mandates the use of a cosignatory – here’s what that means and what the best cosignatories do for their clients.

The EB-5 Reform and Integrity Act of 2022 (RIA) introduced many integrity measures that Regional Centers must follow in order to remain compliant. Among these are requirements for the use of a third-party fund administrator, with specific tasks that fund administrator must oversee.

While JTC has provided EB-5 fund administration to leading Regional Centers for many years, it wasn’t a requirement. Thanks to the RIA, the safeguards and oversight of a good fund administrator are now something everyone involved in EB-5 needs to understand and look for.

One of the requirements of the RIA is to have the third-party fund administrator act as cosignatory for movement of funds from the New Commercial Enterprise (NCE) to the Job-Creating Entity (JCE). A cosignatory, if performing its duties properly, can create an extra layer of protection for Regional Center compliance and investor security.

Those new to EB-5 or who haven’t worked with a fund administrator before may not understand what a cosignatory is or why they need one. Here’s a quick rundown of what a cosignatory does, why it’s important, and how selecting the right provider can improve a Regional Center’s reputation.

What the RIA says about cosignatories and fund administration

The role of cosignatory falls under the section of the RIA that deals with fund administration. According to the text of the bill, “the new commercial enterprise shall retain a fund administrator,” one that is “independent of, and not directly related to, the new commercial enterprise, the regional center associated with the new commercial enterprise, the job creating entity, or any of the principals or managers of such entities.”

This means that you cannot self-administer – the fund administrator must be an independent third party not controlled by the Regional Center or other principals of the project. The bill goes on to list the tasks the fund administrator must carry out. Among these are requirements for the fund administrator to “monitor and track any transfer of amounts from the separate account” (referring to the separate account used for each investor’s funds) and “serve as cosignatory on all separate accounts.”

Before any transfer of funds from these separate accounts to the EB-5 project, the fund administrator must “verify that the transfer complies with all governing documents,” “approve such transfer with a written or electronic signature,” and “periodically provide each alien investor with information about the activity of the account in which the investor’s capital investment is held.”

The NCE must hold all investor funds in separate accounts, and it is the fund administrator’s job to provide investors with information regarding the status of their invested funds. Before any transfer is made from one of these accounts to the EB-5 project, the fund administrator must ensure the transfer complies with the project offering documents and EB-5 rules, and provide a written or electronic signature verifying approval of the transaction.

Since the cosignatory can’t be any of the principals of the Regional Center or the project, an outside party must be hired to fulfill fund administration duties. Depending on the level of service provided, the choice of fund administrator may make a great deal of difference to EB-5 investors.

The minimum requirements for a cosignatory

At minimum, a third party must provide a written or electronic signature for all transfers from the NCE to the JCE. No project funds can be deployed without this third party confirming that the transfer complies with the project offering documents.

Transactions must also comply with RIA rules regarding use of investor funds, which may only “be transferred to another separate account or a job creating entity,” or “otherwise be deployed into the capital investment project for which the funds were intended” until they are transferred back “to the alien investor who contributed the funds.”

In addition, “the affiliated job-creating entity shall maintain such amounts in a separate account until they are deployed into the capital investment project for which they were intended.” And “not later than 30 days after such amounts are deployed,” the JCE must provide “written notice to the fund administrator” that a “construction consultant or other individual authorized by the Secretary has verified that such amounts have been deployed into the project.”

If the fund administrator signs off on a transaction without properly ensuring it complies with these rules and the project offering documents, there could be negative consequences for the Regional Center and the EB-5 investor. At JTC, we take our role as cosignatory seriously, and pride ourselves on our reputation for maintaining strict compliance. We have no intention of risking that reputation by being careless with EB-5 investor funds, which is why we thoroughly scrutinize all transactions and only provide signatures when the proper conditions have been verified.

