Last updated: Dec 01, 2022
The EB-5 Immigrant Investor Visa Program was created under the Immigration Act of 1990, and allows foreign investors to receive Lawful Permanent Resident Status in exchange for a one time investment in a U.S. enterprise that creates at least 10 jobs. The program was designed to leverage foreign investment to create jobs for U.S. citizens and stimulate the American economy via investment in private commercial enterprises. In exchange for their investment, qualifying investors and any applicable family members may receive lawful permanent resident status and subsequently, green cards.
The minimum capital contribution per investor is $800,000 for projects located in a Targeted Employment Area (a rural area or area experiencing high unemployment) or $1,050,000 in a non-TEA. The capital must be an equity investment, and must remain at-risk over the course of the EB-5 investor’s immigration process.
In practice, the EB-5 program supports two types of capital investment. Projects can raise capital from multiple EB-5 investors in an investment offering under the Regional Center program, or a single investor can invest in an enterprise via the Direct EB-5 investment model.
The EB-5 program is mutually beneficial for both foreign investors and U.S. businesses. It has evolved into a viable alternative capital market for developers and operators. And the competitiveness of the EB-5 market, paired with the regulations applied to the program, have created market-driven checks on project sponsors, which in many cases reduces risk for investors, in terms of both their prospects for a green card and the return on their investment. The result is a win-win for both parties.
Benefits to Project Developers and Business Owners
Accessing various sources of funds (financing, equity, tax credits, etc.) to build the capital stack for a project is nothing new for developers. The EB-5 Regional Center Program provides another source of capital that developers can tap for large-scale projects. Relative to other types of funding, EB-5 has unique benefits.
Flexible Structuring
The Regional Center Program allows for variability in structuring the investment offering. A common model is a financing model wherein EB-5 investors contribute equity investment into a new commercial enterprise, which then loans that capital to a job creating enterprise (i.e., the project developer). The loan to the job creating enterprise carries an interest rate and a fixed term, like a traditional commercial loan. Projects can also be set up with EB-5 capital coming in as equity with a preferred return.
Exit timelines are typically five years, but the timing and structure of exits can vary.
Lower Cost of Capital
EB-5 capital often carries a lower interest rate than traditional financing, because the investment opportunity also carries a non-fiscal return for investors: the opportunity for a green card.
High Funding Amounts
The Regional Center Program allows multiple EB-5 investors to be pooled into a single offering, allowing larger sums of capital to be raised. The number of investors that can participate is dictated by the number of jobs created, which in turn is a function of the size of the project and its estimated capital expenditures and operations. It is common for EB-5 capital to account for up to 20-30% of the capital stack of a real estate development project.
Access to Capital
Because different risk factors and return requirements are at play in the EB-5 market, investment from EB-5 investors can be a viable option for projects that may find it difficult to secure commercial financing in a tightened lending market. In fact, during the Great Recession, when banks scaled back lending considerably, the EB-5 program played an integral role in funding businesses and developments across the United States.
Following the passage of the 2022 EB-5 Reform and Integrity Act (RIA), the program is even stronger, with more protections for investors, higher investment requirements, more incentives for projects in Targeted Employment Areas, and long-term program authorization. In many ways, these enhancements have stabilized the program and reduced the risk to investors. Increased participation from foreign investors will yield more available capital to the benefit of American businesses, and the economy.
Turn Key Process
Any project raising capital through the Regional Center Program is sponsored by a Regional Center. Regional centers are entities designated by USCIS that are defined as “an economic unit, public or private, in the United States that is involved with promoting economic growth.” In practical terms, Regional Centers serve as a kind of conduit between project developers and EB-5 investors and are tasked with managing the regulatory and reporting requirements of the program. Regional centers identify projects and often manage or facilitate the process of structuring the deal for EB-5, coordinating with securities attorneys and other professionals to prepare offering documents and project documentation for filing. Following the capital raise, Regional Centers are required to track and report job creation, project expenditures, and other regulatory issues related to the project and program. Many Regional Centers will also play a role in project and investor due diligence and serve as a gateway to the EB-5 market either as broker-dealers or by working with broker-dealers.
The services provided by Regional Centers and associated professionals result in a turn-key process for project developers and businesses, allowing them to access an alternative capital market without fully assuming the burden of reporting and compliance for an unfamiliar government program.
Benefits for Businesses with Lower Capital Requirements
Through the Direct EB-5 Investment model, businesses can raise capital from a single EB-5 investor ($800,000 or $1,050,000, depending on location) to fund an expansion or launch that will result in the creation of 10 new, direct full-time jobs. Compared to traditional private equity, businesses may not cede as much equity (or control) in the enterprise through an EB-5 raise. And, while Direct EB-5 investments are equity investments, they can be structured as either preferred or common shares. EB-5 is also an option for businesses that may not qualify for commercial lending, or can be used by a business to meet loan-to-value ratios for lending. In this way, the EB-5 program serves as a middle ground in the traditional binary structure of debt vs. equity.
While the appetite for Direct Investment projects has historically been lower in the EB-5 market compared to Regional Center projects, there is opportunity for businesses that mitigate risk for an investors’ immigration objectives or that offer a lucrative potential upside or otherwise meet an investors’ investment objectives.
Benefits for EB-5 Entrepreneur-Investors
While EB-5 offers hands-off investment opportunities for EB-5 investors, the Direct EB-5 program is an appealing program for investors that want to launch or operate their own business in the United States. An EB-5 investor can invest in their own project, buy into a franchise model, or acquire a business that they will directly oversee or operate. The same program requirements apply – the minimum investment requirement is dictated by location and the business must create 10 new, full-time jobs following the EB-5 investors’ investment (which can be difficult in the case of buying a business). While not a preferred route for all investors, it can be ideal for investors who:
- want to maintain control over the business and its operations, and by extension, ensure that all immigration requirements are met
- prefer to have access to a higher share (or all) of the returns of the business
- is an entrepreneur with a new concept or business idea for the U.S. market
has an existing business overseas that could be expanded to the U.S. market - sees value in establishing credit and a track record in U.S. financial markets immediately through direct engagement in business activity