aabany 2016 fall conference · under the age of 21) will apply for an eb-5 visa alongside the...

AABANY 2016 FALL CONFERENCE

The Changing Landscape of the EB-5 Immigrant Investor Program

CLE Material

1. Basic Concepts of the EB-5 Investor Program 2. Documenting EB-5 Source of Funds 3. The Regulation S Exemption: Maintaining Compliance with the “Offshore

Exemption” in EB-5 Transactions 4. SEC Teleconference, April 3, 2013 - Staff Discussion Re Disclosure of Broker

Compensation and Registration Issues 5. Securities & EB-5: Recent SEC Enforcement Actions 6. Marketable Elements of Business Plans in the China EB-5 Marketplace

EB-5 PANEL CLÉ MATERIAL

BASIC CONCEPTS OF THE EB-5 INVESTOR VISA(SECOND EDITION, JANUARY 2016)

JUlIA YONg-hEE PARk, ESq.MANAgINg DIRECTOR, ADvANTAgE AMERICA EB-5 gROUP (www.AAEB5.COM)

Copyright 2016 by AAEb5 group.

All rights rEsErvEd. No pArt of this book mAy bE rEproduCEd iN ANy form or by ANy mEANs, ElECtroNiC or mEChANiCAl, iNCludiNg photoCopyiNg, rECordiNg, or by AN iNformAtioN storAgE ANd rEtriEvAl systEm, without writtEN pErmissioN from thE Copyright holdEr. iN othEr words, doN’t Copy ANy of our work, sEll it for profit, or pAss it off As your owN. howEvEr, if you likE it ANd thiNk somEoNE would fiNd it usEful plEAsE fEEl frEE to shArE. but plEAsE givE us CrEdit by lEttiNg pEoplE kNow wE’rE thE Authors whEN you do.

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hyo tAEk [email protected]

introduction 1. The basics2. TEAs and Minimum investment Amounts3. The Eb-5 investment Structure4. Five basic Steps to acquiring an Eb-5 Greencard5. The direct Eb-5 program6. The Regional Center Eb-5 program7. Capturing indirect Jobs8. Source of Funds9. process & Timing10. Exemplar projects: AKA the pre-Approved Eb-5 project11. Cost12. Return of Capital13. how will the Rules Change in the Future?

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Although the EB-5 Program was first enacted by Congress in 1990, the explosive popularity that it enjoys today is a relatively recent phenomenon. In FY2001, only 188 EB-5 visas were issued. In FY2006, when the program started gaining in popularity, 802 EB-5 visas were issued. In FY2014 the number of EB-5 visas issued exceeded the 10,000 quota for first time in EB-5 history. (10,692 to be exact.) That quota, however, was reached in September of 2014 at the very end of the U.S. government’s fiscal year so had minimal impact on visas being processed. it was in April 2015 (7 months into FY2015) that the department of State announced that the 10,000 visa limit was reached and implemented a cut-off date in the visa bulletin for investors born in mainland China. This created a long line of investors and their families from China waiting to get Eb-5 visas and also created complications for Chinese families with children over 18.

in addition, in 2015, a total of six bills were introduced in the house and the Senate each proposing slightly different measures for reform and improvement of the EB-5 program. But all of the bills proposed an increase of the minimum investment amount for TEA projects from $500,000 to $800,000 which prompted a fire sale of sorts as investors tried to squeeze in under the $500,000 investment amount. According to USCIS’s published data for FY2015, over 14,000 I-526 petitions were filed with 46% of these numbers filed in Q4.

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The I-526 petition is the underlying petition for an EB-5 visa. One investor will file a petition and once approved, the investor’s qualified dependents (i.e. spouse and unmarried children under the age of 21) will apply for an EB-5 visa alongside the investor. Currently it is estimated that approximately 2.2 EB-5 visas are issued for each I-526 petition. This means that the 14,000 I-526 petitions filed in FY2015 alone, once approved, will account for over 30,000 Eb-5 visas.

The growing popularity of the EB-5 Immigrant Visa has introduced many changes to the type and size of projects being offered on the market during the past 7 years. Such changes have forced the uSCiS to expand its interpretation of the Eb-5 rules and regulations. Often changes in adjudication policy will come slow and create a disconnect between business reality and immigration adjudications. A great example is the use of bridge loans. At first, the USCIS did not allow EB-5 funds to replace existing financing such as bridge loans brought in to cover the gap while Eb-5 funds were pending in escrow.

When I-526s adjudications took too long, however, and deals could not continue without bridge loans, the USCIS started to allow bridge loans but only if you had jumped through certain hoops. Then in the EB-5 Adjudications Policy Memorandum issued by the USCIS on May 30, 2013 (the “May 30 Memo”), the USCIS finally relented and basically said EB-5 loans could replace existing short term financing. But this was not before many projects had to go through a lot of pain.

In other words, EB-5 rules keep changing and evolving. It is important to note, however, that this is not because the “law” keeps changing. In fact, the laws related to EB-5 have not changed since Congress added the Regional Center program to existing Eb-5 rules in 1993. it is how these laws are interpreted that keeps changing. Similar to other U.S. administrative laws, the immigration laws are broadly written while USCIS devises its own guidance documents. The proper use of agency guidance documents is subject to much debate across administrative law scholars in the United States. However, practically speaking, rules provided in these “guidance memos” operates the same as legally binding rules.

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As of January 2016, there are five official USCIS Policy Memoranda related to EB-5 that can be found here: http://tinyurl.com/EB5memos.

And, as of January 2016, the May 30 Memo is still the most comprehensive document for Eb-5 rules.

After many rounds of collecting public comments, the USCIS announced its comprehensive memo which attempts to address almost every aspect of the EB-5 program – basically superseding all of the existing guidance memos discussing EB-5. Considering that it took the USCIS close to two years to finalize the May 30 Memo coupled with the fact that the EB-5 program in its current form is scheduled to expire in less than nine months on September 30, 2016, it is unlikely that the USCIS will be releasing another set of comprehensive rules in the near future.


1 . t h E b a s i c s

There are two broad categories of visas through which a foreigner can hope to obtain permanent residency (colloquially dubbed “green card” or “greencard”). One is through family based immigration (i.e. spouses, parents, children and sibling) and another is through employment in the United States. Within in the employment based category are five different categories ranging from Eb-1 to Eb-5.1

Under the EB-5 program, a foreigner can obtain a conditional greencard by investing a minimum of $1,000,000 ($500,000 under certain circumstances, as detailed below) to create a new business or invest in an existing business with the promise to create 10 new u.S. jobs by the end of the 2.5 year mark of the approval of the conditional greencard petition, called the i-526.

if the investor is investing in an existing business, the infusion of capital must create 10 additional jobs to the jobs that already exist. (There is also a provision for investing into “troubled” businesses which I will not discuss as it is rarely utilized.)

Once an investor’s immigration petition filed on Form I-526 is approved by the USCIS, she can apply for a greencard along with her spouse and unmarried children under the age of 21. If the child of the EB-5 investor is under the age of 21 when the I-526 is filed, the child will still qualify for a greencard even if he is over the age of 21 when the i-526 is approved 14 to 18 months after the I-526 filing according to the protections provided by the Child Status Protection Act (CSPA). However these protections are limited when visa numbers are backlogged, which is currently what is happening for immigrant investors born in mainland China. As such, Chinese investors whose main purpose of obtaining the U.S. greencard is for the benefit of their child and the child is near or over 18 are strongly cautioned to consider gifting funds to the child and have the child apply as the main petitioner.

please see www.aaeb5.com/chinesebacklog for a detailed discussion about the The visa Backlog for Chinese investors and the impact it has on children.

1The EB-1 greencard is for people who fall into the following categories: Extraordinary Ability, Outstanding Professors and Researchers, or Multinational Manager or Executive. The EB-2 is for employer sponsored petitions for those with Advanced degrees or Exceptional Abilities; and self-sponsorship in the case of National interest waiver visas. The EB-3 is generally for people with college degrees and some non-degree workers. The EB-4 is a category for special cases, mostly religious workers, but also very specifics groups of people like Iraqi translators. Other well-known category of visas like the F-1 student visa or H-1B work visa are non-immigrant visas (NIVs), meaning they are not greencards.


2 . t E a s a n d M i n i M u M i n v E s t M E n t a M o u n t s

while the basic Eb-5 program is for a minimum $1 million investment, if the investment is made in a Targeted Investment Area (“TEA”) the minimum investment is reduced to $500,000. Many people mistakenly believe that only Regional Center projects qualify for $500,000 investment and all direct Eb-5 investments require $1 million. That is not the case. whether the minimum investment is $500,000 or $1 million depends on the location of the project. (we will discuss the difference between a Regional Center investment and direct investment below.)

however, almost all Regional Center projects are located in TEAs. in FY2015, a total of 8,773 EB-5 visas were issued. Of these, only 33 visas were from projects located in non-TEAs requiring $1 million investments. in the same period, a total of 72 Eb-5 visas were obtained through investment into direct investment projects and of these 24 visas were from projects in non-TEAs.

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in 2015, the minimum investment amount for TEA based projects was almost increased from the current $500,000 to $800,000. (The $1,000,000 minimum investment amount for non-TEA based projects would have stayed the same under the proposed bill that almost made it through Congress but was pulled at the very last minute.)

because the $500,000/$1 million minimum investment amounts were last visited in 1993, there is pretty wide consensus that it will be increased in the near future and it will be next up for possible increase before the end of FY2016.

Currently, there are two types of TEAs:

First is an area that, at the time of investment, is a rural area. A rural area, in turn, 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.

The second type of TEA is a particular geographic or political subdivision located within a metropolitan statistical area or within a city or town having a population of 20,000 or more” as a high unemployment TEA. This type of TEA requires that a designated agency of the state make this determination, and this determination is usually in the form of what is called a TEA letter. Most urban EB-5 projects, including projects in New York City, on the market today utilize this second type of TEA.

As can be seen in the table above, in FY2015, out of the total 8,773 EB-5 visas issued, only 33 were issued based on non-TEA deals with minimum investments of $1 million. in other words, without TEA status, a project is not marketable. In 2015, changing the definition of TEA was the biggest controversy among politicians representing the interests of rural area Regional Centers and those representing urban area Regional Centers. And it was the gridlock between the two different interests that apparently resulted in legislative reforms not going forward.

d i r E c t E b - 5 t o ta l


3 . t h E E b - 5 i n v E s t M E n t s t r u c t u r E

The basic framework of the EB-5 regulations requires that an investor make an “equity” investment into a qualifying EB-5 program. Lending funds to a project with a guarantee of repayment does not suffice. This has not always been the case, however. In the 1990s when the program was first introduced, it was common for investors to invest a portion of their investment in cash and a portion in the form of “promissory notes”. The USCIS has since disallowed this and has made it clear that a loan is not an investment. (This, is another good example of how the EB-5 program is really shaped by USCIS policy and not the actual statute and regulations which are broadly drafted.)

There was a brief period following the Great Recession when EB-5 financing took first mortgage positions in real estate projects. but improvement in the lending environment coupled with tighter regulation of the uSCiS on eligible inputs for jobs creation has resulted in EB-5 financing being pushed down the capital stack in recent years. Today, most EB-5 financing can be characterized as mezzanine financing, either in the form of mezz debt or preferred equity, but mostly mezz debt which is commonly referred to as the “EB-5 loan”.That most Regional Center investment projects are structured as a “loan” confuses a lot of investors because it seemingly contradicts the “equity” requirement mentioned above. (A common question is “If an EB-5 investment cannot be in the form of a loan, then how are the Regional Centers saying that their project will give investors a fixed interest rate with the “loan” repaid in 5 years?”)

This is possible because the loan is not made by the investor, but by the company that the investor takes an equity interest in. At this point, it is necessary to employ a bit of EB-5 jargon and diagrams. A typical EB-5 loan takes the form below:

distribution(aKa intErEst)

intErEst PayMEnt

EQuity invEstMEnt($500,000) loan

ncE / lEndEr jcE / borroWEr / Eb-5 ProjEct

rc / ManagEr


A simple explanation is that the EB-5 investor is taking an equity position in a debt fund. The individual EB-5 investors will purchase an equity interest in the New Commercial Enterprise (“NCE”) which is a special purpose entity created to pool the investors’ funds. The NCE is usually a limited liability company or limited partnership. An affiliate of the Regional Center will be the Manager/Gp of this NCE while the investors are the Members/Lps. The NCE is a Lender and the project (usually a real estate construction project) will become the Job Creating Enterprise (“JCE”) which is the Borrower of the loan proceeds. In other words, investor funds into the NCE must be equity but the investment of funds from NCE to JCE can take the form of debt or equity.

While not an EB-5 requirement, most EB-5 loans are collateralized. In a Loan Model where the EB-5 loan takes a mezz debt position, the collateral is the equity interest of the JCE similar to conventional real estate mezzanine loans.

An “Equity Model” investment usually refers to the structure where EB-5 funds come in as preferred equity.2 The Equity Model is often utilized when the senior lender in a project prohibits any subordinated debt, including mezz debt. It is also preferred by the developer because of its relative flexibility compared to mezz debt.

For the EB-5 investor, the two structures are not too different in that both provide a fixed return and are positioned similarly in the capital stack. However, the Loan Model will have benefits such as a clearly established exit date and a guaranty of some sort by the JCE or an affiliate (e.g. pledge of equity interests, Completion Guarantee). The Loan Model also has the benefit of a foreclosure remedy – while realistically not all NCEs will have the capacity to take over a borrower entity and complete a project, the legal right to do so would have the effect of pressuring the JCE to complete the project.