Some fund administrators may offer a more streamlined service, promising lower costs or more expedient approvals. But it’s important to consider that without competent oversight, there could be greater risk of errors or misuse of funds. The consequences for these errors aren’t just felt by the fund administrator: the status of the Regional Center and its investors could be jeopardized by the mistakes of a careless fund administrator.

Penalties under the RIA

Violation of the RIA does not come without consequences. Regional Centers that are found to have broken the rules can be subject to sanctions or termination, and individuals can be barred from participation in EB-5. If the project is found to be in violation, investors may have the opportunity to redeploy their funds to a new project; but with their investments at risk and their immigration petitions hanging in the balance, that’s a situation investors want to avoid.

EB-5 investors who perform thorough due diligence expect their chosen Regional Center to go above and beyond when it comes to protecting their funds and fulfilling their immigration requirements. They understand the value of a trusted, experienced third party that provides the level of supervision envisioned by the RIA, not a basic service focused on rapid approvals. Partnering with a quality fund administrator is one way top Regional Centers set themselves apart.

Obtaining a waiver for the fund administration requirement

While fund administration is mandated under the RIA, there are some situations where it is possible to obtain a waiver for this requirement, such as when the NCE is “controlled by or under common control of an investment adviser or broker-dealer that is registered with the Securities and Exchange Commission.”

The fund administration requirement can also be waived if the NCE “commissions an annual independent financial audit of such new commercial enterprise or job creating entity conducted in accordance with Generally Accepted Auditing Standards, which audit shall be provided to the Secretary and all investors in the new commercial enterprise.”

An annual audit of practices can be a good thing, but audits alone may not be enough to assure investors. Audits can only catch errors after the fact, when it may be too late to fix things. A competent fund administrator that oversees key aspects of the project can catch issues in real time and provide immediate solutions to avoid interruptions or rule violations.

Having a third-party fund administrator adds another layer of protection to ensure compliance and bolster investor confidence. To follow best practices, Regional Centers should retain third-party oversight along with yearly audits.

The benefits of a quality EB-5 cosignatory

The purpose of the cosignatory requirement is to ensure investor funds are handled properly and invested according to the offering documents, and that all investor capital is adequately tracked according to the rules set forth in the RIA. A quality fund administrator is an experienced, independent third party that can monitor, track, and report on all activity, ensuring movement of funds is in accordance with project offering documents and EB-5 rules before signing off on any transfer, while making all necessary information available to investors.

At JTC, we go beyond the minimum to provide help at each stage of a project’s life cycle without any gaps. As part of the onboarding process, project offering documents are reviewed by our team to identify what triggers are required for each transfer of funds and what documentation will satisfy those triggers. Because of our advanced technology and EB-5 experience, our oversight can layer seamlessly into a Regional Center’s operations to confirm that disbursements align with the offering documents quickly, avoiding needless interruptions.

If your fund administrator isn’t familiar with the nuances of an EB-5 offering memorandum or loan agreement, they could cause slowdowns or fail to ensure investor funds are released at the proper time to an approved recipient, which could result in the ultimate denial of the investor’s green card. At JTC, we get to know your project intimately, so we can fully integrate with your processes while providing extra protection for investors.

With fast setup and seamless AML, KYC, and OFAC compliance, JTC provides the third-party controls necessary for drawdown accounts, including tracking the flow of funds, producing necessary reports, and approving/cosigning on all transfers, with document aggregation and a full audit trail. And with access to our secure online portal, investors aren’t just “periodically” provided with updates, but able to view investment and project information 24/7 from anywhere in the world.

In addition to cosignatory services, JTC’s EB-5 fund administration solution includes data management and document storage as mandated by the RIA. We also offer USCIS audit preparation and additional services such as fund accounting, loan administration, and investor immigration workflow in a fully customizable format that allows you to choose exactly which services you need. With JTC, your Regional Center will have a trusted name that shows investors you’re willing to go above and beyond for the protection of their invested funds and the success of their EB-5 investor petitions.