At a recent webinar, EB-5 experts discussed redeployment and whether investors can and should look for shorter-term projects.
On October 11th, 2023, the United States Citizenship and Immigration Services released updated guidelines for how certain provisions of the EB-5 Reform and Integrity Act of 2022 (RIA) will be interpreted. One of the major components of this guidance dealt with the EB-5 investment sustainment period, potentially eliminating the need for redeployment of EB-5 investments.
Before the passage of the RIA, investments had to be sustained throughout the investor’s entire period of conditional residence, but according to the newest guidance, “the RIA removed the requirement” and investments “must be expected to remain invested for at least two years.”
Some major questions arose after the guidance was published. How would this affect the EB-5 industry? Would projects with shorter lifecycles become more popular because of their potential to return investor capital faster? When does the two-year period actually start? To get the answers, JTC enlisted some of the most trusted minds in the business.
How we got here: understanding the nuances of the RIA
At a virtual event titled, EB-5 is Changing: What the New USCIS Guidance Could Mean for Investors and Regional Centers, a panel of industry experts discussed what we learned from the guidance and what these changes mean for the future of EB-5.
To understand how this guidance may affect the EB-5 landscape, it’s important to understand that these rules regarding redeployment aren’t new – they were part of the RIA when it was passed. The guidance is merely a clarification for how the law will be interpreted. This type of guidance is necessary because of confusion around the wording in the RIA.
The EB-5 Reform and Integrity Act of 2022 was a major step forward for EB-5, reauthorizing the Regional Center program for five years and adding a host of integrity measures designed to remove bad actors and reduce the possibility of fraud within the program.
But because of how some elements of the law were phrased, it wasn’t totally clear how USCIS would interpret those provisions, leading to the need for guidance like the recent release. The sustainment period was one provision that seemed promising, provided USCIS viewed it the same way many in the industry did.
Robert C. Divine, Shareholder at Baker Donelson, said he didn’t realize the significance of the change to the sustainment period when he first went through the law upon its passage.
“I missed it because I couldn’t believe it,” he said at the webinar. “They just deleted the old requirement.”
In the pre-RIA era, EB-5 investors were required to sustain their investments throughout the entire period of conditional residence. If the project concluded prior to adjudication of the investor’s visa application, funds would have to be redeployed to a new project in order to keep the investment at risk.
Keeping an investment at risk is a major part of EB-5, and under the old law, petitions could be denied if these redeployment rules weren’t followed. Regional Centers would often offer additional projects to investors so they would have an option if their applications hadn’t been adjudicated by the time funds were returned from the initial project.
Investors often had little time or ability to vet those projects, redeploying out of necessity rather than choice. And as the adjudication process slowed down, redeployment became more likely.
As Nima Korpivaara, Partner, KLD LLP, explained at the webinar, the sustainment period combined with a slow adjudication process “forced investors into longer and longer hold times,” including occasionally “a second project that they’re not comfortable with.” This provision of the RIA eliminates that issue, said Korpivaara.
When the RIA was passed, it was believed by some that redeployment would no longer be necessary. It took the new guidance for us to be confident USCIS will interpret the law as expected, and that redeployment will not be required in many (if not most) situations. But one question remained: when USCIS says “at least two years,” when do they start counting?
What does two years actually mean?
According to USCIS, investments must be sustained “for at least two years, provided job creation requirements have been met.” The two-year period is said to begin on “the date the investment was contributed to the new commercial enterprise and placed at risk.”
This may seem straightforward to USCIS, but it’s not precise enough to inspire confidence for investors who have a lot to lose if they get this wrong. The guidance adds, “We 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.”
So when do investments qualify as having been “made available?”
“As a practical matter, the money cannot be actually sent to the operating account of the JCE until it’s time to spend it,” said Divine. “So that’s, to me, the practical equivalent of saying until the EB-5 money is spent.”
In most cases, investor money is not spent by the JCE one person at a time, so a single investor can’t be sure their entire investment was made available until all money has been spent by the JCE.
“For any one investor, that investor’s two years does not begin until the last dollar of that investor is spent by the JCE in the job-creating project,” said Divine. While it’s possible that offering documents could specify the order in which each investor’s capital is to be spent, “the safe, general rule is, when all of the EB-5 money is spent, then everybody’s two-year sustainment period begins.”
It’s important to remember that job creation requirements must also be met before capital can be returned, and that the two-year period is only a minimum. That’s why several of the panelists believe that for the most part, the best EB-5 projects will continue to look as they always have.
What will investors be looking for in an EB-5 project given this new guidance?
While investors might want to get their capital back as soon as possible, a 2-3 year project could have several drawbacks: it might be a riskier investment to begin with, with a greater likelihood of loss of invested capital; a faster project timeline may mean a smaller project that creates fewer jobs, meaning a reduced buffer for important job creation numbers; and if the project finishes too quickly, investors will have the same issues with the sustainment period that they did in the pre-RIA era.
“The last thing you want is for your project to finish short of the sustainment period,” said Christine Chen, COO, CanAm Enterprises. “It’s just best to interpret it a little bit more conservatively,” she added, noting that “for a good project, you need about a five-year window.”
The panelists largely agreed that the best projects will still have a 4-7 year timeline, allowing for safe return of capital, job creation, and proper sustainment of EB-5 funds. While investors potentially could look for 2-3 year projects in order to have their capital returned faster, they face risks in doing so. Leading Regional Centers likely won’t change the way they evaluate and offer projects.
At JTC, we understand how much investors have at risk when they embark on an EB-5 investment. They risk not only their invested capital, but their families’ immigration status as well. They deserve to know their funds are secure and have access to important information and documents when they need them. That’s why our EB-5 administration solution is designed to offer greater security for investor funds, transparency through a 24/7 online portal, and tools to help Regional Centers comply with the RIA now and in the future.
While we may see some shorter-term EB-5 projects offered, the experts still say the best projects will remain much as they were. Whatever changes come down the road, JTC will be ready to help Regional Centers meet them.
At the webinar, the panelists discussed other issues, including the guidance on pre-RIA investments in terminated Regional Centers and whether the new sustainment period might affect where EB-5 capital fits into a project’s capital stack. The full webinar is available online, so anyone interested in understanding the RIA and the latest guidance can watch it for free right now.
To watch the full webinar for free online,