2Previously this referred to EB-5 funds being deployed as “true” equity where the individual investor takes an equity position in the project itself. Today, “true” equity is still common in Direct EB-5s where the investor is the owner of the project, so the NCE and JCE are one and the same. And while a handful of older Regional Center deals (pre-2005) utilized the “true” equity model, today, in the Regional Center or Pooled Direct EB-5 context is almost non-existant. As such Equity Model in this booklet refers to preferred equity deals.


4 . F i v E b a s i c s t E P s t o a c Q u i r i n g a n E b - 5 g r E E n c a r d

The following are the five steps of getting an EB-5 greencard.

Immigrant investor identifies a project for EB-5 investment. She then works with an immigration attorney to clear the Source of Funds (“SOF”) for the funds to be used for the EB-5 investment. Once immigration attorney signs off on the SOF, the investor invests the minimum required capital into the New Commercial Enterprise (the “NCE”).

Investor files a petition for a conditional greencard on Form I-526. The I-526 petition consists of two parts:

1) Investor’s SOF documentation

2) Eb-5 business related documents a. Eb-5 business plan showing how the investor intends to create 10 new U.S. jobs in the next two years. (I-526 must be accompanied by documents that show how the investor proposes to create jobs within 30 months of i-526 petition approval.)

b. Eb-5 Economic Report showing how indirect jobs will be created (for Regional Center projects only).

c. Eb-5 Offering documents such as private placement Memorandum, Subscription Agreement, partnership/LLC Operating Agreement.

iNvEST

FiLE i-526 iMMiGRATiON pETiTiON

After the I-526 is approved, the investor and her family will apply for conditional residency (aka “temporary greencard”) either through Adjustment of Status on Form I-485 or Consular processing depending on where the investor lives.

AppLY FOR GREENCARd

CREATE JObS

pROvE JObS

Finally, between month 21 and month 24 of the approval of the conditional greencard, the investor must file a petition on Form I-829 to prove to the USCIS that the jobs have been created or will be created within a reasonable period of time.

Either the investor (in most direct Eb-5 projects) or the project (in a Regional Center Eb-5) must create the requisite number of jobs.

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5 . t h E d i r E c t E b - 5 P r o g r a M

When the EB-5 program was originally established in 1990, Congress had in mind a single immigrant investor (and his/her family) coming to the United States with investment funds to set up a business that hired 10 full-time U.S. workers. This structure is referred to as the basic Eb-5, Non-Regional Center Eb-5, the Original Eb-5 program or direct Eb-5. (i prefer the term direct Eb-5.) A common misconception about the direct Eb-5 program as mentioned above, is that the minimum investment must be $1 million. in fact, the minimum investment depends on whether or not the business created is located within a TEA.

In a Direct EB-5, the proposition is pretty simple:

when the investor applies for a direct Eb-5, at the i-526 stage (the FiLE stage, above) the investor is required to show how he actually plans on creating 10 or more jobs. For example, if you were opening a restaurant, you would include in the business plan the size of the restaurant, how many customers you anticipate, the hiring plans, and how you plan to increase the number of employees over a two-year period so that at the I-829 stage, you will have 10 or more employees. These projections need to be based in reality (what the USCIS calls “verifiable data”) – so you would put in third-party market studies if they were available, or if not, at least include basic information about your competitors to prove to the USCIS you are not just making things up out of thin air.

At the i-829 stage (the pROvE JObS stage), the investor will need to provide the uSCiS with a list of a minimum of 10 employees who are:

• Salaried W-2 employees• Full time, which is defined as a minimum 35 hours/week,• U.S. Citizens or greencard holders or people otherwise authorized to work in the United States, and who are not immediate family members of the investor. (Immediate family members can work in the business but they can’t be counted to make up the 10 employees.)

Then what is the difference between the Regional Center Eb-5 and the direct Eb-5? The procedural difference is that an investor doesn’t need to affiliate with a Regional Center and can file an I-526 petition based on a qualified investment. The substantive difference is that investors in Direct EB-5 projects need to hire ten W-2 workers while Regional Center investors are allowed to count indirect jobs. Let’s take a closer look at Regional Center EB-5 projects and what it means to count indirect jobs.

Pooled direct Eb-5 Programs

Until recently, Direct EB-5s have usually taken the form of a single investor investing in his own venture as the 100% owner. However, pure direct Eb-5 projects have virtually disappeared due to the extremely long period of time between when the funds have to be invested into the business for the i-526 filing and when the investor

can enter the united States on the EB-5 visa (currently approximately 2.5 to 3 years for non-Chinese investors and almost 40 months for investors born in China). As a result, most direct Eb-5 projects on the market today are third- party projects similar to Regional Center projects (i.e. the investment project is set up and managed by a business that is not owned by the investor) where the investment is pooled and the

investors get an allocated share of the hired workers. because direct Eb-5 projects are required to show direct job creation, by definition most businesses seeking direct Eb-5 investments are in labor-intensive businesses. Examples of pooled direct EB-5 projects today include fast food restaurants, livery car services companies or call centers.

in FY2015, out of the total 8,773 Eb-5 visas issued, only 72 were issued based on investments into direct Eb-5 projects compared with the 8,701 Regional Center Eb-5s.


6 . t h E r E g i o n a l c E n t E r E b - 5 P r o g r a M

A Regional Center is a company that has received a federal designation from the USCIS to pool the investment of multiple foreign investors into a qualifying U.S. business to create employment.

While there are a handful of Regional Centers that are affiliated with government entities, the vast majority of Regional Centers are privately owned. Loosely Regional Centers can be categorized into “developer owned” Regional Centers or “third-party” Regional Centers that are formed by attorneys or real estate professionals.

As of January 2016 there are approximately 790 approved Regional Centers in the United States and many more applications pending with the USCIS. But note that most Regional Centers currently do not have projects on the market. Many are new centers preparing to launch a project and many more are dormant and not actively operated. You can find the current list of Regional Centers here: http://tinyurl.com/regionalcenterlist.

Currently the USCIS monitors Regional Centers by requiring each center to submit an annual report outlining the investment activities of each fiscal year, such as the number of I-526s or I-829s filed, the number of jobs created, etc.

While the more comprehensive EB-5 reform bill did not make it to a vote in Congress, as of January 2016, the EB-5 Integrity Act of 2015, or S. 2415, is pending which could bring some changes to the Eb-5 rules but not touching the more controversial provisions related to TEAs or job counting. S. 2415 bill was introduced by Senator Flake of Arizon on Dec. 17 and co-sponsored by Sens. John Cornyn, R-Texas, and Charles Schumer, D-N.Y. This bill proposes to introduce Sarbanes-Oxley type certification requirements for Regional Centers and their principals as well as a $25,000 a year “license” fee of sorts. These fees would be utilized to perform uSCiS site visits to Regional Centers and Eb-5 projects. These fees, if introduced, will probably also have the effect of weeding out non-operating Regional Centers.

As mentioned above, the only meaningful difference between a Direct EB-5 project and a Regional Center project is that Regional Center projects have the ability to capture indirect job creation. This gives Regional Centers the ability to raise bigger amounts of foreign capital because there will always be more indirect jobs created in a project than direct jobs. But what are indirect jobs?


7 . c a P t u r i n g i n d i r E c t j o b s

The Eb-5 Economic Report

When filing an I-526 for a Regional Center EB-5, an EB-5 Economic Report will be included. The Economic Report shows how many jobs (both direct and indirect) will be created from the particular project in which the investor is investing. Eb-5 Economic Reports are economic impact analyses using “reasonable methodologies” that have received the blessing of the uSCiS. (RiMS ii, iMpLAN, REdYN are examples of these methodologies.) Economic impact analyses attempt to measure the effect that a policy or a program or even an event has on the economy of a given region. For example, Rutgers University published an economic report estimating that Hurricane Sandy resulted in 4200 jobs lost in Q4 of 2012 in New Jersey; the New York City Economic Development Corporation can quantify the economic impact that Fashion Week or the NYC Marathon has on the local economy, and even how marriage equality impacts the wedding industry in New York City.

in a similar manner, an Eb-5 economic report will measure how a certain Eb-5 project can have an economic impact of creating jobs in a given region. These economic impact jobs are what are called “indirect jobs”. Here is an extremely simplified explanation of how indirect, economic impact jobs are measured using RIMS II: An economist inputs three factors – the industry, the region, and the dollar amount – into the economic model. Let’s say, for example, the EB-5 project at hand is a hotel construction in New York. The construction costs are estimated at $20 million dollars (not including the cost of land). By using the three known variables – the industry (non-residential construction), the region (New York) and the investment amount ($20 million) the economic report will tell us that based on the RIMS II employment multiplier for this region, the Eb-5 project, once completed, will create 187 jobs.

At the i-526 petition stage of a Regional Center Eb-5 investment, the investor needs to submit an Eb-5 economic report that outlines the number of jobs that this project is expected to create. And, just like in the Direct EB-5 scenario, the USCIS looks to see if the job projections are based on reasonable and verifiable assumptions.

The main difference between the direct Eb-5 and the Regional Center Eb-5 comes at the I-829 stage. In a Direct EB-5, the investor provides the USCIS with the payroll and tax records to show job creation. but how do we show that 187 jobs were created in the $20 million hotel example? When counting indirect jobs, we are not counting the construction workers who built the hotel or the staff employed by the hotel – remember, these are real people, hence direct jobs. in the Eb-5 Economic Report we said that based on a reasonable economic model accepted by the USCIS, $20 million spent on construction in New York will create 187 jobs.

Accordingly, at the I-829 stage when the investor must show job creation, we are not counting the number of people directly employed by this hotel construction project; rather, the investor needs to show that $20 million was in fact spent on construction in New York as set forth in the original business plan. To prove this you would submit invoices of the construction expenditure, pictures of the construction in progress, and the completed hotel, etc. Once the uSCiS is comfortable that the project in fact did what it said it would do at the i-526 stage, the jobs in the economic report will be deemed to have been created. in other words, if the project spent $20 million on construction in New York, the USCIS will deem the 187 jobs to have been created as a result of the spending. And, if because of delays the project is only half done so only $10 million has been spent? Then, only one-half of the 187 jobs, so only 93 jobs will be deemed to have been created.

And, because any given project will have more indirect, economic impact jobs than direct jobs, the Regional Center EB-5 program makes it possible for qualified U.S. businesses to attract more investment than through the direct Eb-5 program.


To use the example above, a $20 million hotel somewhere in New York City would probably get you a 100-room outfit. Think of a Marriot Residence Inn near one of the airports. How many full-time workers would such a hotel hire? I would say, no more than 40 maximum. (Front desk staff for 24 hours, room service, housekeeping, etc.) That means 4 EB-5 investors could invest $500,000 each and the project job numbers allows you to raise $2 million total. Compare that to 187 jobs – that means 18 EB-5 investors could claim 10 jobs each, and at $500,000 each, the hotel project could raise a total of $9 million. This is the effect of indirect job counting through Regional Centers.

So the answer to the question of “How do you count indirect jobs?” is that you show the economic impact of the project according to what you promised to do at the I-526 stage and the indirect jobs will be deemed to have been created by virtue of the kept promise.3

the regional center immigrant investor Program

Unlike the Direct EB-5 program, the Regional Center program is a pilot program that is extended every three years. Since 1993, the program has always been extended, and that the Regional Center program will continue to be extended in and of itself is not a matter of controversy. However, the specifics of the Regional Center program and Eb-5 rules in general are long overdue for updates. Therefore it was widely anticipated that there would

be an amendment to the statutes and regulations addressing the Eb-5 program that would codify many of the USCIS policies in effect today when the program was up for another extension on September 30, 2015. Congress and the EB-5 industry came very close to reaching a compromise on new rules in december of 2015 which included increasing the minimum investment amount into TEAs from the current $500,000 to $800,000 and also new definitions of TEAs. The new rules would also

have extended the Regional Center program for another 5 years. But at the last minute, the Regional Center program was temporarily extended until September 30, 2016 in its current form. This extension brought a collective sigh of relief to many people with vested interest in the current program that would have been adversely affected by new proposed rules. but it has also extended the uncertainty surrounding Eb-5 rules for another year, making it harder for Regional Centers and developers to plan for the future.

3This is the “expenditure based” indirect job counting. There is also a “revenue based” job model that allows you to calculate indirect jobs based on projected revenues. In this case, you would need to show that the revenues were actually created at the I-829 stage to prove job creation.


8 . s o u r c E o F F u n d s

An individual investor’s I-526 petition consists of two parts. The first part is the Business Content (business plan, economic report, etc.) which is discussed above. The second part describes in detail the investor’s Source of Funds (SOF).

The SOF tells the story of the origins of the $500,000 that was invested in the United States. A common question asked about SOF is whether the investor can obtain loans to use for EB-5. The answer is yes. The caveat is that the loans must be secured with personal property. For example, a loan from a bank using real estate owned by the investor as collateral is acceptable. Or a loan from a company where the investor holds an equity interest is acceptable. In this case the collateral would generally be the investors’ shares in the company.

