EB-5 Direct Investment Versus EB-5 Regional Center
The EB-5 Visa, also known as the Immigrant Investor Program, is one of the few US visa programs that can result in permanent residence for investors, business owners, and their families and has become extremely popular. Between its inception in the early 1990s and the late 2000s, EB-5 did not attract a huge number of applicants but today demand for these visas far outstrips available supply. The EB-5 visa route only really took off with the increase of EB-5 interest from Chinese applicants after 2008. Since then, Chinese investors have driven exponential growth in the number of visas issued, claiming a majority of these visas until the total number of EB-5 visas possible to issue hit its ceiling, the annual quota of about 10,000 visas, in FY2014.
There are two fundamentally different ways that EB-5 investors can approach this visa route. These options are:
- EB5 Direct Investment Visa - Prospective EB-5 visa applicants can invest directly into a new or existing business.
- EB5 Regional Center Visa- Prospective EB-5 visa applicants can also invest into a regional center EB5 project.
EB-5 Regional Center Investment is Overwhelmingly More Popular than EB-5 Direct Investment
The Regional Centre approach is by far the most popular of the two options available to EB-5 investors.
EDIT (January 2019): The table below shows detailed EB-5 statistics for FY2018 (i.e. year ending September 30, 2018). Please note when assessing the information in this table that it indicates the number of green cards issued for conditional permanent residence. Green cards are issued between 1 to 5 years after the initial application, depending on investor origin and I-526 processing time. Also, these numbers not only include the actual investor but also any dependents, of which there is an average of two for every investment.
As the table shows, EB-5 direct investors and their families received 581 green cards for conditional permanent residence whilst regional center investors and their families received 9,021. In other words, almost 94% of the EB-5 visas granted in FY2018 were granted based upon an investment into a qualifying regional center project.
Why Do the Overwhelming Majority of EB-5 investors Decide to Invest in a Regional Center Project?
I will list and critically examine below the various reasons why an individual EB-5 Investor might opt to invest in a regional center project instead of making a direct investment.
EB-5 Regional Centers Require a Lower, Fixed Investment
As the table above shows clearly, the vast majority (>99%) of the investments that are made into qualifying regional center projects are for $500,000. This is because the vast majority of regional center projects (there are currently 800+ USCIS approved regional center projects operating across every US state) are deliberately located in a Target Employment Area (TEA). The investment amount is also fixed ($500,000 + one time administrative or syndication fee of 8% - 15% of the investment amount) and is known before an investor commits to a particular Regional Center project.
On the other hand, the amount needed for direct EB-5 investment into a new or existing business is difficult to quantify in advance. In the case of a new business, whilst a detailed business plan will provide some indication as to costs, there will invariably unexpected problems and opportunities along the path of starting and growing a new business that will mean that the project ends up costing more money than expected. It is relatively common for a new business to require as much as double the amount of capital that was initially anticipated.
Some investors believe that attempting to either invest in or acquire an existing business offers a third way between the regional center model and the option of starting your own business. Whilst investing in a known business entity seems like a good idea, in theory, the rules governing the EB-5 visa scheme make this by far the most complicated way to secure conditional permanent residence in the United States. For this and other reasons, the vast majority of direct EB-5 businesses tend to be brand new enterprises.
The fact that the investment amount required for a direct EB-5 visa application is almost impossible to gauge with precision in advance and almost invariably ends up being significantly more than the minimum investment amount of $500,000 is one reason why many potential EB-5 investors choose the EB-5 Regional Center route. Many investors prefer the comparative certainty of a regional center investment over the "blank cheque" option of direct investment into a new or existing business.
EB-5 Regional Center Projects Can Satisfy the Visa Employment Criteria More Easily
To meet the requirement that 10 full-time jobs are created by every primary EB-5 visa applicant, the Regional Center is allowed to count not only those jobs directly created by the project but may also count indirect or induced jobs created as a result of the project. Direct jobs are usually construction or jobs created during the operational phase of the EB-5 project, such as hotel operations. Jobs related to the construction phase of the project can only be counted if they last longer than 24 months; otherwise, only indirect and induced jobs created by construction spending can be counted. Indirect jobs are those created in industries that supply the necessary goods and services required for construction or operations. Examples might include new jobs created within a construction supply company. Induced jobs are created from the extra spending in the local economy by people with direct and indirect jobs related to an EB-5 project. Examples might include a clerk at nearby supermarket hired to accommodate the extra business they are experiencing because of the EB-5 project.
