Top 10 questions every EB-5 investor should ask

By Rick Karch and Trevor Roberts

Top 10 questions every EB-5 investor should ask

* This article first appeared in Inside Counsel Magazine on October 14, 2015: http://bit.ly/1PGK40X

Just a decade ago, very few people had even heard of the EB-5 Program. In 2004, only 16 EB-5 visas were granted to Chinese nationals according to Chinadaily.com, and as late as 2007, USCIS only issued a total of 700 EB-5 visas for the entire year. Interest was lacking and the program appeared to be withering on the vine. But, oh, how things have changed!

Today, the demand for EB-5 visas is skyrocketing. The annual 10,000 visa quota has been reached each of the last two years. In fact, the cap for fiscal year 2015 was reached all the way back in April, CNN reported. And with 13,000 petitions already pending, the wait time may now be 24 months or longer. People are rushing to get their paperwork filed and in queue before the line gets any longer.

Many investors hope to file their petitions before minimum investment amount jumps from $500,000 to $800,000 under proposed changes to the EB-5 program (this increase is part of the immigration reform efforts now under consideration). Others are concerned that these delays may jeopardize their chance to bring their children with them to the U.S.

Under the rules of the EB-5 program, only the petitioner, his spouse, and children under the age of 21 are eligible for permanent residency. Thus, a long wait may cause older children to "age out," and this may mean the end of a dream to attend an American university as many petitioners are not eligible for other visa types.

Choosing the Form of the EB-5 Investment

Petitioners that are mainly focused on immigration concerns such as these - rather than the investment aspect of the program - largely prefer to invest passively through one of the 732 USCIS-approved regional centers. But some investors may not want to hand over their hard-earned money and decision-making authority to others.

Petitioners with strong business background, for example, may prefer to make a direct EB-5 investment in a standalone (non-regional center) project. Only such direct investments allow for petitioners to become personally involved in creating, managing and directing the project. And this aspect may be very important to investors who prefer to be masters of their own destiny.

For while regional centers do have certain advantages - such as being allowed to count "indirect jobs" to satisfy the job creation requirement - they may not share the investor's management entrepreneurial vision or business goals, and they are obviously far more adept at funneling investors' money into its "sponsored" projects than prudently conserving investors' capital

Also, a regional center may be terminated if it fails to demonstrate continued eligibility or promote economic growth as required. Recently terminated centers include; New Jersey Liberty Regional Center (terminated May 15, 2015), Front Burner Restaurants Regional Center (terminated May 14, 2015), and LaSalle County Business Development Center (terminated May 4, 2015).

The Importance of Due Diligence

Regardless of the form the EB-5 investment, conducting due diligence, either personally or through a qualified financial professional, is essential. Investors need to gather as much objectively reliable data as possible in order to make an informed decision. The information provided in marketing materials should never be relied upon without verification from local, state, SEC, U.S. Department of State, and/or other trustworthy sources - including previous investors.

And though the offering materials will vary depending on the structure of the investment, it is very important to carefully read and understand each of the documents provided. These materials commonly include, a private placement memorandum (PPM), a limited partnership agreement, an escrow agreement, and the subscription agreement.

The private placement memorandum is particularly important because it spells out the details of the transaction. This document - as well as all other EB-5 related materials - should be reviewed with the assistance of experienced legal counsel. There is simply too much at stake to cut corners when choosing an EB-5 project. Not only is the non-investment "syndication" or "administrative fee" of some $50,000 immediately expended, but the entire principal investment (generally $500,000 to $1 million) is at risk of total loss.

A poor investment decision not only puts this significant amount of money at risk, it can also jeopardize the investor's goal of immigrating to the U.S. By working with a law firm that is knowledgeable in corporate and securities law as well as immigration law, the investor will be able to receive guidance every step of the way so as to make the best investment choice possible.

10 Important Questions EB-5 Investors Should Ask

Every potential investor should get answers to the following questions before choosing an EB-5 project. This list is not intended to be exhaustive - and some of the questions may only apply to one form of EB-5 investment or the other - but this list should nevertheless help investors gain a better understanding of the kind of information they should seek prior to making a commitment.

1. What is your track record for I-526 and I-829 approvals? If the I-526 is denied, how and when will I get my money back?

2. How many EB-5 projects have you managed?

3. Will this project be developed in an officially designated targeted employment area (TEA)?

4. How much are the management and/or administrative fees?

5. Who are the promoters? And are the promoters also principals or affiliates of any of the project contractors or other participants?

6. Who, if any, entity or individual will have the fiduciary duty to manage the investment? What are their qualifications? And do they have financial stability and resources to refund investments if they breach their fiduciary duty?

7. How many jobs will this project create, and will there be a buffer in case job forecasts fall short?

8. Are there any non-EB-5 investors investing in this project?

9. How many years of experience do the general partner and/or principal have with EB-5 projects?

10. Are any promoters (brokers, lawyers, accountants, etc.) receiving compensation for recommending this project? And do they have a conflict of interest for other involvement in the project (e.g., lawyers completing the immigration paperwork)?

Conclusion

Clearly, there are many more questions that can and should be asked before making an EB-5 investment. The point is that EB-5 investors must not accept any promotional materials at face value - such documents are, after all, outright sales materials. Every important piece of information should be confirmed through an objective source.

For the old saying applies just as much to EB-5 investments as it does anything else in life: "If it sounds too good to be true, it probably is."