In loans, however, an additional layer of where the investor obtained funds to purchase the underlying assets must be submitted to the USCIS. For example, in a real estate loan, how the investor purchased the real estate in the first place must be shown. (It used to be that if the real estate was purchased more than 5 years ago, this step was not needed, but starting 2014, the uSCiS has been requesting this original source information no matter how long ago the asset was acquired.) in the case of shareholder loans, for example, if the investor is the majority owner of the company, where the funds for the initial capitalization of the company would be required.

The second common question is whether investor can use funds that are gifted to him as Eb-5 investment capital. That is also allowed, however, when there is a gift involved, the USCIS looks past the investor and looks at the source of funds that were used for the gift.4

One thing the potential investor absolutely must keep in mind is that the SOF needs to be reviewed and documented by the investor’s lawyer before any funds are wired to the United States. It is extremely difficult for the person preparing the SOF documents to try to tease out what exactly happened after the funds have left the investor’s home country. In addition to the source of funds, the path of Funds needs to be documented. This is done through wire receipts and other bank documents, and it is also very important for the investor’s lawyer to create a roadmap for this before any funds are wired. The entire SOF and wiring process can easily take two or three months for many investors.

4 One exception to this rule is when a collateralized loan is used as the source of funds. If the investor is taking out the loans, the collateral must be personally owned by the investor, while when a third-party takes out a loan to gift to the investor, the underlying collateral need not be personally owned by the giftor. (The fact that someone can get a loan using someone else’s property may be a bit confusing in the U.S. context, but it is quite common in China where, for example, a parent would purchase real estate for a child and then the parent would use that real estate as collateral and become the borrower and the child would only execute the underlying mortgage.)


9 . P r o c E s s & t i M i n g

The timing for this step varies widely depending on how (in)decisive the investor is. Many people ask if there is a website where the public can access EB-5 projects. The short answer is no. This is because EB-5 projects are fundamentally private placement offerings that rely on exemptions to the registration requirement such as Regulation d for domestic offerings and Regulation S for overseas offerings. As such, they are subject to securities regulation that prohibits general solicitation (e.g. websites!). Therefore an investor looking for qualified EB-5 projects will often have to contact a Regional Center directly and request information. investors residing in countries with an emigration infrastructure such as China or Korea will often rely on local migration consulting companies for project information.

Investors today can expect to wait at least 14 months, if not more, before hearing back from the USCIS. The USCIS simply has not been able to keep up with the increase in the I-526 petitions in recent years. (As of December 2015, there are approximately 20,000 I-526 petitions pending and only 58 adjudicators on the EB-5 team in Washington, DC.) This number is an estimate, however, and generally ranges between 12 to 22 months. It used to be that investor petitions in exemplar approved projects enjoyed a shorter wait, but that has changed as discussed below. Also, there was a period during which direct Eb-5 projects also enjoyed a shorter wait time as well, but this is no longer the case.

The time it takes to prepare SOF documents and wire funds to the United States will also differ depending on the investor’s circumstances but generally this step takes 2 to 3 months. In particular, if the investor is from a country with currency regulations such as China, the wiring part alone can take a month (or more). The I-526 is filed after all the documentation is completed AND once all the funds have been wired into the Regional Center’s escrow account.

ChOOSE A pROJECT: vARiES

pREpARiNG SOF/pATh OF FuNdS/wiRE FuNdS/FiLE i-526: AppROxiMATELY 2 MONThS

wAiT FOR uSCiS AppROvAL OF i-526: AppROxiMATELY 14 MONThS

FiLE FOR A GREENCARd: AppROxiMATELY 6 MONThS

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4(4-1)adjustment of status (i-485): If the immigrant investor is already in the United States and in valid status at the time of I-526 approval, he may apply for a greencard without leaving the country. It is at this stage that the investor’s qualified dependent’s application is submitted. A qualified dependent is defined as a spouse and unmarried child under the age of 21. Generally, investors are not interviewed for adjustments in an EB-5 case. Your greencard is mailed to you and the start date of your permanent residency is the start date of the card.

(4-2) apply for consular Processing (ds-230): If the immigrant investor is not already in the united States on a valid visa, upon approval of the i-526, the investor must process his

Previously most EB-5 investments were held in escrow accounts pending the approval of the investor’s I-526. These types of arrangements were called “traditional” Eb-5 escrows. however, once the i-526 petition approvals started taking over one year, releasing funds upon filing of the i-526 and not the approval became more commonplace. Such “early release” escrows are often backed up by a guarantee of investment refund if i-526 is denied.


A conditional greencard holder enjoys all the rights, benefits and duties of a permanent greencard holder.

This petition is filed between month 21 and month 24 after the start of the conditional greencard period. For investors who have created a direct Eb-5 investment, this is when you show the USCIS that you have in fact created 10+ full-time, U.S. jobs by submitting payroll and tax records. Regional Centers, on the other hand, must provide each individual investor who has filed an I-526 petition and invested in a project, all the records that prove to the uSCiS that the projections in terms of expenditure and revenues made in the Eb-5 Economic Report filed with the I-526 petition have been met. The I-829 petition stays pending for approximately a year during which the conditional residency period is extended.

greencard through the National visa Center (NvC) and then go through an interview process at the u.S. Consulate near his home. because documents are submitted to the NvC then sent to the foreign post and then reviewed again there before an interview is scheduled, this process can be longer than you expect. Once you go through the interview and are approved, you will get a visa stamp on your passport with an approval date. The investor and his family must enter the United States as permanent residents within 180 days of this approval date. The date the investor and his family enters the United States is the beginning of the conditional greencard. (The card is mailed to you after you enter.)

RECEivE CONdiTiONAL pERMANENT RESidENT STATuS vALid FOR 2 YEARS

FiLE i-829 REMOvAL OF CONdiTiONS: AppROxiMATELY 12 MONThS

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1 0 . E x E M P l a r P r o j E c t s : a K a t h E P r E - a P P r o v E d E b - 5 P r o j E c t

Exemplar EB-5 projects are also known as “pre-approved” projects. As discussed above, when an investor makes the decision to invest in a Regional Center EB-5 project, she files an i-526 petition. if the Regional Center project is raising $20 million dollars in a TEA, 40 investors will each file their own I-526 petition. The i-526 petition consists of two parts: one involving specific project information and the other pertaining to the individual investor’s source of funds (SOF). This means that the 40 petitions filed in our example above all have identical project information. As nobody really knows the inner workings of the USCIS, we can’t be sure, but today it seems like the same adjudicator (or team of adjudicators) review a single project. A few years ago, however, when the EB-5 program started growing at a very rapid rate, it wasn’t unusual for two investors investing in the same project to receive different RFEs (Request of Evidence) asking for different things on the identical project information. To alleviate this confusion, the AILA (American Immigration Lawyers Association) EB-5 Committee started to push for an “exemplar” procedure in 2008.

An “exemplar I-526” is filed by the Regional Center on Form I-924 which is the same form that is used to file an initial Regional Center application. In short, you are filing a “sample I-526” petition where the investor’s SOF information is left out, but all the project information would be put in as if the project were going ahead tomorrow. Once the uSCiS approves the exemplar petition, the project is deemed “pre-approved” by the USCIS.

Sounds pretty straightforward, doesn’t it? But if you’ve spent a bit of time in the EB-5 world, you should know by now that nothing is simple when it comes to EB-5.

When the exemplar process was first introduced, the USCIS would approve a project within 2 to 3 months. And there was the tacit understanding was that the USCIS would only look at investor SOF and not review the project information for an exemplar approved project. While they first honored this, after a year or so, maddeningly they didn’t keep their promise to not review the project portion of the i-526s. So Regional Centers who got their exemplar designation approved, would go out to market and tout that their project was “pre-approved”. Then individual investors would sometimes still get RFEs for the project information.

Then in 2012-2013 we did see some projects with exemplar approved status get a more expedited review. but after the Eb-5 team moved from California to washington dC in 2014, it seems like the exemplars approved by the California Service Center are being ignored by the Washington DC IPO (Immigrant Investor Program Office) team. Or it might be because the USCIS is now fully implementing a stricter FIFO processing of all petitions so even if an investor invests in an exemplar approved project, there are no time advantages of cutting the line. Nobody is really sure.

However, for all practical intents and purposes, you will not see many exemplar approved projects (also called “I-924 approved” projects) out on the market today. This is because it takes approximately 1 year (often longer) for an I-924 exemplar application to be approved. This means in order for a deal to be structured so that a Regional Center can market an “Exemplar Approved Project”, the Regional Center and Project Developer would have to get a project ready to go (i.e. all the permits, other financing, etc.), file for the I-924 application and then wait around for the I-924 application to be approved – which realistically is not going to happen as time = money in a real estate project.

Therefore, projects that have exemplar I-924 approval on the market today will usually fall into either one of the following categories:

1) Very large projects where the Regional Centers file for exemplar approval at the same time as they start marketing and because of its sheer size, there were still slots left for the investors to fill after the exemplar was approved.


Then, what is the value of an exemplar approved project? Exemplar approved projects used to have two benefits. The first is that it gives the investors comfort that the USCIS has agreed that the structure of the project has been approved by the USCIS to be EB-5 compliant. That means that the investor can expect to receive an i-526 approval as long as his Source of Funds have no issues. The second is that investors that invested into exemplar approved projects would enjoy a quicker approval of the I-526 petition as the USCIS used to have different lines for each project. So if you got in line for an exemplar approved projects, the line would be shorter.

As of January 2016, the first benefit still stands while the second benefit has gone away. Sometime in 2014, the USCIS casually mentioned on one of its Quarterly EB-5 Stakeholder Calls that they were going to implement a First-In-First-Out processing of I-526 petitions. The industry didn’t think much of it at the time of the “announcement” but since 2014, anecdotally (because no one really gathers these statistics) investors who invested into an exemplar approved project have no longer enjoyed any benefit of quicker approval periods.

2) Projects that didn’t sell on the market that well for whatever reason and are still available after 1+ year it took for the exemplar to be approved.

3) A project owned by a developer that has a large pipeline of projects who selects a fully entitled project to submit as part of their original Regional Center application. This is rare but in at least two occasions i have seen a developer just wait and wait until they get the approval before going out to market the project. That said the assumption is that while all this waiting is happening, the project does not change because an exemplar approval might not be honored if the project has changed in a material way during the waiting period because exemplar approvals are only honored when there are no material changes to the original application.


1 1 . c o s t

i n v e s t m e n t P r i n c i p a l

s u b s c r i p t i o n F e e o r a d m i n i s t r a t i v e F e e

i - 5 2 6 u s c i s F i l i n g F e e

i - 4 8 5 a d j u s t m e n t o f s t a t u s F i l i n g F e e (applicable only if, at time of i-526 approval, investor is in the us and in valid visa status)

n a t i o n a l v i s a c e n t e r f e e (applicable only if, investor is not in the us and will obtain visa through consular processing overseas)

t h e $ 5 0 0 , 0 0 0 m i n i m u m i n v e s t m e n t s f o r p r o j e c t s l o c a t e d i n t E a s ( o r $ 1 , 0 0 0 , 0 0 0 m i n i m u m i n v e s t m e n t s f o r n o n - t E a l o c a t i o n s ) i s u n c h a n g e d f r o m t h e e a r l y 1 9 9 0 s w h e n t h e l e g i s l a t i o n w a s f i r s t i n t r o d u c e d . ( r e m e m b e r , t h e i n v e s t m e n t a m o u n t s d i f f e r d e p e n d i n g o n t h e l o c a t i o n o f t h e p r o j e c t ; n o t w h e t h e r i t i s a d i r e c t E b - 5 o r a r e g i o n a l c e n t e r E b - 5 . ) t h i s a m o u n t c o u l d b e i n c r e a s e d i n t h e n o t t o o d i s t a n t f u t u r e a s t h e r e a r e i n d i c a t i o n s o f t h i s h a p p e n i n g i n t h e c o m p r e h e n s i v e i m m i g r a t i o n r e f o r m b i l l ( s ) p e n d i n g i n c o n g r e s s .

t h e s e f u n d s a r e u s e d b y t h e r e g i o n a l c e n t e r s t o c o v e r o v e r h e a d .

b e c a u s e o n l y t h e m a i n i n v e s t o r ’ s i n f o r m a t i o n i s s u b m i t t e d a t t h e t i m e o f t h e i - 5 2 6 f i l i n g , t h i s i s p a i d o n l y o n c e .

i f c h i l d i s u n d e r 1 4 y e a r s o f a g e a n d a p p l y i n g a t t h e s a m e t i m e a s p a r e n t , $ 6 3 5 .

W h at a M o u n t n o t E s

$ 5 0 0 , 0 0 0 ( o r

$ 1 , 0 0 0 , 0 0 0 )

$ 4 5 , 0 0 0 -

$ 5 5 , 0 0 0

$ 1 5 0 0

$ 1 0 7 0 p e r p e r s o n

$ 3 4 5 p e r p e r s o n


W h at a M o u n t n o t E s

l e g a l f e e s v a r i e s l e g a l f e e s v a r y w i d e l y d e p e n d i n g o n t h e s c o p e o f s e r v i c e : s o m e l a w f i r m s w i l l p r o v i d e a q u o t e f o r i - 5 2 6 f i l i n g o n l y w h i l e s o m e i n c l u d e t h e w h o l e p r o c e s s u p t o t h e i - 8 2 9 f i l i n g . s o m e w i l l q u o t e f o r t h e i - 5 2 6 w i t h a s e p a r a t e f e e t o b e p a i d d i r e c t l y t o a l o c a l a c c o u n t i n g f i r m f o r t h e s o u r c e o f f u n d s w o r k . l e g a l f e e s f o r d i r e c t E b - 5 s a r e u s u a l l y h i g h e r t h a n t h a t o f r c E b - 5 s b e c a u s e t h e y i n c l u d e t h e c o s t o f p r o v i d i n g a d v i c e r e : s e t t i n g u p t h e b u s i n e s s .


