Structuring an EB-5 Regional Center Offering

EB-5 capital contributions must be an equity investment into a new commercial enterprise (NCE); loans are not eligible at this stage. This is to ensure that every investor in the NCE holds one share in the pooled investment. When money is moved from the NCE to the job creating entity (JCE), the money may be loaned or be made as an equity contribution Any guarantee to return the capital cannot be issued or the “at risk” requirements are violated. 

Outside of these requirements, the terms of EB-5 offerings vary and are defined by their respective issuer/company. As in traditional equity raises, the terms of the deal (i.e., equity share, returns, distribution schedule) play a role in how attractive a project is to investors. How the project is structured – in terms of protections offered to investors relative to their immigration process – is also a key consideration. When structuring a project or defining the terms and developing the associated documentation for an offering, it is best to work with the right parties with ample EB-5 experience to ensure program compliance.

Today’s investors are faced with a competitive market of projects which offer less risk and greater investment returns for their investment, winning out unfavorable projects through the promise of greater returns. Keep in mind that more favorable risk and return policies will make your project easier to market later on. Furthermore, investor word of mouth is one of the best drivers of new business, which may benefit you in future offerings.

Capital Stack

The capital stack is an important consideration when structuring a deal, as investors can be swayed by which level of debt they are subordinated to. Capital stacks determine who is paid out first in the event of bankruptcy or liquidation. Investors generally like to see their investment subordinated only to a senior loan given by a bank or other lender. Further subordination makes their investment less secure and increases the risk of losing the capital entirely. Most investors judge the quality of a project’s offering based on this feature.

Investors are more motivated and less wary of a project when they know that the general partner and the developer have “skin in the game”. It is generally good practice to divide equity in the project evenly between the owner, EB-5 funding, and alternative forms of debt/loans from reputable parties. Typically project sponsors never hold less than 20% of the project’s total equity, nor seek out more than 60% of the project’s funding from EB-5 investors. When investors can see that their terms for repayment are similar to the other parties funding the project – or that EB-5 investors are not the sole investors with equity in the project – they are more likely to consider the investment offering.

That said, there is no minimum or maximum EB-5 component requirement according to the program rules. Is strictly a matter of what makes sense for the business and what is most appealing to prospective EB-5 investors.

What position in the capital stack do investors want

While it is important for project sponsors to raise EB-5 financing in the capital stack position that makes the most financial sense for them, it is equally important to balance that with what immigrant investors want. Investors from foreign countries may also perceive debt vs equity commitments very differently. For example, many real estate developers see mezzanine debt and preferred equity (in the second position) as one and the same; however, an immigrant investor may still prefer the security of a debt model as they often perceive debt investments as more predictable and feel safer with a loan agreement in place.

EB-5 investors may have preferences for certain capital stack positions based on their risk tolerance and investment goals. Project Sponsors should consider these preferences when structuring their project.

Backup sources of financing

EB-5 investors are drawn to projects with backup financing sources for several reasons. First, it acts as a safety net, mitigating the risk of project failure. If the primary funding source falters, backup financing ensures the project’s completion, safeguarding investors’ capital and their pathway to a green card. Secondly, it signals the project’s viability and strong financial foundation, boosting investor confidence. It demonstrates that the project isn’t solely reliant on EB-5 capital, making it more attractive to investors. 

Additionally, U.S. Citizenship and Immigration Services (USCIS), the agency overseeing the EB-5 program, favors projects with robust financial structures. Backup financing strengthens the project’s overall financial profile, increasing its chances of approval and potentially leading to faster processing times for investors. Ultimately, the presence of backup financing instills confidence in investors, showcasing the developer’s commitment to the project’s success, and reducing the risk of delays or uncertainties.