Michael Bowen, CFA is the Director of Finance for Southeast Regional Center, LLC (“SRC”), an EB-5 Regional Center operating across 10 states with a stellar track record since 2010.

The US EB-5 Immigrant Investor Program enables non-US foreign nationals to acquire a US Green Card by investing in a for-profit commercial enterprise in the US.

The program is enjoying a tremendous rebound in popularity.  For example, there were 1,687 new filings for I-526 during the first three quarters of 2023 alone, compared to 829 filings and 814 filings in the entire years of 2022 and 2021 respectively.

Investors are excited because they now enjoy stronger protections than ever, thanks mainly to the Reform and Integrity Act of 2022 (“RIA”) which now requires additional, strict financial and anti-fraud mechanisms for each new project in the program.   This new law aims to enhance the program for investors by clarifying the duties and responsibilities of project developers, promoters, and regional centers while also lowering the required investment amount in certain cases. 

But with these improvements, we encourage our investors to remain focused.  After all, the risks remain the same: 

1) Will this project’s underlying business plan work financially?  Will I get my original investment back, and what will protect me from financial loss if things do not go as planned?

2) Will this project yield the required jobs and comply with all the rules set forth by USCIS – in other words, will I get my Green Card?  Can the sponsor produce documentation about the project that is verifiable and credible?

In this series, we will focus on the financial risk component of EB-5 investment. If the immigration process moves sideways or slowly, will investors still get their money back? Investors must protect their capital in case they have to re-attempt the process due to a shortcoming on the immigration paperwork.

Our hope is that investors will come away from this series equipped with better information and tools to be successful in the EB-5 investment process. 

Last time we explored the risk protections that sponsors can offer to maximize the safety of the investor’s capital.  Let’s look at some common pitfalls and misconceptions related to reading the EB-5 Private Placement Memorandum (the “PPM”).

PPM Financial Analysis:  Common Pitfalls

The average EB-5 PPM can amount to hundreds of pages of content.  One common pitfall is the tendency of investors to pay less attention to the financial risks and protections, while paying more attention to immigration risks such as USCIS compliance and job creation.  

The instinct to analyze the PPM in this way is natural.  After all, the program’s main attraction is the successful issuance of a Green Card at the end of the process.

But that type of mentality leaves too much exposure to potential financial calamity.  After all, the USCIS requires capital to be placed “at risk,” but that does not mean capital has to be placed at “high risk”.  

If a project fails from a business and financial perspective, will the required jobs be created at all? While it is estimated that less than 1% of EB-5 investment capital is lost due to fraud, the percentage lost due to unforeseen financial risks exceeds that amount, resulting in too few or no qualifying job creation that transform the financial risk into an immigration risk.

Another major error some investors (especially new investors) make is to assume the inclusion of collateral and/or repayment guarantees suggests that the developer doesn’t believe in the project. The erroneous assumption is that the developer includes additional downside protections because they are fearful about the project’s financial health from the start.

While that logic is understandable, investors must consider that project developers are competing to appeal to EB-5 immigrant investors.  For example, let’s imagine that investors have a choice between Project A and Project B in the EB-5 marketplace, and that those two projects are essentially the same from the perspective of profits and risk. 

The two developers behind Project A and Project B are competing for investors’ attention and capital.  Both developers are operating in the mindset of making their project more attractive to investors than the competition.  

But Developer A and Developer B can only promise so much related to the financial upside of their project.  After that, the main enhancements to a project’s viability and safety involve downside protections.

That is why developers add collateral and guarantees when and where they can.  Although they will say they do so to take care of the investors, which is true, the developer’s principal motivation is to enhancethe appeal of their project.

IF ever a project does not have any sort of collateral or repayment guarantee—be alert as that is a red flag for investors. It could be that the developer knows that there is a serious chance of financial failure, and therefore they do not want to be on the hook if that comes about.  

In other words, the exclusion of downside protections should not be interpreted as a sign of “confidence” by the project developer.  Investors should seriously question why the developer will not (or cannot) provide extra cushions of financial protection.

The information provided here is not investment, tax or legal advice. You should consult with a licensed professional for advice concerning your specific situation. 

This article is educational and informational, and items including policy, program structures, financial models, feasibility studies, and other documentation may change without notification. 

Information prepared on electronic media such as PowerPoint, websites, blogs, WeChat, or other methods of delivery are often truncated and summarized to improve readability; details of any financial, tax or legal nature should only be addressed with a trusted licensed professional.