1 2 . r E t u r n o F c a P i ta l

As discussed above, most EB-5 investments today are structured as loan products or preferred equity products that are made to mimic loans as closely as possible. For Loan Model products, the maturity dates, on average, is about 5 years. (But if you look closely, it is not uncommon to find that recently many investments give the borrower the option to extend the term for two one-year terms, making the total loan period 7 years.)

So generally, investors can expect to get a return of their capital in approximately 5 years.5

however, this assumes that the Eb-5 investor has received an approval of the i-829 petition made to remove conditions on the conditional greencard. Unfortunately, with the backlog of EB-5 visas for people born in China, most Chinese investors will almost certainly not get their conditions removed within 5 year of investment.

Current EB-5 rules state that an EB-5 investment must be at-risk and sustained until the I-829 petition is made. The visa backlog coupled with the fact that the majority of investors are from China, this has thrown a huge wrinkle in the process of returning capital and more importantly, what Regional Centers should do with the funds that are repaid after 5 years if the investors’ i-829s have not all been approved.

Recognizing this, the USCIS released a draft policy guidance in August of 2015 titled Guidance on the Job Creation Requirement and Sustainment of the investment for Eb-5 Adjudication of Form I-526 and Form I-829 which can be found here http://tinyurl.com/draft12345. This is a very technical but important issue for EB-5 that is outside of the scope of this booklet.6 but for our purposes, it is important to remember that investors cannot get their money back until their i-829 petitions have been adjudicated.

5However, the start date of the 5 year period EB-5 Loan depending on the project could be as long as one year after the funds are invested even without a traditional escrow because it is not uncommon for the Eb-5 Loan start date to be the date the last investor invests or one year after the offering is launched, whichever comes earlier. 6 Please read my analysis on the topic here: http://www.aaeb5.com/eb-5-investment-sustainment-requirement/


1 3 . h o W W i l l t h E r u l E s c h a n g E i n t h E F u t u r E ?

After much hand wringing and negotiations surrounding the draft language of a new bill that proposed to change the EB-5 program as we know it today, the US Congress came to an agreement to temporarily extend the program unchanged until September 30, 2016.

Due to the explosive speed at which the program has grown during the past 7 years, there are definitely elements of the current rules that do not scale easily to accommodate the larger projects on the market today. In addition, the proliferation of Regional Centers in recent years has increased the need for government oversight of the Eb-5 program.

Reflecting this reality, efforts to reform the EB-5 program in 2015 fall into two broad categories: (1) Technical Rules addressing such topics as the TEA, minimum investment and visa quota allocations and (2) so-called Integrity Measures that are aimed at strengthening the government’s oversight capabilities of the program to prevent fraud and protect investors.

The five bills that were floated in Congress in 2015 attempted to address all of these issues in one fell swoop. However, the EB-5 program is a complicated program that has many interrelated moving pieces.

So moving one piece inevitably affects other pieces. In addition there are different interests among the players in the EB-5 community. The bill that was negotiated up to the last minute on December 15, 2015, attempted to cram through too many changes with too little discussion and failed because it was difficult to reconcile all the technical issues but also because it didn’t receive the support of the EB-5 community as a whole.

however, despite the disagreement over the Technical Rules, there was never much disagreement over need for Integrity Measures. Reflecting this, a new bill was introduced in the Senate in December 2015 by Senator Flake of Arizona. Listed as the EB-5 Integrity Act of 2015, or S. 2415, the bill was introduced by Senator Flake on Dec. 17 (two days after the more comprehensive bill) and co-sponsored by Sens. John Cornyn, R-Texas, and Charles Schumer, d-N.Y. it contains several provisions aimed at increasing regional center transparency and integrity, and some of its proposals are similar to ideas contained in the Eb-5 legislation that failed to pass.

Most of the provisions of the bill are obviously aimed at regional centers (such as a $25,000 annual fee for all RCs), but in this article i want to point out some provisions of the bill that would impact the Chinese marketplace and investors.

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EB-5 capital may not be used to purchase municipal bonds or any other bonds if such bonds are available to the general public

An exemplar petition must be filed by the Regional Center before any investor can file their I-526. (Currently, it is considered best practice to do so, but it is not a rule that an exemplar must be filed. But unchanged from the current rules, the Exemplar Petition doesn’t have to be approved for the investor to file.)

A person must be a U.S. citizen or permanent resident to be “involved with” a Regional Center. Being “involved in” a Regional Center is generally defined as having an ownership interest or being in a position of substantive authority to make operational or managerial decision.

A foreign government entity may not provide capital to, or be directly or indirectly involved with the ownership or administration of a Regional Center. (This is actually a looser restriction compare to the bill that almost passed in december 2015 which said that a foreign government entity may not be involved in not just the Regional


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Center but also the NCE or JCE – which basically eliminated involvement of all U.S. affiliates of Chinese SOE from being involved in EB-5 in any way.)

Investors will be required to pay an additional $1000 in addition to the $1500 filing fee. (This number was $12,000 in the bill that didn’t pass.)

Migration agencies will have to register with the uSCiS and disclose fee arrangements to the USCIS. The list of registered agencies may be made publicly available by the uSCiS

Each investor’s I-526 petition must include a disclosure document signed by the investor which discloses all fees and compensation paid by the Regional Center or the NCE in connection with that investor’s investment

investors must provide source of funds for administrative fees in addition to the $500,000 investment. (The rather controversial new SOF rules of the bill that didn’t pass didn’t make it into the Integrity Bill. Ex. Only direct family members can gift; Only chartered banks or financial institutions can make EB-5 loans.)

Investors must disclose any monetary judgments against them as well as any pending governmental civil or criminal actions, governmental administrative proceedings, and any private civil actions involving possible monetary judgment against the investor in any court in or outside the U.S.

The Integrity Bill provides procedures to save investors whose I-526 has been approved if the RC is terminated. This is great news for people who are inadvertently caught up in RC termination cases through no fault of their own. Basically if the investor already has an approved I-526 or already is a conditional resident and the RC that sponsors their investment is terminated, the investors will have 6 months to reinvest into a new project and not lose their i-526 approval or their conditional resident status. There is also an option for the entire NCE to associate itself with a non-tainted Regional Center which would be very helpful for lease deals.

There is a pretty good chance that this bill will be passed as it doesn’t address any really controversial issues while also allowing Congress to save face in the face of criticism that they failed to pass EB-5 reforms due to lobbying pressure. So it is worth monitoring the movement surrounding this bill and also plan ahead for the possible new rules in the relatively near future.

EB-5 Source of Funds Looking Beyond China: EB-5 Emerging Markets

With the arrival of retrogression in EB-5 immigrant visa numbers for China last year, and the more recent woes of the Chinese economy and stock market crash this past summer, EB-5 actors have started looking outside China to other markets that promise the next generation of EB-5 Investors. While Chinese Investors still dominate the EB-5 world stage, smaller players are poised to consume a larger chunk of the EB-5 investment pool. In light of this, it would be wise to look beyond the current horizon and acclimate to other emerging EB-5 markets that can fill the void, should interest in the EB-5 program level off in China. In this regard, there are several interesting parts of the world to watch, including Iran, Nigeria and Russia, as well as parts of Asia, such as South Korea, Vietnam and Taiwan. While it is not possible to address all of these jurisdictions in detail, this article will highlight some common source of funds issues, touching on several “hot” or soon-to-be hot markets, including Vietnam, India, Turkey, Brazil and Venezuela.

Top EB-5 Visa Investor Countries1

Fiscal Year 2014

1 U.S. Department of State. Report of the Visa Office 2014. Table VI (Part IV) Preference Visas Issued Fiscal Year 2014. Retrieved from http://travel.state.gov/content/dam/visas/Statistics/AnnualReports/FY2014AnnualReport/FY14AnnualReport-TableVI-PartIV.pdf.

As part of the I-526 immigrant visa petition process, investors must provide substantial documentation to demonstrate the lawful source and path of their investment funds. Generally, the U.S. Citizenship and Immigration Services (“USCIS”) requires investors to submit bank statements, tax returns, and documents evidencing ownership of assets that serve as the basis for the investment.2 In emerging EB-5 markets such as Vietnam, India, Turkey, and countries in Latin America, the political and economic climates often complicate the source of funds documentation process. In some cases, EB-5 investors are unable or unwilling to produce the requisite documentation. Prepare the Investor for the Rigor of Documenting Source of Funds Early On

As a starting point, it is important to identify and explain the source of funds requirement to the investor up front, and provide detailed examples of the documentary evidence required by USCIS to demonstrate the legality of capital used for investment purposes. Many investors from transitional or emerging markets outside of China are simply not sophisticated about the United States Immigrant Investor program and are unaware of the onerous nature of these requirements. In some cases, investors may be knowledgeable about investor programs in other countries but are unprepared for the high standard of review that accompanies the source of funds analysis for a U.S. EB-5 investment. Therefore, from the inception of the case, the burden is on the attorney to ensure that the investor appreciates the level of detail that is necessary in order to assure full client cooperation and a successful source of funds review at the I-526 adjudication phase.

Lack of Tax Returns and Source of Funds, is it Game Over?

Initially, it is also worth mentioning that regardless of the jurisdiction, the most common

issue that an attorney will encounter is lack of compliance with local tax filing requirements, either because the investor claims an exemption or simply underreports their income. While the lack of income tax returns does not mean per se that the investor will be unable to meet their source of funds burden, it is a heavy factor weighed against them by USCIS in determining the credibility of their case, and must be addressed comprehensively in their petition. In the first instance, an investor who claims an exemption from income tax filing should be asked to obtain a letter from the local tax filing authority that confirms that this is the case. Since this is often difficult to obtain, (even a U.S. domiciled person may have a hard time obtaining this kind of document from the Internal Revenue Service) then it is recommended that the investor submit to an individualized examination of their income and tax filing status by an international auditor or accounting firm, ideally one with a branch office located in that country. In addition to submitting relevant documentation, the attorney should provide a copy of the local tax code that indicates that the exemption exists, along with a certified translation, and prepare additional corroborating documentation to show that the investor himself or herself fits squarely within the exemption requirements. Finally, it is imperative to review the tax return (or the certified translation) and understand the relationship between the declared income and the investor’s overall statement of wealth. If there is a marked contrast between the two, a RFE seeking clarification may follow. By the same token, if the tax returns are particularly voluminous or difficult to understand, it is likely that a USCIS will have similar challenges and issue a RFE for additional clarification or evidence. The bottom line is if you do not understand what you are 2 8 CFR § 204.6 (j) (3) (2013)

reading, neither will the next person reviewing the documentation, so it may be necessary to request a summary of the investors income and tax return history from an accountant or tax professional to include with the filing.

In India, underreporting of income by citizens is common. From a source of funds

perspective, this can be particularly problematic for expatriate Indian investors residing in countries with limited tax enforcement mechanisms (e.g., the Persian Gulf Emirates). Notwithstanding the complexity of the Indian tax code, most Indian citizens are obliged to file income tax returns, although the penalties for late filing are minimal and enforcement against the individual tax dodger virtually non-existent. Therefore, lack of income tax filings for Indian citizens may be a red flag for a USCIS adjudicator. Nonetheless, India remains fertile ground for EB-5 investors and currently ranks seventh among investor markets across the world.3 Moreover, according to a 2012 report released by Credit Suisse Research Institute, India is projected to have nearly 250,000 millionaires by 2017. Given the sheer number of high net worth Indian nationals and the considerable backlogs in priority date availability for other employment based visa categories, the EB-5 visa option will continue to be an attractive alternative for Indian investors seeking residency in the U.S.

Both Brazil and Turkey have enjoyed impressive economic growth in the last 15 years, with Turkey’s economy quadrupling in size since 2002, and Brazil becoming a regional powerhouse in banking and finance. The net result is more wealth and opportunities for those investors interested in utilizing the Eb-5 program. From a source of funds perspective, Brazilian investors are more likely to be able to provide detailed tax returns as they are required to list all their assets and corresponding value annually, in addition to income. Tax compliance in Brazil is generally more common than India, Vietnam and other emerging markets. An interesting footnote here is that dividend payments are generally considered nontaxable in Brazil, creating a situation where tax returns may reflect relatively low salaries but high dividend payments. In Venezuela, individuals must pay taxes on all earned income. However, certain sources of income such as savings plans, retirement plans, and loans (even from an employer to an employee) may be exempt from taxation depending on the nature of the loan. In addition, a distrust of the Chavez government’s socialist policies prompted many wealthy Venezuelan families to move money off shore during the last two decades for safe-keeping, often to accounts in Caribbean Island nations or to the U.S., sometimes making both tracing the path of funds as well as sourcing them, a difficult task. Currency Restrictions and Source of Funds

Vietnam has emerged as one of the fastest growing EB-5 markets over the past seven years. Notably, Vietnam was among the four largest investor markets utilizing the EB-5 program in FY2014, not including Mainland China.4 Typically, Vietnamese investors frequently use earned income or the sale of an asset as the basis for their EB-5 investment. The sale of long held family assets, such as real estate, may require the investor to document the atmospheric rise in real estate prices in the places like Ho Chi Mihn city since the 1960s, accounting for huge profits

3 U.S. State Department Report of the Visa Office 2014, Table V (Part 3). 4 IIUSA “EB-5 Data of the Year Presents an Unprecedented Growth of the EB-5 Regional Center Program in FY2014” Vol. 2, Issue 4, December 2014, Pgs. 40-46.

in the sale of certain properties. In documenting the lawful source of these funds as well as the path these funds take in reaching the U.S., attorneys frequently encounter issues relating to Vietnam’s restrictions on transferring currency abroad, and the lack of or incomplete tax filings and bank records. Vietnamese law regulates the export of currency abroad, and while the amount has fluctuated over the years, these restrictions can make it difficult for investors residing in Vietnam to transfer funds to the United States for a qualifying investment. Similar to EB-5 investors from China, EB-5 investors from Vietnam frequently use a 3rd party, such as a credit institution, to transfer money to the United States, or may rely on family and friends to transfer money out of the country. As such, Vietnamese investors will often need to take an extra step in documenting their source of funds by including not only evidence of the transfer to the credit institution, but also include a letter from the credit institution or bank verifying the deposits or transfers from the investor in Vietnam. Vietnam’s modern private banking industry has only been around since the 1990s, and today State owned banks still dominate the market. Many wealthy Vietnamese individuals also maintain accounts in Singapore and other neighboring countries, which generally make it easier for the investor to trace the path of funds for these monies, although documenting the lawful source of funds is still a necessity.

