06 Apr Why Direct Investment Options Can be a Good Choice for EB-5
As we have previously reported, the fate of EB-5 Regional Center Program remains uncertain. After two temporary extensions in 2015, the Regional Center Program is once again set to expire on September 30th, 2016. At that time, Congress may renew the Regional Center Program with substantial changes that will increase regulatory compliance and raise the minimum investment threshold, among other things. (You can read about the proposed reforms here).
While much attention has been focused on the fate of the Regional Center Program, investors and other EB-5 constituents should note that only the Regional Center component of the Immigrant Investor Program is actually temporary. The EB-5 Immigrant Investor Program also permits applicants to invest directly in a business, without the involvement of a Regional Center. This direct investment option does not face expiration. In fact, when originally enacted in 1990, the EB-5 Program was solely a direct-investment program; the Regional Center “Pilot” Program was added in 1992, and although it is no longer referred to as a “pilot” program, it requires congressional re-authorization due to its temporary nature.
Investors looking to sidestep the uncertainty over the Regional Center Program now have a greater incentive to explore a Direct Investment opportunity. According to law, Direct Investment projects share three main requirements with Regional Center projects. The foreign applicant must (1) make a capital investment in the amount of $500,000 in a TEA (Targeted Employment Area)[1] or $1,000,000 (2) in a new commercial enterprise (NCE) that (3) creates at least 10 new, permanent, full-time jobs. It is important to note that, later this year, Congress is likely to raise the minimum investment thresholds for all projects—whether located in a TEA or not—and that this increase will impact Direct Investment and Regional Center projects equally.
The Pros and Cons of Direct vs. Regional Center Projects
The main difference between a Regional Center project and a Direct Investment project is the job creation requirement and the management role of the investor. Concerning job creation, USCIS permits a Regional Center project to count both direct and indirect jobs, while the Direct Investment alternative requires that each individual’s investment in the NCE result in the creation of at least 10 direct W-2 jobs (or preserved jobs in the case of a troubled business).[2] Many see this as an advantage of the Regional Center option.
Additionally, in a Direct Investment Project, the investor is required – at a minimum – to fill an advisory or policy-making role within the business. This can be accomplished either through the issuance of common shares or preferred equity. In Regional Center projects, investors tend to play a more passive role, usually as a limited partner and or an investing member in a limited liability company.
For investors not interested in the day-to-day obligations of running a business, the Direct Investment option may not be attractive. But increased involvement in the business does carry its advantages. Because direct investors take an active role in the NCE’s business, they have more control over the project and their investment capital. Additionally, the investor is always aware of how the business is doing. Furthermore, a skilled attorney can help an investor minimize their required involvement through a careful definition of the role they are to play in the business.
In addition to having better control over the business and investment capital, other advantages of a Direct Investment include:
- Shorter Timeline: It is generally more expeditious to invest in a Direct Investment project as the Investor need not wait for the creation of a new Regional Center or amendment to an existing Regional Center prior to their selected project and investment being eligible for approval.
- Lower Costs: Since indirect jobs will not be involved, investors can avoid the additional expense of obtaining an economic impact report. Also, direct investors will not have to pay administrative fees to a Regional Center.
- Freedom of Choice: A Direct Investor can choose a project in virtually any industry—whether a franchise or small business—as long as it is a legal business and meets the minimum investment requirements. Investors can explore both franchises and small business.
- Higher Returns: While investing in a Regional Center typically yields very low returns (often ½ to 2%), a direct investment can yield much higher returns both in the short and long term, with no cap on the rate of return.
- Less risky: With direct control over the business, the investor can avoid some of the investment scams concerning Regional Centers publicized in the media.
In sum, investing in a Direct-investment project can be cheaper, less risky, more expeditious, and yield higher returns for the investor.
Want to Invest in an EB-5 Project but Don’t know Where to Begin?
Investors must carefully consider the type of EB-5 investment most appropriate for their individual needs and diligently investigate the suitability of the project for EB-5 investment. e-Council Inc.’s experienced and skilled professionals can assess an investor’s goals and profile to help them select a business that is right for them, and right for EB-5.
e-Council’s attorneys, researchers, and other professionals also specialize in providing due diligence services to equip potential investors with the information needed to assess the viability and feasibility of opening a new business and the likelihood that it will pass USCIS scrutiny. If the business passes muster, e-Council Inc. can create a Matter of Ho-compliant business plan and provide a wide range of complementary services designed for the EB-5 application. Working with e-Council Inc. to complete all of your EB-5 documents minimizes the need for outside services from unrelated sources; all of our diverse service providers have been fully vetted and are immediately available.
To inquire about our wide range of EB-5 concierge services, including project oversight and coordination, our best-in-class Matter of Ho-compliant business plans, due diligence project assessments and a wide range of ancillary services, please contact us at info@ecouncilinc.com.
e-Council Inc.’s website, newsletter and other forms of communication contain general information about legal matters. The information is not legal advice and should not be treated as such. You must not rely on the information on this website as an alternative to legal advice from an attorney or other professional legal services provider. For specific questions about any legal matter please consult with an attorney or other professional services provider.
[1] The minimum qualifying investment either within a high-unemployment area or rural area in the United States is $500,000. A targeted employment area is an area that, at the time of investment, is a rural area or an area experiencing unemployment of at least 150 percent of the national average rate. A rural area is any area outside a metropolitan statistical area (as designated by the Office of Management and Budget) or outside the boundary of any city or town having a population of 20,000 or more according to the decennial census. (http://www.uscis.gov/working-united-states/permanent-workers/employment-based-immigration-fifth-preference-eb-5/about-eb-5-visa)
[2] A “troubled business” is one that has been in existence for at least two years, has incurred a net loss for accounting purposes during the twelve- or twenty-four month period prior to the priority date on the alien entrepreneur’s Form I-526, and the loss for such period is at least equal to twenty percent of the troubled business’s net worth prior to such loss. For purposes of determining whether or not the troubled business has been in existence for two years, successors in interest to the troubled business will be deemed to have been in existence for the same period of time as the business they succeeded. 8 C.F.R. § 204.6(e).