21 Jul Will Reforms to the EB-5 Program Impact Franchises?

Given the EB-5 Regional Center Program’s pending expiration on September 30, 2015, the EB-5 community is anxiously waiting to see what changes and reforms will be made to the Program in order to ensure its re-authorization. One bill—the bi-partisan American Job Creation and Investment Promotion Reform Act of 2015 (aka the Grassley-Leahy Bill) —currently being reviewed by the Senate Judiciary Committee – proposes to re-authorize the program for five years and to institute sweeping reforms, including enhanced oversight, increased accountability and transparency, and a higher priority for national security while discouraging fraud. (For more details, read our earlier coverage of the proposed Act).

There is no doubt that investors and business owners/project developers alike are concerned about how the bill, if implemented, would impact their projects.  Perhaps the most notable change proposed by the Act is an increase in the minimum investment thresholds: from $500,000 to $800,000 for TEA (Targeted Employment Area)[1] investments and from $1,000,000 $1,200,000 for non-TEA investments.  This change alone would translate to a significant impact on the program for all stakeholders.

Other potential reforms that will impact investors and business owners concern how job creation is calculated. According to the bill (the full text of which can be found here):

• Only 90% of the 10 required jobs per investor may come from indirect sources[2] (p.4 of bill).
• Only 30% of the capital provided to a project from non-EB5 sources can be counted towards indirect job creation (p.6).
• At least 50% of the estimated indirect job creation must occur within the combined statistical area or metropolitan statistical area in which the TEA is located (pgs. 15-16).[3]

Although a higher investment threshold will be a challenge for investors and business owners alike, the aforementioned reforms, if instituted, will undoubtedly also increase the appeal of direct EB-5 investments—as opposed to those offered through Regional Centers—such as the ever-popular franchise opportunities. Franchise investments would become even more attractive to investors for the following reasons, among others:

• Since all 10 jobs need to be directly created by the franchise (as opposed to indirect jobs), investors need not worry about the proposed limits placed on indirect job creation. Also, the jobs created by franchises tend to be direct jobs (i.e. actual identifiable jobs for qualified employees within the enterprise).
• There is no need to go through a Regional Center, making execution of the enterprise simpler and easier. In addition, the new bill proposes that all Regional Center investments be pre-approved prior to filing I-526 Petitions. Direct investment enterprises can skip this step.
• No economic study is required since the reliance is totally on direct job creation and, therefore, the holding company/employment company just needs to provide payroll documentation.
• The EB-5 direct investment program is permanent and is not subject to expiration or in need of re-authorization; only the Regional Center Program requires re-authorization.

e-Council Inc.com’s helpful chart below further explores the advantages and disadvantages of using franchises as EB-5 investments:

e-Council Inc.’s attorneys, researchers, and other professionals specialize in providing due diligence services that will equip potential investors with the information needed to assess the viability and feasibility of selected franchises as EB-5 investments, the investment threshold, the location of the new franchise, as well as the likelihood that the investment will pass USCIS scrutiny as an EB-5 new commercial enterprise. 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 for the EB-5 petition. 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 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.com’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 your attorney or other professional legal services provider. If you have any specific questions about any legal matter you should consult your attorney or other professional legal services provider.

[1] A TEA is either a “high unemployment area” in an urban setting (i.e. part of a Metropolitan Statistical Area, or MSA) that has an unemployment rate of at least 150 percent of the national average or a “rural area”.

[2] According to USCIS, “Indirect jobs are those jobs shown to have been created collaterally or as a result of capital invested in a commercial enterprise affiliated with a regional center by an EB-5 investor. A foreign investor may only use the indirect job calculation if affiliated with a regional center.” See http://www.uscis.gov/eb-5.

[3] http://www.eb5investors.com/blog/senators-chuck-grassley-patrick-leahy-eb-5-bill-2015