Investors from other emerging markets face similar challenges with currency restrictions.

India, for example, continues to regulate their outflow of the Rupee in an attempt to bolster the strength of the national currency. While the restrictions are not as stringent as they once were, this remains an issue for Indian EB-5 investments, as some investors are forced to provide documentation for various transfers, to different accounts and through different intermediaries, to compile a complete picture of their investment. Similarly, EB-5 investors from certain Latin American countries can face restrictions in transferring funds to the United States. For example, in order to stabilize its faltering economy, the Venezuelan government imposed strict restrictions on the amount that an investor can transfer outside of the country, leaving citizens with few options outside of the Black Market, to convert the local currency (bolivares) into U.S. dollars. Recently, in February 2015, in an attempt to counter the black market currency exchange, Venezuela opened a government sanctioned currency market, known as the Marginal Currency System (commonly referred to as Simadi, in Spanish), allowing individuals to buy and sell U.S. dollars privately for the first time in over a decade. It should be noted that that notwithstanding this positive development in loosening its foreign currency controls, most Venezuelan investors ultimately utilize long established foreign dollar bank accounts as the source of their EB-5 investment. By contrast, Brazil has a relatively open banking and financial system, and moving money out of Brazil is easier than other Latin American countries. Likewise, Turkey has a relatively open economy and sophisticated international banking system with few limitations on monetary transfers abroad.

In sum, developing and transitional economies offer abundant opportunities to hedge bets

against the potential for waning interest in the EB-5 program in China, and should be explored further. In doing so, understand that these newer EB-5 markets often present unique issues with regard to documenting source of funds and tracing the path of investment monies into the U.S.

1

The Regulation S Exemption:

Maintaining Compliance with the “Offshore Exemption” in EB-5 Transactions

By Clem Turner1

I. Introduction

Section 5 of the Securities Act requires that all securities offered or sold by means of interstate

commerce be registered, unless an exemption from registration is available. The registration

process is commonly referred to as “going public” and it is time consuming and very expensive.

In addition, numerous ongoing reporting requirements are imposed on “public” companies after

the registration process. The general purpose behind Section 5 is to ensure adequate disclosure

before a security is offered to the public so that the public may make informed investment

decisions.

Fortunately for issuers of securities, various exemptions to this registration requirement have

evolved over the years. The most common exemptions utilized by Regional Centers2 conducting

securities offerings in connection with the EB-5 Program3 are (1) non-public (i.e., private)

offerings of securities, governed by Regulation D,4 enacted in 19825 and (2) offshore offerings of

securities governed by Regulation S,6 enacted in 1990.7 Failure to comply with Regulation D,

1 Clem Turner, Esq. is a shareholder and the Managing Attorney of the New York Office of Homeier Law PC. Clem

practices in the area of general corporate, corporate finance and business transactional law. With nearly 20 years’

experience in the corporate and securities transactional fields, Clem brings a deep level of legal knowledge and

expertise to the EB-5 industry. Clem has counseled numerous corporations and regional centers raising capital

through the EB-5 Program on matters of structuring, strategy, securities law and corporate law. As of September

2016, Homeier Law PC. has provided counsel on hundreds of EB-5 transactions, with an aggregate deal value over

$3 billion. Clem has published numerous articles and routinely speaks at EB-5 events throughout the country.

Clem received his B.A. from Princeton University and his J.D. from Georgetown University Law Center. He is a

member of the New York State Bar and California State Bar.

2 For the sake of convenience, this article refers to the regional center as well as the issuer of securities (such as a

limited partnership or limited liability company) formed by the regional center for the purpose of aggregating EB-5

investor funds as the “Regional Center.”

3 See Generally, Section 203(b)(5) of the Immigration and Nationality Act, as amended, the Departments of

Commerce, Justice and State, the Judiciary, and Related Agencies Appropriations Act of 1993, Pub. L. No. 102-395,

section 610, as amended, and all applicable regulations promulgated thereunder.

4 Securities Act Rules 501 through 508, also at 17 CFR §230.501 et seq.

5 See Securities Act Release No. 6389.

6 Securities Act Rules 901 through 905, also at 17 CFR §230.901 et seq.

7 See Securities Act Release No. 6893.

2

Regulation S, or the onerous disclosures and other obligations required by registration may

subject the Regional Center to penalties and fines by the Securities and Exchange Commission

(SEC) which can be equal to or greater than the amount raised by the Regional Center in its non-

compliant offering. Furthermore, the Regional Center’s own investors can sue to recover the full

amount of their investment. The Regional Center and its principals may also be banned from

certain securities activities.

This article will focus on Regulation S, also referred to as the “Offshore Exemption.” First, the

article will discuss the Preliminary Notes set forth in Regulation S. Next, the article will

examine the issuer “safe harbor” as set forth in Rule 903 of Regulation S, and the two general

conditions that must be met in order to comply with the Regulation S exemption. Then, the

article will explain the “category” conditions imposed on the various classes of Regulation S

issuers (e.g., foreign, domestic, public, or private) and transactions (e.g., equity or debt). The

additional conditions that Regional Centers must meet to comply with Regulation S will be

addressed. Finally, the article will provide conclusions and analysis with respect to EB-5

offerings.

II. Regulation S – The Preliminary Notes

The Preliminary Notes8 that precede Rule 901 of Regulation S may be overlooked by

practitioners unfamiliar with Regulation S. This would be unfortunate, as the Preliminary Notes

set forth the guiding principles that should be considered when structuring a transaction to

comply with Regulation S. There are eight (8) general assertions set forth in the Preliminary

Notes which are:

1. Regulation S relates solely to the application of Section 5 of the Securities Act of

1933 (the registration requirement) and not to antifraud or other provisions of the

federal securities laws.9 In order to meet the antifraud requirements of the securities

laws, Regional Centers must, among other things, provide adequate and accurate

disclosure of all material facts.10 Generally speaking, a fact is material if there is a

substantial likelihood that a reasonable investor would consider it important in

determining whether to make the described investment.11 Accordingly, a “sham” offering

memorandum that merely restates the facts set forth in the business plan without adequate

disclosure of risks, conflicts, project weaknesses, and other material facts is unlikely to

protect a Regional Center from liability if an SEC or investor action is commenced,

whether such Regional Center complied with Regulation S or otherwise. 8 Securities Act, Regulation S Preliminary Notes 1-8, also at 17 CFR §230.901 et seq.

9 Securities Act, Regulation S Preliminary Note 1, also at 17 CFR §230.901 et seq.

10See generally, SEC Rule 10b-5, codified at 17 C.F.R. 240.10b-5.

11 See generally, TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).

3

2. Regulation S is not available with respect to any transaction or series of transactions

that, although in technical compliance with these rules, is part of a plan or scheme

to evade the registration provisions of the securities laws.12 Regional Centers are

cautioned against “clever” manipulations just to sign up that non-compliant investor or to

conduct non-compliant activities. Executing documents with an offshore agent when the

true investor is a resident of the United States; transporting investors to offshore locations

solely to execute documents; setting up a “phantom” offshore office; and similar “form

over substance” actions may not ultimately preserve compliance with the Regulation S

exemption.

3. Regulation S does not eliminate the need for any issuer or any other person to

comply with the securities registration or broker-dealer registration requirements

of the securities laws.13 Regional Centers seeking investors should either use a

registered broker dealer, a foreign licensed migration agent, or otherwise avoid

conducting any brokerage (i.e., sales) activities within the United States.

4. Regulation S does not eliminate the need to comply with any applicable state “Blue

Sky” laws relating to the offer and sale of securities.14 Regional Centers should check

with qualified securities counsel to determine if blue sky compliance is necessary.

5. Compliance with Regulation S need not be exclusive; a person making an offer or

sale of securities in reliance on Regulation S may also claim the availability of any

applicable exemption from registration requirements, such as Regulation D.15 This

guiding principle encourages Regional Centers and other issuers to take advantage of the

dual protection in employing two exemptions. This allows Regional Centers to have a

“safety net” in the event one of the dual exemptions is inadvertently violated.

6. Regulation S is available only for offers and sales of securities outside the United

States. Securities acquired overseas, whether or not pursuant to Regulation S, may

be resold in the United States only if they are registered under the Act or an

exemption from registration is available.16

7. Regulation S does not preclude access by journalists for publications with a general

circulation in the United States to offshore press conferences, press releases and

meetings with company press spokespersons in which an offshore offering or tender






4

offer is discussed, provided that the information is made available to the foreign and

United States press generally and is not intended to induce purchases of securities

by persons in the United States or tenders of securities by United States holders in

the case of exchange offers.17 This guideline is welcome, as media coverage of EB-5

and Regional Centers is becoming more widespread.

8. Regulation S shall not apply to offers and sales of securities issued by open-end

investment companies or unit investment trusts registered or required to be

registered or closed-end investment companies required to be registered, but not

registered, under the Investment Company Act of 1940.18 Most EB-5 Offerings are

structured similarly to closed-end investment companies. In the same way Regulation S

will not shield a Regional Center from liability under the other provisions of the

Securities Act or the Exchange Act, Regulation S will not shield a Regional Center from

liability for an offering conducted without complying with (or a valid exemption to) the

Investment Company Act of 1940.

Generally speaking, even before the first rule of Regulation S, the Preliminary Notes make it

clear that complying with Regulation S will not be a “magic cloak” shielding a Regional Center

from any and all securities liability in connection with its offering. Regulation S only provides

relief from the registration requirements of the securities laws. All other aspects of the securities

laws must be observed and complied with in order to maintain protection from liability. This

includes the antifraud provisions, broker-dealer registration requirements, state blue sky matters,

and the Investment Company Act, as applicable.

III. The Two General Conditions of Regulation S

Generally speaking, Regulation S requires two conditions to be met by all Regional Centers

conducting a compliant offering.19 An offer or sale of securities shall be deemed to occur

outside the United States, within the meaning of Regulation S, if:

(1) The offer or sale is made in an offshore transaction; and

(2) No directed selling efforts are made in the United States by the issuer, a distributor, any of

their respective affiliates, or any person acting on behalf of any of the foregoing.

Because Regional Center offerings are conducted in reliance on Rule 903 of Regulation S, which

governs offers and sales of securities by issuers, distributors or entities acting on their behalf, this

article will focus on Rule 903. Rule 904 and Rule 905 of Regulation S relate to resales by

investors who have purchased securities in a Regulation S exempt offering. This is not common

in EB-5 offerings (EB-5 investors rarely resell their securities to third parties), so Rules 904 and



19 Securities Act Rule 903(a), also at 17 CFR §230.903(a).

5

905 will not be discussed in this article. Furthermore, the provisions of Regulation S that relate

to corporate and similar business entities will not be discussed, as EB-5 investors must be natural

persons.

What is an “offshore transaction”?

Rule 902 of Regulation S20 provides, in part, that any offer, sale, and resale is part of an

“offshore transaction” if:

no offer is made to a person in the United States; and

either (1) at the time the buy order is originated, the buyer is (or is reasonably believed to

be by the Regional Center) physically outside the United States, or (2) the transaction is,

for purposes of Rule 903, executed on a physical trading floor of an established foreign

securities exchange.

A buyer is generally deemed to be outside the United States if the buyer (as opposed to the

buyer’s agent) is physically located outside the United States. However, notwithstanding the

foregoing, Rule 902 of Regulation S21 states that offers and sales of securities specifically

directed at identifiable groups of U.S. citizens abroad, such as members of the U.S. armed forces

serving overseas, are not considered to be offshore transactions. In addition, according to Rule

90222, offers and sales of securities made to persons excluded from the definition of “U.S.

Person,” even if physically present in the United States, are deemed to be made in offshore

transactions.