On the other hand, a direct EB-5 investor is only allowed to count direct jobs they create when seeking to meet the requirement to create ten brand new, full-time jobs within the new commercial enterprise they have launched within two years from the initial grant of the visa. These ten direct jobs must be salaried employees of the new commercial enterprise. This requires the new commercial enterprise to maintain payroll records to prove that the employee was employed as a salaried employee and was also a qualified U.S. worker. This would exclude, for example, persons who hold non-immigrant visa status such as H-1B or L-1A visa status from being counted for job creation purposes. In short, the employment requirement is significantly more stringent for direct EB-5 investors than it is for EB-5 regional center investors.
EB-5 Regional Center Investments are Largely Passive
The investor's role in a regional center project is typically limited to that of a limited partner. Limited partners are less active in the business than general partners, who shoulder the day to day operational involvement of the investor. However, despite having a less demanding role in the project, limited partners still qualify as having active management in it for purposes of the EB-5 visa program. This provides freedom for the regional center investor and their family that would not be possible for a direct EB-5 investor and their family. It also opens up this type of investment to individuals who do not have significant experience as a business executive or entrepreneur or do not want to embrace all of the risks inherent in owning your own business for the first time.
For example, many regional center investors are able to live in a different state to the one in which the EB-5 Regional Center project is located. This would be inconceivable for a direct EB-5 investor who would of necessity be heavily involved in the day to day operations of their business and would thus be tied to the physical location. Given the fact they only have two years to meet the investment and job creation criteria for an EB-5 visa so as to avoid the revocation of their conditional permanent residence, the business owner would be forced to focus exclusively on their business for at least the first two years and would most likely be making a five year commitment before they could start to take a back seat. Some business owners would prefer to be in control of their own destiny.
EB-5 Regional Centers Are Actively Marketing their Projects to Investors
The majority of the active EB-5 regional centers across the USA are all seeking funding. Consequently, they are reaching out via a wide range of sales and marketing activities to persuade investors of the wisdom of backing their particular projects. Whilst a small number of business brokers and franchise brokers target potential Direct EB-5 investors, the time, money and effort that goes into sales and marketing activities promoting regional center investments far outweighs that spent promoting Direct EB-5 investment.
One aspect of these sales and marketing activities that should ring alarm bells for potential investors is the size and scale of the commission/referral fees paid to introducers. Many of the people that are involved in promoting this particular visa route only offer regional center investments to clients wanting to pursue this visa route as many regional centers offer significant referral fees to agents, consultants and immigration attorneys. These commission payments/referral fees provide those involved in the immigration investment industry with a strong financial incentive to promote those Regional Center projects which pay the largest referral fees and to discourage investors from pursuing direct EB-5 investment.
A Regional Center investment seems to be attractive to people who have no interest or time to devote to managing a business in the United States but who still want to obtain a US green card. Regional Center investors are typically not concerned about lack of control over the investment funds, prioritize capital preservation over return on investment and want an easier path to their green card that provides geographic mobility.
Why Do Some Investors Prefer Direct EB-5 Investment Projects?
Despite the advantages of an EB-5 Regional center investment outlined above and the fact that most foreign investors are pushed in the direction of Regional Center investments by their financially self-interested advisors, hundreds of investors each year still choose to make a direct EB-5 investment. There are several reasons for this which I will enumerate and expand upon below:
It is Easier to Perform Due Diligence for an EB-5 Direct Investment than for an EB-5 Regional Center Project
There are currently over 800 EB-5 Regional Center projects for investors to choose from and with permanent residency in the U.S. on the line as well as over $500,000 (including the various fees associated with the investment and subsequent visa application), selecting the right regional center and EB-5 project to invest in can be an intimidating and difficult task. The risks inherent in any investment decision are only compounded in the EB-5 context, where, apart from financial and operational considerations, prospective investors must also assess the likelihood that their investments will comply with immigration laws, regulations, and policies such that their goal of permanent immigration to the United States will be achieved. It is critical to make a sound decision regarding your EB-5 Regional center project as once you have committed funds to the project, it will be extremely difficult to change your mind.
On the other hand, with many direct investments, there is the possibility of making adjustments to your business model. So, whilst initial due diligence and the business planning process is very important, the ability to direct the course of your own investment rather than having to depend on the effort and judgment of the general partners of the regional center means that you have the chance to "pivot" with a direct EB-5 investment. This ability to make course corrections if they are necessary to ensure that you achieve an optimal outcome from your investment and not "sink or swim" on the decision you made based upon an extremely challenging due diligence process is one reason why some EB-5 visa applicants prefer the direct investment route.
