20 Jan The Due Diligence Questions Every EB-5 Investor Should Ask

Investors and business owners seeking to enter the EB-5 arena must conduct a thorough analysis at the outset to determine whether the particular project meets all EB-5 requirements and is likely to pass USCIS scrutiny. In addition to assessing its EB-5 readiness, investors should scrutinize the financial aspects of the project to ensure it is a sound investment and establish relevant safeguards in the event of project failure. On their end, project developers and business owners must determine that the new project fills a real market need and can attract investors. Conducting an in-depth project assessment prior to the development of a business plan can save investors and business owners, alike, significant time and money.

In this two-part series, we will review many of the key questions that investors, developers, and business owners must ask concerning the legal, economic, and financial aspects of EB-5 projects. Covering all of these bases can be overwhelming and time consuming. e-Council Inc. is highly experienced, both directly and in conjunction with our EB-5 strategic partners, in conducting Due Diligence Assessments that can guide investors toward making appropriate investment choices.

In this post, we will review the most important points that investors should consider before committing time and money to an EB-5 project, while our next post will address business owners and developers. The questions below are a sample of what investors should ask Regional Centers, attorneys, financial advisors, and consultants concerning the EB-5 project of interest. e-Council Inc.’s Due Diligence Project Assessments address each of these elements and more:

• Has the Regional Center been designated by USCIS? Before investing, make sure to check the list of current Regional Centers (henceforth, RCs) on USCIS’s website (here). If the Regional Center is not on the list, investors should request a copy of the USCIS designation letter from the Regional Center itself.
• Has the Regional Center been approved for the relevant geographic area/industry? RC’s are designated for particular geographic regions and NAICS industry clusters. Investors should confirm that their investment project falls within the Regional Center’s approved area and industries by reviewing the RC’s designation letter. If not, the investor should inquire whether the RC intends to file an amendment with USCIS to expand its geographic area, its NAICS codes or both and whether that amendment is reasonable.
• Has the project received provisional approval from USCIS? While all EB-5 projects have to be “approved” by USCIS, the timing of the approval is a strategic decision. Some RC’s obtain what is known as “provisional” approval from USCIS before raising and releasing EB-5 investor funds, which essentially translates to “deference” to the project. Other projects seek approval with the first investor’s I-526 petition. Project pre-approval takes the guesswork out of I-526 filing and significantly reduces the investor’s burden of proof.
• Is the project located in a Targeted Employment Area (TEA)? A TEA is defined as an area that, at the time of investment, is either a rural area or an area that has experienced unemployment of at least 150 percent of the national average rate. In order to qualify for the reduced minimum investment of $500,000 instead of $1 million, projects must be located in and principally doing business in a TEA. If the RC claims that the project is located and will operate within a TEA, investors should seek proof, including maps and census data, and monitor it to ensure that the area continues to qualify as a TEA through investment.
• Will the project create at least ten jobs? The investor must review the RC’s calculation and documentation of how the investor’s capital will create at least 10 qualifying jobs, including the economic models used and the consideration of indirect vs. direct jobs. The investor should consult immigration counsel to ensure that the methodology used is reasonable and will pass USCIS scrutiny.
• Does the project provide a sufficient job cushion? In a project involving a large group of investors, it is important that the number of jobs projected by the economist’s report provides a cushion of at least 20% over the ten-jobs-per-investor minimum to avoid job-creation shortfalls at the I-829 stage.
• What is the track record of the parties involved? Investors should do background research to determine whether the principals of the RC and/or the project developer have a solid and consistent track record in the field, including the following:
  • Ask about the Regional Center’s I-526 (and where applicable, the I-829) success rate. While past success is no guarantee of future success, it is indicative.
  • Inquire about the number of projects completed by the RC. New RC’s are not necessarily a bad option, as they may have been established by experienced developers, but if it’s an older RC, the investor may want to see that the RC has successfully completed a respectable number of projects.
  • Investigate the developer’s reputation. Look into the professional background and experience of the development team to ensure good professional standing.
• Do the Regional Center and developer have a financial stake in the project? It is important to know if the Regional Center principals and developers are making equity investments in the projects they own/manage. If the owners of the project do not make an equity investment in the project, they may have little incentive to ensure its success.
• Are there other sources of capital comprising the capital stack? If the project has attracted other investors or merited other financing, the project is more likely to be viable and generate appropriate risk adjusted returns. If the capital stack only consists of EB-5 capital, investors should be wary of its financial soundness.
• What are the EB-5 fund release mechanisms? While most investors prefer their funds to be held in an escrow account until the project and I-526 petition is approved by USCIS, many developers cannot wait the many months required for release of funds. Consequently, RC’s have set up various early release mechanisms that allow deployment of EB-5 capital prior to project approval, which increases the risk to the EB-5 investor. The investor should thus ensure that proper protection provisions, such as return of capital in the event of a denial, are implemented.
• What are the denial provisions? Investors should review the offering documents carefully to ensure they understand what portion of the administrative fee and capital investment will be returned if the I-526 is denied.
• What is the exit strategy? All EB-5 investments must be “at risk” until the I-829 (removal of conditional status) is approved. As such, there can never be a guaranteed return of investment. The investor should consult a financial professional to conduct a business risk analysis on the project prior to investing. The investor should also carefully read the offering documents to understand when and how the investment funds will be returned upon successful removal of conditions from his residency.
• Has the RC and developer provided documentation supporting their claims about the project? It is important to confirm whether claims made about the investment are true by obtaining relevant documentation from state authorities. For example, if the investment involves construction of commercial real estate, one may examine county records to see if the issuer has obtained the proper permits and whether state and local property tax assessments correspond with the values the Regional Center attributes to the property. If other companies have purportedly signed onto the project, the investor can go directly to those companies for confirmation.
• Is the business plan Matter of Ho compliant? Most importantly, each project should be backed by a Matter of Ho-compliant business plan that includes all the required components and the credibility to pass USCIS scrutiny. Please reference the list of these components by clicking here.

Answers to these and other questions will equip EB-5 investors with the tools to make the most informed decision concerning their investment.

To inquire about our Due Diligence Assessments or to choose from a wide range of complementary EB-5 services such as our best-in-class Matter of Ho-compliant business plans, 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.