Regulation S defines a “U.S. Person” as a natural person residing in the United States.23 This is

the only relevant definition for purposes of EB-5 offerings, as the other definitions relate to

business entities. Accordingly, a person who is a non-resident of the United States could

conceptually receive an offer or consummate a sale of securities while in the United States in

compliance with Regulation S. However, there is little federal securities guidance regarding who

qualifies as a non-resident of the United States. One would expect someone visiting the United

States on a very short term basis would qualify as a non-resident. However, it is currently open

to interpretation, from a securities law perspective, if a person living in the United States on a

student visa, work visa, or other temporary visa would be considered a “resident” of the United

States and thus would be a “U.S. Person” under Regulation S. Although there is some guidance

on the residency question within U.S. tax laws and immigration laws, it is unclear if such

guidance would be applicable in a securities law context. As a result, it is prudent when

conducting a Regulation S Offering to always communicate offers and sales of securities to

investors while they are located outside of the United States.

20 Securities Act Rule 902(h)(1), also at 17 CFR §230.902(h)(1).



23 Securities Act Rule 902(k)(1)(i), also at 17 CFR §230.902(k)(1)(i).

6

What are “directed selling efforts”?

The Rule 903 issuer safe harbor is only available to Regional Centers if they make no directed

selling efforts within the United States or to U.S. persons. “Directed selling efforts” is defined by

Regulation S as “any activity undertaken for the purpose of, or that could be reasonably expected

to result in, conditioning the U.S. market for the relevant securities.”24

Under Regulation S the following activities are deemed to expressly constitute “directed selling

efforts” targeted at U.S. persons:

advertising the offering in publications with a “general circulation” in the United States;

mailing printed materials to U.S. investors;

conducting promotional seminars in the United States;

placing advertisements with radio or television stations that broadcast in the United

States; and

making offers directed at identifiable groups of U.S. citizens in a foreign country, such as

members of the U.S. military.25

In addition, Regulation S26 specifically excludes certain advertisements and activities from the

definition of “directed selling efforts,” including the following:

an advertisement required to be published by U.S. or foreign laws or regulatory or self-

regulatory authorities;

a communication with persons excluded from the definition of U.S. person;

a tombstone advertisement in a publication having less than 20% of its worldwide

circulation in the United States

bona fide visits and tours of real estate facilities in the United States by prospective

investors;

quotations of a foreign broker-dealer distributed by a third party system, subject to certain

conditions;

a notice in accordance with Rule 135 or 135c of the Securities Act that an issuer intends

to make a registered or unregistered offering of its securities;

providing journalists with access to issuer meetings held outside the United States, or

providing written press or press-related materials released outside the United States in

compliance with Rule 135e of the Securities Act;

isolated limited contact within the United States;

routine activities conducted in the United States unrelated to selling efforts, including

normal communications to shareholders; and

24 Securities Act Rule 902(c)(1), also at 17 CFR §230.902(c)(1).

25 Securities Act Rule 902(c)(2), also at 17 CFR §230.902(c)(2); Regulation S Adopting Release, Securities Act

Release No. 6863, Fed. Sec. L. Rep. (CCH) 84,524, at 80,666, 80,668 (Apr. 24. 1990).

26 Securities Act Rule 902(c)(3), also at 17 CFR §230.902(c)(3); Regulation S Adopting Release, Securities Act

Release No. 6863, Fed. Sec. L. Rep. (CCH) 84,524, at 80,666, 80,668 (Apr. 24. 1990).

7

publication and distribution of research reports by a broker or dealer under Rule 138(c) or

139(b) of the Securities Act.

While Regulation S appears to contain mechanisms that allow domestic communication with

EB-5 investors (e.g., site visits are allowed, isolated limited contact is allowed, as well as

communications in the United States with non-U.S. Persons), Regional Centers are cautioned

that they should utilize such allowances sparingly. Should something go wrong with a Regional

Center’s sponsored project, a disgruntled EB-5 investor may claim that his site visit was actually

a ruse that allowed a Regional Center to conduct in person “directed selling efforts.” There is

little useful guidance regarding the meaning of “isolated limited contact” and, as discussed

above, the securities law issues surrounding whether an investor is a “non-U.S. person” have not

been settled. As a result, when site visits are requested by the investor (it would not be prudent

for Regional Centers to offer such visits, due to the complications discussed herein), such

requests should be documented in writing. Furthermore, the itinerary for the Investor should be

exclusively devoted to visiting operations or administration related departments, with no contact

with sales or marketing teams. The itinerary should be documented, and sales and marketing

personnel should be warned to avoid interacting with the touring investor. Finally, in an

abundance of caution, Regional Centers should consider requesting an investor’s signature on an

acknowledgment confirming that (s)he was not exposed to any directed selling efforts while on

the site visit.

In addition, although internet postings are not specifically mentioned on the list of de facto

“directed selling efforts,” in light of the growing ubiquitous nature of the internet since 1990 and

the fact that many people receive all their news from this medium, Regional Centers should

avoid posting any marketing information about the projects that are the subject of their current

offerings. It is certainly possible for the SEC to believe that an internet marketing campaign

touting the benefits of a particular EB-5 offering “could be reasonably expected to result in

conditioning the U.S. market for the Regional Center’s securities.” However, selling efforts can

be initiated from the United States, provided that these efforts are directed or effected abroad.

Websites can be geographically restricted so that access is not possible from within the United

States. If information is made available online generally, it should be password protected and

only made available to potential investors whose “non-U.S. Person” status has been verified by

the Regional Center. A Regional Center’s closed offerings should be generally permissible to

post online, as the sales effort with respect to such offerings has concluded.

IV. The Issuer Category Conditions of Regulation S

In addition to the two general conditions discussed above (only offshore transactions and no U.S.

directed selling efforts) which apply to all issuers, Regulation S27 specifies three (3) categories of

permissible issuer offerings and imposes a sliding scale of additional conditions on the various

offering categories in relation to the likelihood that such securities offered abroad would make

their way back into the United States. The additional conditions are safeguards designed to limit

this flow of securities back into the domestic securities market.

27 Securities Act Rule 903(b), also at 17 CFR §230.903(b).

8

What is a Category 1 transaction?

Category 1 transactions28 include offerings of:

securities by foreign issuers who reasonably believe at the commencement of the offering

that there is no substantial U.S. market interest in certain securities;

securities by either a “foreign issuer” or, in the case of non-convertible debt securities, a

U.S. issuer, in an “overseas directed offering”;

securities backed by the full faith and credit of a foreign government; and

securities by foreign issuers pursuant to an employee benefit plan established under

foreign law.

Since Category 1 securities are deemed by the SEC to be the least likely to flow back into the

U.S., there are no additional precautionary conditions imposed in connection with Category 1

transactions by foreign issuers.


Category 2 transactions29 include offerings of:

equity securities of a reporting foreign issuer;

debt securities of a reporting U.S. or foreign issuer; and

debt securities of a non-reporting foreign issuer.

Category 2 securities are believed by the SEC to be moderately likely to flow back into the U.S.,

and Regulation S places certain precautionary limitations in connection with Category 2

transactions.

The conditions imposed on Category 2 transactions will not be discussed in this article, as they

are generally inapplicable in EB-5 offerings. Regional Centers are usually non-reporting (i.e. not

publicly traded) U.S. issuers, whose offerings fall under Category 3.


Category 3 is the residual safe harbor because it applies to all transactions not eligible for the

Category 1 or Category 2 safe harbors. Category 3 transactions30 include:

debt or equity offerings by non-reporting U.S. issuers;

equity offerings by U.S. reporting issuers; and

equity offerings by non-reporting foreign issuers for which there is a substantial U.S.

market interest.

28 Securities Act Rule 903(b)(1), also at 17 CFR §230.903(b)(1).



9

The risk that these securities will come to rest in the United States is considered to be the highest

by the SEC. Consequently, Category 3 offerings endure the most Regulation S restrictions.

Regional Center offerings will typically fall under Category 3, therefore several sale (and resale)

limitations are imposed on their securities.

What are the Category 3 Sales Conditions?

In general the Offering Memorandum, Subscription/Stock Purchase Agreement, Marketing

Agreement and any certificated interest issued by a Regional Center must contain certain

language acknowledging the restricted nature of its securities.

The Offering Memorandum and any other offering materials and documents (other than press

releases) used in connection with offers and sales of Regional Center securities must include31:

a legend generally stating that the securities have not been registered under the Securities

Act and may not be offered or sold in the United States or to U.S. persons (other than

distributors) unless the securities are registered under the Securities Act, or an exemption

from such registration requirements is available; and

a legend generally stating that hedging transactions involving those securities may not be

conducted unless in compliance with the Securities Act.

These legends must appear on (or inside) the cover page and in the underwriting section of any

offering memorandum used in connection with the EB-5 offering. If the legend is on the front

page of the offering memorandum, it can be summarized. The legends must also be printed in

any advertisement made or issued by the Regional Center, any distributor, and their respective

affiliates or representatives. These legends should also appear on the Regional Center’s website,

to the extent the website makes generic references to ongoing offerings, even if other

documentation related to the ongoing offering is not publicly available.

In addition, the Subscription Agreement (also known as a Stock Purchase Agreement) governing

the purchase of Regional Center securities must contain representations and warranties from the

Purchaser:

certifying that he/she is not a U.S. person and is not acquiring the securities for the

account or benefit of any U.S. person or is a U.S. person who purchased securities in a

transaction that did not require registration under the Securities Act; 32 and

agreeing to resell such securities only in accordance with the provisions of Regulation S,

pursuant to registration under the Securities Act, or pursuant to an available exemption

from registration; and agreeing not to engage in hedging transactions with regard to such

securities unless in compliance with the Securities Act.33

31 Securities Act Rule 903(b)(3)(i), also at 17 CFR §230.903(b)(3)(i).

32 Securities Act Rule 903(b)(3)(iii)(B)(1), also at 17 CFR §230.903(b)(3)(iii)(B)(1).


10

In addition, the Regional Center should also provide representations that it has not used “directed

selling efforts” as defined under Regulation S34 and that it has implemented the necessary

Regulation S “offering restrictions”35 as defined in Rule 90236.

Furthermore, the Marketing Agreements that the Regional Center enters into with foreign

migration brokers must contain a covenant and/or representation from the foreign migration

agent:37

that all offers and sales of the securities shall be made in accordance with the provisions

of Rule 903 or Rule 904 of Regulation S, pursuant to registration requirements or

pursuant to an available exemption from registration; and

not to engage in hedging transactions, in connection with offers and sales of equity

securities of domestic issuers, unless in compliance with the Securities Act

Finally, Regulation S38 requires that any certificates for the securities of a Regional Center

contain a legend to the effect that transfer is prohibited except in accordance with the provisions

of Regulation S, pursuant to registration under the Securities Act, or pursuant to an available

exemption from registration; and that hedging transactions involving those securities may not be

conducted unless in compliance with the Securities Act. A sample Rule 903 legend might read:

“These securities will be offered only outside of the United States to non-U.S. persons,

pursuant to the provisions of Regulation S of the U.S. Securities Act of 1933, as

amended. These securities will not be registered under the Securities Act, and may not be

offered or sold in the United States absent registration or an applicable exemption from

the registration requirements.”

The Regional Center also is required by Regulation S39, either by contract or a provision in its

bylaws, articles, charter or comparable document, to refuse to register any transfer of the

securities not made in accordance with the provisions of Regulation S, pursuant to registration

under the Securities Act, or pursuant to an available exemption from registration.

This article will not discuss the resale limitations placed on Regional Center securities, as the

investors in an EB-5 Offering are purchasing the securities with the hopes of acquiring a green

card. A transfer of Regional Center securities could jeopardize the immigration status of the EB-

5 investor. Furthermore, Regional Center securities typically have very low rates of return, as

compared to the securities market in general and might not be very marketable outside of the EB-

34 Securities Act Rule 903(b)(3)(iii)(B), also at 17 CFR §230.903(b)(3)(iii)(B).


36 Securities Act Rule 902(g), also at 17 CFR §230.902(g).




11

5 securities market. Accordingly, the resale of Regional Center securities to third parties is

reasonably rare.

V. Conclusion

Regional Centers frequently rely on Regulation S, either alone or in conjunction with Regulation

D, to conduct offerings of EB-5 securities that are exempt from the registration requirements of

Section 5. These Regional Center offerors should be advised that Regulation S will not shield

them from any of the remaining obligations imposed by the securities laws, including: antifraud

liability, broker-dealer registration requirements, blue sky laws, the Investment Company Act of

1940, or otherwise. It is a common misconception that compliance with Regulation S allows an

issuer to meet a lesser standard of compliance with respect to the other securities laws. Some

may believe that their disclosure documents can be shorter, less comprehensive and supported by

less due diligence in a Regulation S offering. Furthermore, some issuers may employ tactics that

are designed to conform to the form of Regulation S, but not the spirit and substance of its

Preliminary Notes and Rules. The faulty belief that Regulation S offerings provide a more

relaxed standard with respect to the other securities laws can lead to disaster, in the form of legal

liability that meets or exceeds the total amount of an issuer’s offering.

In addition, the two general directives that serve as the foundation of Regulation S (only offshore

transactions and no U.S. directed selling efforts) make it clear that any U.S. related activity in a

Regulation S offering should be avoided. Although each of the two rules contains language that

provides some latitude in connection with non-U.S. Persons, best practices with regard to

Regulation S dictate only marketing to potential investors outside the United States. Potential

investors may visit the United States (if they insist), however procedures should be implemented

to deter potential challenges to the Regulation S exemption. Written policies, itineraries

(including the names and titles of employees who interacted with an EB-5 investor) and perhaps

a signed Investor Acknowledgment attesting to the lack of direct sales efforts during a U.S. visit,

may be very useful to refute a claim of violation. This course of action is prudent until

additional guidance is handed down by the SEC regarding the meaning of “residency,” “isolated

limited contact” and other key exceptions. Furthermore, a Regional Center should not display

any current offerings on its website, and if marketing or offering material is available online, it

should be password protected. The people given the password should be screened on the basis of

whether or not they are a U.S. Person.

