The Dark Side of EB-5 – A Summary of the Risks Involved

Many countries across the globe offer immigration via investment programs, often referred to as “golden visa programs”, sharing similarities to but with one major difference from the EB-5 visa. Put simply, the EB-5 program requires a foreign national to make an “at-risk” investment in a new U.S. commercial enterprise (NCE). 

Even though funds must remain at risk, this does not mean the EB-5 investment must be unnecessarily risky. Risks can be mitigated by proper deal structures by the issuer and traditional due diligence conducted by the investor. Due diligence for projects is an extensive process which may not be feasible, however, for many investors, due to professional, familial, and other affairs – life happens! However, investors can utilize professional representatives such as foreign intermediaries/immigration agents or EB-5 private placement consultants registered with the Financial Industry Regulatory Authority (FINRA). Both these types of professionals are experienced and trained specifically for these purposes. 

In addition to investment risks and the need for due diligence, an investor may face immigration risks such as extremely delayed processing times, redeployment, or even petition denials for reasons such as poorly-filed or unorganized documentation and/or incriminating evidence. As delayed processing by the USCIS directly affects the timeline between filing I-526Es and receiving conditional green cards, investors may struggle with time-sensitive conditions, such as family planning, employment offerings, and children “aging out” of visa eligibility. Such risks can be mitigated by an experienced EB-5 immigration attorney who can better assess an investor’s overall application and suggest suitable solutions tailored to an investor’s needs.

Return on Investment

While funds may be returned to an investor with a substantial degree of interest in a typical non-EB-5 Private Equity Investment scenario, traditional EB-5 projects tend to have minimal returns for investors apart from their potential immigration benefits. The downside of low return is generally because investors are willing to accept a lower ROI in exchange for a Green Card. See the overall benefits here.

Highlighted risks of EB-5

“At Risk” Investment/Risk of losing investment

As the U.S. government does not offer or underwrite any EB-5 investments, the program shares many common risks with other private investments. By definition, there can be no guarantee on the return of investment to the investor. Any project which guarantees a return on an investment – such as exchanging real estate, guaranteed returns on investments, etc – violates the “at risk” requirement of the EB-5 program and thus disqualifies investors from the benefits of the program. Such deals, often found online or pitched to investors, guarantee assets in return for investments and are oftentimes seeking to defraud investors by appearing to mitigate the risk inherent in the EB-5 process.

Redeployment

Private Placement Memorandums (PPMS) will often have a “redeployment” clause which must be reviewed carefully. These clauses state the processes under which investment funds will be “re-deployed” or invested into a different investment project from the initial investment project. Redeployment occurs when a project is ready to repay investors before they have reached the minimum time threshold for a qualified investment (the “sustainment period”) or if the project repays earlier than initially promised. When this happens, an investor’s capital will be returned to the New Commercial Enterprise (NCE) and the issuer will reinvest their money in a new project.

Redeployed funds are managed by the same investment issuer but can be moved into a different new commercial enterprise than the one the investor initially sent funds to. This process can happen with or without the investor’s consent or any forewarning to the investor, depending on the specific language of the PPM. Because the investor is not required to give consent for this transfer, the investment issuer may sometimes opt to reinvest them into a project with higher returns for the issuer but far higher risk portfolios for the investor.

This is a controversial topic within the EB-5 industry as the financial fallout and liability for all risk falls solely on the investor, not the investment issuer even though the issuer is in full control of where and how the investor’s money is reinvested and we recommend you read our article explaining this risk in depth.

Country Caps

U.S. immigration programs receive the most immigration petitions from large, densely-populated nations, especially countries and regions like China, Vietnam, Taiwan and India. Although the EB-5 program is meant to provide a faster path to permanent residency than other employment based visas, applicants from these countries may encounter longer wait times because of an immigrant quota called a “country cap”. Essentially, the country cap ensures no single nationality occupies more than 7% of the total number of foreign nationals accepted into each EB-5 visa category.

If over 7% of the total visa pool for a single category is occupied by investors from one country, a cap will be placed on visas issued to that country, and petitioners from said country will experience a “visa backlog.” Even though investors may still be able to apply to the program, they will not be eligible to receive a green card until all petitioners who filed before them have received their green cards. Investors from backlogged countries should regularly check the USCIS visa bulletin  to see if their country of residence is currently experiencing a visa backlog. 

For more on this issue read AIIA’s guide to understanding the visa bulletin and the visa backlog problem.

Aging out

If investors plan to include their children in their EB-5 petition, they must pay attention to the USCIS’s age requirements for dependent family members. Historically, to be considered a dependent child for immigration purposes, the USCIS considered the age of an immigrant petitioner’s child as less than 21 years old when the visa petition was approved. However, drawn out and unpredictable processing times lead to many investors filing for an immigrant petition long before their child is 21, only for the child to turn 21 before the visa petition is approved.

To remedy this, the Child Status Protection Act (“CSPA”) was passed in 2002 granting investors the ability to “freeze” a dependents age when filing an immigration application. Freezing the dependent’s age does not change the definition of a “child” but allows children at risk of aging out to use a “CSPA age” which is calculated by subtracting the amount of time it took for immigrant petition approval from their age at the time of visa approval subtracted by the amount of time it took for the visa petition to be approved.

(Age when Immigrant Petition is Approved) – (Time for Immigrant Petition Approval) = CSPA Age

For CPSA benefits to apply to a dependent, investors must seek to acquire lawful permanent resident status within a year since visas have become available to them. They may choose to satisfy “Sought to Acquire” requirements by filing a DS-260 or an I-485 form to the appropriate department, paying the immigrant visa fees to the DOS, or other actions recognized by the U.S. government. If the investors failed to satisfy any of these requirements, their child’s age will be re-calculated next time the visa category becomes current, meaning the child could age out before they are available to file for LPR status again.

For some investors, extraordinary circumstances may qualify them for CSPA benefits. However, to qualify for CSPA after a child turns 21, an investor must demonstrate circumstances which directly impacted an investor’s ability to “seek to acquire” their conditional green card. Circumstances which the USCIS has qualified for this exemption include:

• Illness and serious mental/physical disabilities
• Death
• Ill or incapacitated legal counsel
• Ill or incapacitated immediate family members
• Petitions which were refiled with USCIS with corrections

Conclusion

There are a lot more risks we haven’t mentioned. Lots of risks up in here but the rewards are also great…go read them here.