EB-5 Direct Investment Has the Potential for Much Greater Returns
One of the conditions of the EB-5 visa is that all funds invested must be placed "at risk". There are numerous instances where EB-5 regional Centres have failed and investors have lost all of their money. For example, 700 EB-5 investors in the bankrupt Jay Peak Report in Vermont lost their money and their chances at green cards, in what was characterized as a Ponzi scheme. However, it is statistically less likely for an EB-5 project to fail than it is for the average business.
Consequently, EB-5 regional center investments are touted by promotors as being less risky than direct EB-5 investments. However, in return for offering a lower risk profile, EB-5 Regional Centers offer a poor return on investment. By the time management fees are taken into account, most regional center investments will generate returns that are lower than the rate of inflation. Capital is returned within a minimum of five years, but many EB-5 investment agreements include clauses providing the Regional Center with the right to unilaterally extend this period by anything from 1 to 5 years without penalty and at the same rate of interest.
On the other hand, a successful direct EB-5 investment could generate returns over a five year period of 2x - 10X or even more. For experienced entrepreneurs, who feel that they are able to mitigate much of the risk inherent in launching a new business through their skill and hard work, a direct EB-5 investment provides an enticing opportunity which promises a much healthier return on investment than a regional center project could possibly offer.
EB-5 Direct Investment Provides Access to A Much Wider Range of Projects/Industries
There are currently 800+ Regional Centers in operation, promoting projects in several different industries and sectors including health care, education, renewable energy sources, senior living facilities, transportation, affordable housing, research facilities and hotels to name just a few of the most prominent examples. However, the market for EB-5 regional center projects is opaque, with most EB-5 investors only offered a limited choice by the Immigration Lawyers or Consultants they are working with to obtain their visa.
On the other hand, a Direct EB-5 investor can invest their money in any business in almost every conceivable industry that exists in the United States and could even launch a new, innovative business concept that is entirely original in the US. The Direct EB-5 investor is essentially only limited by their own imagination and access to capital. This is attractive to those interested in investing in a company that operates within their field of interest or professional expertise.
EB-5 Direct Investors Can Influence the Success of the Investment
The Direct Investment pathway does not allow for a passive investment. The Investor in a Direct Investment must be an equity investor in the job-creating enterprise. At the least, the Investor must be placed in an advisory capacity. With this structure, the Investor could obtain a more substantial return on his investment. With a Regional Center Investment, the Investor is usually a limited partner and or an investing member in a limited liability company and he does not have to meet the day to day operation obligations. This is marketed as a positive thing but could be frustrating for investors with the professional experience, contacts and entrepreneurial drive needed to ensure that a project is successful.
EB-5 Direct Investors Have Access to Different Types of Investment Capital
Regional Center investments invariably require the transfer of cash in order to meet their investment requirements. However, the type of investment capital for a Direct Investment may consist of various forms of capital, including cash, equipment, inventory, property or other tangible equivalents. For example, a large portion of the capital contribution could come through the transfer of specialized manufacturing equipment from the investor’s home country to the US, as long as the investor is able to show the value of this contribution through the US Customs forms completed at the time the equipment arrived in the US. This opens up the EB-5 visa route to experienced businessmen and women who are asset rich but who might find it difficult to raise the necessary investment funds in cash due to the illiquidity of their principal assets.
EB-5 Direct Investors Will Have an Asset Which Can Be Passed On to Their Children
Regional Center investments are time-limited and, if successful, will end with the investor's capital being returned as agreed in the investment agreement. A successful direct EB-5 investment will have created a substantial business; an asset that will generate positive returns for as long as it continues to operate. Indeed, the business can be passed on to other family members and can become part of the investor's legacy. This certainly cannot be said of a regional center investment, although an investor may be able to point towards assets that are owned and controlled by others to which their investment has contributed.
How you will proceed as an EB-5 investor is one of the most important business decisions you will ever make. There is no right or wrong way, as the path for one person is not necessarily the best path for another. If having read this article you want to discuss your options further with consultants that have no financial vested interest in your decision and no objective other than for you to make the right decision for you and your family, contact Continuous Business Planning today for a free, no-obligation consultation. If you decide to proceed with your EB-5 visa application, we'd be delighted to help you either with creating the "Matter of Ho" compliant business plan you will require for your direct EB-5 investment or with the due diligence required into your preferred regional center investment. In any case, we'll send you on your way with added clarity and the benefit of the insights of a fellow immigrant.