Finally, one of the easiest and most obvious ways to violate compliance with Regulation S is the

failure to include all necessary disclosures, legends, covenants, etc. in Offering Memoranda,

websites, Subscription Agreements, Marketing Agreements, certificates of equity, and corporate

governing documents. Omitting the language required by Regulation S can lead to difficult

violations to cure and defend. Simply put, the obligatory language either is or is not in your

materials. Regional Centers are advised to retain qualified securities counsel when navigating

their securities offerings, to make sure no inadvertent violations occur.

Regulation S can be a powerful ally and shield from Section 5 liability when used correctly and

in the right context. Working with experienced and proficient securities counsel can be essential

to avoiding missteps and properly utilizing Regulation S protections.

ATTORNEY-CLIENT PRIVILEGED AND CONFIDENTIAL

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MEMORANDUM

TO: CLIENTS AND OTHER EB-5 INTERESTED PARTIES

FROM: HOMEIER LAW PC SUBJECT: SEC TELECONFERENCE, APRIL 3, 2013 – STAFF DISCUSSION RE DISCLOSURE OF

BROKER COMPENSATION AND REGISTRATION ISSUES DATE: APRIL 9, 2013

There were important insights to be gleaned from the April 3, 2013 USCIS EB-5 Stakeholder

Teleconference (the “Teleconference”) featuring members of the staff (the “Staff”) of the

Securities and Exchange Commission (the “SEC”) from various of the SEC’s divisions—in

particular during the Question & Answer segment of the Teleconference. We believe it is vital

for all those involved in the EB-5 industry to understand the key issues addressed during the

Teleconference, in particular those appearing to expand the SEC’s view of the level of disclosure

necessary in offering documents regarding the compensation of broker-dealers, as well as the

Staff’s statements regarding broker-dealer registration that have possible implications for EB-5

issuers who engage foreign broker-dealers with offices and/or activities in the U.S. As always,

please review this memo carefully, and please do not hesitate to contact us with any questions

you might have regarding it.

The Staff members prefaced their remarks with the agency’s standard disclaimer that they were

expressing only their individual views and not formal agency guidance. Nevertheless, their

statements represent important insights into the positions the agency will take on regulatory and

enforcement matters. The Staff strongly indicated that EB-5 practitioners should not expect the

Staff to give written guidance on how federal securities laws and regulations specifically apply to

EB-5 offerings. Rather, the Staff considers EB-5 offerings to be just like any other offering on

which its existing general guidance speaks–and with which it expects offerors, broker-dealers

and advisors to comply. When asked how the general rules apply to the specific circumstances

of an EB-5 offering, time and again the Staff members instructed Teleconference participants to

consult with experts in securities law practice to ensure compliance with the law.

Disclosure of Compensation to Brokers or Other Intermediaries

At the Teleconference, the Staff gave the SEC’s most recent confirmation of longstanding advice

by securities practitioners that using compensated intermediaries to bring investors to an EB-5

offering is a material fact requiring adequate disclosure to investors. (For the sake of brevity we

will refer to all compensated intermediaries as “brokers” in this memorandum.) Because during

the Teleconference the Staff reiterated several times that offering documents must clearly

disclose broker compensation, we believe that the extremely broad disclosure that currently

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prevails—along the lines of “some brokers or others may get some fees”—will likely be viewed

as inadequate if it comes under SEC scrutiny or is challenged in litigation.

Information is material if it would be important to a reasonable investor making an investment

decision. Offerors must therefore ask themselves if a reasonable investor would find it important

to know that the person recommending an investment will be paid for successfully encouraging

them to invest, and important to know the magnitude of the fees that person will receive and may

continue to receive. If the answer is yes, omitting this information risks violating anti-fraud

provisions of the federal securities laws.

We know that many foreign brokers in the EB-5 industry staunchly resist including such

disclosures in offering documents; however, it is broadly understood that brokers object because

of concern that prospective investors will decide not to invest if they learn the details of broker

compensation, in particular, due to concerns about conflicts of interest. This motivation is

precisely why the securities laws compel disclosure as material information. Brokers’ interest in

concealing their fees is directly contrary to an issuer’s explicit duty to disclose (as confirmed by

the Staff during the Teleconference). If both positions cannot be concurrently maintained, one or

the other must fall—and given that SEC liability attaches to failure to disclose, we believe it

clear that the offeror’s duty to disclose must prevail.

One thing remains unclear after the Teleconference: the Staff did not say how specific this

disclosure must be; that is, must offerors disclose (1) the name of each broker or other

intermediary and (2) the precise amount of its compensation? We anticipate that ultimately,

once the issue is clearly drawn, this level of disclosure will become the norm because it is the

typical level of disclosure as to brokers and their fees in a domestic private offering context—

from which EB-5 private offerings are in no way (on this ground) distinct. In the absence of

further definitive guidance from the SEC as to what exactly offerors must disclose, we believe

that as a matter of best practices, EB-5 offering documents should provide as much disclosure on

this point as possible, ideally including: identity of all brokers receiving compensation for

placing investments; the terms of arrangements with specific brokers, including the amount or

extent of fees agreed upon, the timing of when payments will be made, and the nature and extent

of any annual or ongoing commissions to be paid in addition to up-front fees during the life of

the investment; the fact that up to the full amount of the administrative fee may be paid to

brokers; the impact of such fees on the projected economic performance of the project (including

factoring such fees into pro forma financial information); and the inclusion of additional risk

factors relevant to broker compensation (including, without limitation, effect on conflict of

interest).

As an interim step toward the level of significantly increased disclosure that we expect will

eventually become the standard in the EB-5 industry, we believe that offering documents should

at least disclose the range of fees that will be paid to brokers out of the administrative fee

(however, too broad a range likely dilutes the efficacy, and hence any protective effect, of the

disclosure); the dollar amount, or a narrow range of amounts, of continuing commissions or fees

that will be paid to any brokers; the fact that a part, up to the full amount, of the administrative

fee may be paid to brokers as up-front fees, and the timing (and effect) thereof; the impact of

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factoring such fees into economic projections; and the inclusion of additional relevant risk

factors, in a fashion that in good faith gives a reader a significantly more complete idea about the

compensation received by intermediaries who market to the investor and the circumstances

surrounding such compensation. Clients have consistently been advised to include at least

general disclosure language concerning broker compensation in the offering documents, but the

Teleconference has convinced us that the SEC would view this disclosure as inadequate, and that

as SEC scrutiny of EB-5 offerings increases, so will liability for offerors. Hence, we will likely

need to discuss with all clients the details of their specific agreements with brokers, so as to

make sure that this information is as fully and accurately disclosed in the offering documents as

possible.

Please keep in mind that as the SEC continues to investigate practices of the EB-5 industry and

commences various enforcement actions, we believe that such SEC actions will ultimately shift

the EB-5 industry’s standard for disclosure of broker compensation to the one articulated above:

the same type of explicit disclosure of broker identity and precise amount and timing of

compensation as is standard in domestic private offerings. To avoid the headache of

investigation, let alone of defending an SEC enforcement action, we advise clients to “get out in

front” of this tide, and immediately move their level of disclosure as close to the likely final

standard as possible.

Broker Registration

Additionally, during the Teleconference the Staff provided more insight into its standards for

what it considers broker-dealer activity within the EB-5 space that falls under the regulation of

the federal securities laws. Broker-dealers are primarily regulated under the Securities Exchange

Act of 1934 (the “Exchange Act”), and the securities laws of many states, which are commonly

referred to as “blue sky laws.” Broadly, the Exchange Act makes it unlawful for a U.S. issuer

(such as an EB-5 fund-raising limited partnership) to pay any unregistered broker (whether U.S.,

or foreign) a transaction-based fee for any activities relating to the offer, solicitation, or sale of

securities that the broker has conducted within the U.S.

As a general matter, the Exchange Act’s provisions probably do not apply “extra-territorially” to

the activities of foreign brokers who conduct all of their activities outside of the U.S. (such as the

typical Chinese or other foreign migration agent involved in sourcing investors in an EB-5

transaction). However, during the Teleconference, the Staff reiterated four separate times that if

a foreign broker conducts within the U.S. any activities relating to the offer or sale of securities,

that foreign entity would likely become subject to the broker registration regulations of the U.S.

securities laws and blue sky laws and would likely be deemed to be an unregistered broker acting

unlawfully under the Exchange Act (since to our knowledge no foreign broker is currently

registered in the U.S.). While unwilling to answer inquiries regarding a current or proposed

offering and hesitant to express a clear stance on exactly what activities or presence constitutes

“brokering” in the U.S., the Staff confirmed that it can take a very expansive view of the

activities that it deems to be included in “brokering,” stating that holding meetings or

conferences in the U.S. with potential American offerors (even in connection with offerings

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whose intended investors are not U.S. residents), or even by merely having a physical office

within the U.S., could in the Staff’s view, depending on the totality of the circumstances, suffice

to “raise registration issues.”

Accordingly, EB-5 migration agents from any foreign country who maintain offices in the U.S.

(some of them, several) and conduct activities marketing to, securing engagement by, and then

working on offering preparations with American EB-5 issuers are likely brokering in the U.S. by

virtue of “merely” these activities—even if formal marketing, solicitation, and sales to actual

investors are conducted exclusively overseas. We conclude further that this would likely include

those foreign migration agents who, even if they do not maintain formal offices in the U.S., visit

frequently, regularly appear at seminars, and actively negotiate agency agreements across the

U.S.

Keep in mind that the unlawful brokering activities of unregistered foreign migration agents are

not only a violation of law by those agents, but can be ascribed to the companies who knowingly

retain them. For example, in March 2013 the SEC announced settlement of an enforcement

action against an investment advisory company that “aided and abetted” an unregistered broker.

The SEC found that the company had caused the violation by ignoring “red flags” concerning

the broker’s activities, resulting in significant penalties. Therefore, utilizing the services of

unregistered brokers remains an extremely risky activity—if caught, the consequences to an

offeror could be catastrophic.

Lastly on this registration point, during the Teleconference, two statements by the Staff raised

the troubling possibility that the SEC may seek to impose broker registration obligations on a

U.S.-situated individual who conducts broker activities entirely overseas, to investors outside the

U.S. for an issuer also located outside the country—and thereby subject the agent (and

potentially, derivatively, its principal) to the consequences of a failure to meet the federal

regulation merely by virtue of being a resident of the U.S. If the SEC extends its reach in this

manner, the Staff did not clearly indicate whether the fact of residency in the U.S. means

conclusively (in the agency’s view) that an individual is conducting broker activities in the U.S.,

or whether the fact of residency in the U.S merely establishes a presumption of broker-dealer

activities in the U.S., which that individual would have the opportunity to rebut. Regardless, for

our purposes, the Staff’s statements might indicate an increased risk of SEC action against

individuals resident in the U.S. who conduct brokering activities exclusively overseas merely by

virtue of their residency.

Conclusion

With the SEC’s growing involvement in EB-5, we strongly advise all clients to take extra

precautions to conduct their offerings in such a manner that is acceptable to the SEC—or, at least

not waving a red flag to attract unwanted attention. Were the SEC to take action against any

issuer or individual, it might be possible for such a company or individual to argue successfully

to a judge or jury at the conclusion of lengthy and expensive litigation that certain SEC rules do

not apply or should not be enforced in that specific situation. However, even if that end result

would be favorable, the considerable costs and time involved in defending against an SEC action

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would very likely still result in devastating effects to a company or project—both in the near, and

long, term.

Therefore, until greater clarity is achieved over time, we believe that the most advisable course at

present is to avoid any potential SEC enforcement action (let alone investigation) as much as

possible by conducting offerings in as conservative a manner as possible. This means maximum

practicable disclosure of broker compensation, coupled with using only registered brokers or

migration brokers/agents with no substantive activities (or even presence) in the U.S.

The Staff made it clear that they believe existing agency guidance is sufficient for EB-5 offerors,

working with expert advisors, to learn to comply with federal securities laws and regulations.

Industry participants should expect that if further guidance comes, it will come in the form of

enforcement actions.

The contents of this presentation are for educational purposes only (i.e., not legal advice).

Securities & EB-5: Recent SEC Enforcement Actions

Copyright © 2016 Homeier Law. All Rights Reserved

Homeier Law PC – About Us

Collective 50 years Corporate and Securities Experience

Completed Hundreds of Real Estate Finance Deals since 2009 (Primarily via the EB-5 Program)

Clients have raised Billions of U.S. Dollars in Real Estate Capital Raises in numerous industries, including (but not limited to):

Hospitality (Hotels and Casinos)

Restaurants/Franchises

Medical Facilities/Assisted Living Facilities

Energy /Manufacturing

Charter Schools

Athletic Facilities

Several Firm Members voted a “Top 25 EB-5 Attorney” in a nationwide poll of EB-5 Service Providers in 2014 and 2015

Big Firm Experience:Partners prior firms include: Skadden, Arps; Paul, Hastings; Sherman & Sterling; etc.


Clem Turner – About Me

Managing Attorney of the New York Office of Homeier & Law, PC.

Princeton University, BA; Georgetown University Law Center, JD

Over 20 years experience in corporate and securities lawyering

Several published articles related to EB-5, including two published by the American Immigration Lawyer’s Association (AILA):

Guidebook for Immigration Investors & Entrepreneurs; and

“Voice” magazine

Several interviews with media outlets, including New York Public Radio

Lectured in over 40 hours of MCLE Credit Courses

One of eight Corporate and Securities lawyers named a “Top 25 EB-5 Attorney” by a nationwide poll of EB-5 service providers.

Admitted to the New York State Bar and California State Bar.


OCIE – Examinations Priorities for 2016

Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (“SEC”)

In furtherance of the importance being given to SEC matters in the EB-5 space, SEC announces that the SEC Office of Compliance Inspections and Examinations: “will review private placements, including offerings involving Regulation D of the Securities Act of 1933 or the Immigrant Investor Program (“EB-5 Program”) to evaluate whether legal requirements are being met in the areas of due diligence, disclosure, and suitability.”


Regional Center Case Studies

Date Case Type of Action2/16/13 SEC v A Chicago Convention Center,

et al

Civil enforcement case

9/30/13 SEC v Ramirez et al (USA Now) Civil enforcement case

8/27/14 United States v Sethi Criminal case (felony) (derived from

Chicago)9/3/14 SEC v Justin Lee, et al Civil enforcement case

6/23/15 Matter of Ireeco, & co SEC administrative proceeding

7/6/15 SEC v Luca, & co Civil enforcement case7/6/15 Matter of Wisteria Global SEC administrative proceeding (related

to Luca)8/24/15 SEC v. Path America Civil enforcement case


SEC v A Chicago Convention Center, et al


SEC v Ramirez et al (USA Now)


United States v Sethi


SEC v Justin Lee, et al


Matter of Ireeco & Company Release # 75268, June 23, 2015(SEC Administrative Action)


Matter of Ireeco & Company

Florida LLC wholly owned by Hong Kong entity with an “administrative office” in Greenville, South Carolina (red flag – need for administrative office of offshore entity already with US presence)

Used a freely accessible website in USA to reportedly service “over 3,300 immigrants from 34 countries” in their selection of EB-5 investments (red flag – USA was one of those countries)

Ireeco would evaluate clients for suitability and investment preferences; also performed due diligence on deals from its “referral partners” (red flag – no deals from others evaluated)

Ireeco would earn portion of administrative fee upon I-526 approval (red flag – fees apparently not payable otherwise)

Release # 75268, June 23, 2015(SEC Administrative Action)



Section 15(a)(1) of 1934 Act – very broad and note the disjunctive in the context of the facts:

“effecting” transactions – Ireeco did this through providing names of its screened investors to its “referral partners”- OR

“inducing” transactions – Ireeco did this through its service of clients and direction of investors to others - OR

“attempting to induce” (the website) AND

“without registration as b/d” OR “associating with a b/d” – Ireeco and its principals did neither. One of them had to be registered to avoid Section 15 liability


SEC Violations



Creation of an offshore entity affiliated with US entity doesn’t provide free pass on Section 15

The source of the fee or commission is not determinative for Section 15 liability. The conduct for which it is (or will be) earned is determinative.

Calling a commission something else does not relieve Section 15 compliance obligations

Website provided “nails in the coffin” – nothing to counter allegations of general solicitation


Main Takeaways


SEC v Luca, et al.


Matter of Wisteria Global & Fujigami Release # 75362, July 6, 2015(SEC Administrative Action)


Matter of Wisteria Global & Fujigami

Japanese-American (Fujigami) and Japanese national domiciled in Macau owned Wisteria Global, a California corporation (red flag – expat foreign owner of domestic LLC; how to enforce CA Corp. Code?)

Both owners of Wisteria Global solicited Japanese and Chinese investors for EB-5 investments in Luca oil deals (red flag – why did Wisteria even have a relationship with Luca? Any relationships with other deals?)

Fujigami (acting on behalf of Wisteria Global) arranged and coordinated meetings with Luca personnel and investors in Texas and Japan (note extraterritorial reach of SEC here; would result be the same if just Japan and not Texas?)

Fujigami attended these meetings, told people he would attend, and acted as a translator (red flag – use of personal affinity and translation skills as concierge to visiting foreign investors)

Received commissions/fees from Luca directly

Release # 75362, July 6, 2015(SEC Administrative Action)



Section 15(a)(1) of 1934 Act – very broad and again note the disjunctive in the context of the facts:

“effecting” transactions – tough to tell from the facts if they did this - OR;

“inducing” transactions – did this through its service of clients and direction of investors to others OR;

“attempting to induce” (the cold-calling, client service, etc) AND

“without registration as b/d” OR “associating with a b/d” – they did neither. One of them had to be registered to arguably avoid Section 15 liability


SEC Violations



Caution with business partners in strange jurisdictions (Fujigami’s partner left unscathed here as far as we know); liability should have been joint/several but SEC clearly did not want to expend resources here

“inducing” transactions includes what may be “high touch” client service, especially where the deals have issues of their own

Fujigami’s violations included his conduct in Japan. Beware of Section 15 and extraterritorial reach of SEC.

Just because payments are made directly by issuer does not mean that the receiver of those payments is shielded from Section 15 liability


Main takeaways


SEC v. Path America


Recent 2015 SEC Actions

SEC vs EB-5 Asset Manager, LLC

SEC vs Robert Yang et al

SEC v Hui Feng and Law Offices of

Feng & Associates P.C.

SEC v. EB5 Asset Manager LLC et al, Case No. 0:15-cv-62323

Date Filed 11/3/2015

Defendant Lily Zhong, owner and manager of EB-5 Asset Manager regional center

EB-5 Investment $8.5 million

Receivership Yes

SEC v. Robert Yang et al, Case No. 5:15-cv-02387


Defendant Dr. Robert Yang, president and owner of Suncor Industries

EB-5 Investment $20 million

Receivership Yes

SEC v. Hui Feng and Law Offices of Feng & Associates P.C., Case No. 2:15-cv-09420


Defendant Hui Feng, attorney of Feng & Associates P.C.

EB-5 Commissions $1.168 million received + $3.1 million potential

Receivership No


For Further Information

Clem Turner, Esq.

Homeier Law PC

420 Lexington Ave., Suite 1425

New York, NY 10170

(646) 393-4702

[email protected]

Will This Project Sell?: Marketable Elements of Business Plans in the China EB-‐5 Marketplace

The business plan is an essential tool used by agents in China to determine whether a project will be marketable to investors. Agents have a tremendous responsibility to act on behalf of investors to find the best and safest projects in the market. Thus, the business plan is a key tool that successful and experienced agents use to make this determination. Knowing how to use the business plan to evaluate a projects’ potential for success distinguishes an experienced agent from the rest. The sheer length and complexity of an EB-‐5 business plan often makes it impossible for an agent, who is bombarded with hundreds of projects a month, to do a complete review of all the project during an initial meeting. As such, often times, people selling a project provide agents with Cliff Notes in the form of a PowerPoint presentation, executive summary, or other marketing materials. However, all well-‐respected and experienced agents know that the marketing materials must be validated by the contents of the business plan. Below are some insights into the trending topics that successful agents in the marketplace are inquiring about when reviewing a business plan to determine whether a project is worth introducing to their investors. Who and What Matters to an Agent Reviewing Your Business Plan With a myriad of business plans piled on their desks and an endless line of sales people knocking at their doors, large agents have learned how to quickly and effectively sort through the chaos by asking for the name, experience and reputation of the developer. As the gatekeepers to investors, agents select projects that will satisfy the two main concerns investors have; how are you going to assure me a green card; and how are you going to assure I get my money back? For agents who have been in the EB-‐5 industry for over a decade, this means that the projects most likely to result in a green card and the return of investor capital are those that have experienced developers involved. The business plan should contain a section that describes the management team working on the project. This management team should consist of an experienced developer who has a reputation for successfully completing a number of projects. It is important to note, however, that the developer’s reputation and experience completing projects similar to the one discussed in the business plan is what is key. For example, a developer with a long record of successfully developing hotels may not be able to translate those skills into developing an assisted living facility. An experienced agent will know the difference and before he or she places investors into a project, he or she will do a significant amount of due diligence on the developer and his experience, all of which should be highlighted in the business plan. Since the developer is responsible for creating the jobs associated with

construction, the significance of the developer’s ability to complete the project cannot be underestimated. Another equally as important entity involved in a successful EB-‐5 project is the facility operator. This is because a developer rarely has the skill set and experience required to operate a facility. For example, a developer that has built twenty assisted living facilities generally does not have the knowledge required to operate them. As such, the developer will bring in an operating partner who has the experience and tools required to make the facility function smoothly. Since the operator is responsible for creating the operational jobs required for an investor to receive their permanent green card, they are yet another significant asset that knowledgeable agents value. Other important entities include the regional center as well as the companies responsible for preparing the submission documents. A regional center with a successful track record of selecting projects and keeping track of expenditures and revenues for purposes of supporting job creation is vital for during the I-‐829 stage, when investors receive their permanent green card. Additionally, a team consisting of economists, immigration lawyers, securities lawyers, and business plan writers who specialize in EB-‐5 projects and have a reputation for success in the industry is important for ensuring that each element of the project is satisfying the regulations as set forth by USCIS. A team of experts will result in fewer hurdles for the investors seeking to obtain their permanent green card. All of these parties should be clearly defined and their biographies should be included in the business plan or readily available for review in ancillary documentation. It is also important to note that once an agent does have the opportunity to review the business plan in its entirety, he or she will be looking for verification of all the material elements of the plan. This includes third party verification of construction costs in the form of an AIA agreements and construction bids, along with revenue and expense projections in the form of a market study or other third party report. The more documentation provided to support the assertions made in the business plan, the more comfortable an agent will be to present the project to his investors. Not All Jobs Are Created Equal An agents’ primary concern is how he or she can assure investors that there is a high probability that they will receive a green card. In order for an investor to receive a green card, the project into which they invest must create at least ten full time jobs for each investor. All EB-‐5 business plans should contain a section dedicated to job creation, which provides for the total number of jobs the project will create. As part of job creation, strong projects will often provide a job buffer as an element of security to the investor. The importance of a job buffer when selling a project is no longer a trade secret of experienced agents. Today, most agents understand the significance of having more than ten jobs per investor and a 20% or higher job buffer has become industry standard when evaluating a project for job creation

security. Often, projects have a job buffer that is 30-‐50% or higher. However, what more experienced agents understand is that not all jobs are created equal. Construction jobs are considered safer, as the likelihood of the construction expenditures used to create those jobs being met are high. It is rare for the development costs of a project to decrease and unforeseen additional costs are not uncommon in the construction industry. However, operational jobs are considered more variable in that the revenue required to create those jobs can be greatly affected by market events. For example, in a hotel project, the revenue projections are based on a minimum occupancy and average daily rate (or, “ADR”). Any variance in these elements can result in a lower revenue, resulting in fewer jobs created than projected. An experienced agent will therefore calculate the job buffer as a percentage based on a ratio of construction to operational jobs a project creates. Projects that create enough jobs through construction to satisfy the ten job per investor requirement, with operational jobs used for purposes of the job buffer, are considered safer than those who need operational jobs to reach the ten job minimum. Moreover, a project that creates enough jobs through construction only to support all required job creation, plus has additional jobs through construction to support a job buffer for each investor, is considered to be very strong. The Key to a Proper Exit An agents’ secondary concern is how to assure the return of capital to investors. As such, agents are interested in projects with a strong exit strategy and a greater promise of the return of investor capital. An EB-‐5 business plan should always contain an exit strategy section which describes how the developer intends to return investor capital at the end of a designated period. Often times, an attractive exit strategy will include refinancing from a financial institution or the federal government. If a project provides for refinancing in the exit strategy section of the business plan, experienced agents may ask to see evidence that a given financial institution would be interested in refinancing the project on certain terms. Sometimes, a developer can provide a Letter of Intent from a lending institution, which proves that the institution would be interested in refinancing the project in the future, should it meet its projected profitability. While there is no guarantee that the institution will follow through with the refinancing once the project is completed, a Letter of Intent carries great weight to an experienced agent when evaluating whether a project is a safe option for their investors. As the Letter of Intent is generally not part of the EB-‐5 business plan, experienced agents know to ask for it, or some other documentation to establish that the exit strategy will be viable. Other documentation to establish the viability of an exit strategy includes an appraisal

showing an “as stabilized value,” as well as explanations of debt to equity ratios in the project business plan and how that relates to the viability of refinancing. Additionally, certain types of projects are eligible for refinancing under the U.S. Federal Government’s Housing and Urban Development (HUD) program. The U.S. Department of HUD administers loans and refinancing at low interest rates to assist in providing safe housing for eligible low-‐income families, the elderly, and persons with disabilities. This financing and re-‐financing option is not available for all projects and experienced agents are familiar with the type of industries and projects that can receive refinancing under the HUD program. These industries include, but are not limited to residential developments that have low-‐income housing as a percentage of their unit type, hospitals, and assisted living facilities. The Foundation of Your Capital Raise The business plan is an integral document in the sales process, that when used properly, can assist in distinguishing a good project from a failure. It is the agent’s responsibility to use the information in the business plan to support the claims made by the project and as a stepping stone to request additional documentation for the security of their investors.

aabany 2016 fall conference · under the age of 21) will apply for an eb-5 visa alongside the...

Documents