On Aug 19 2015 by Karuna Chandani Simbeck
EB-5 Regional Center Program: A Powerful Job Creator
The EB-5 Reform and Integrity Act of 2022 brought many changes to the EB-5 program. For the latest information, please click here.
Congress created the Immigrant Investor Program, more commonly known as EB-5, in 1990 to stimulate the U.S. economy through job creation and capital investment by foreign investors. At the time, the program granted U.S. permanent resident status only to immigrant investors who directly invested in and managed job-creating commercial enterprises. With the enactment of the regional center pilot program in 1992, foreign investors can also invest through EB-5 regional centers, which allow investors to create jobs both directly in the business they start, and also indirectly through the economic effect of their investments.
Based on current regulations, the EB-5 category requires at-risk investment of $1 million or $500,000 in a targeted employment area (high unemployment) or rural area, with no guaranteed return of the investment funds. The money must be utilized in a project that will create at least 10 full-time jobs for U.S. workers for every investor in the project.
The investor may invest in his or her own commercial enterprise or in a commercial enterprise owned by other parties. The investor may also choose to invest in a pre-approved regional center. Although the investor’s role cannot be completely passive, he or she does not have to be involved in the day-to-day management of the business unless he or she wants to do so. This legal obligation is met in the regional center context by granting the investor rights and responsibilities of a limited partner. For direct EB-5 investment, if the investor is not going to be employed by the investment enterprise, at the very least the investor should be placed in an advisory capacity similar to that of a limited partner.
It is critically important that the investor be able to document the lawful source of investment funds, whether his or her own or funds given to him or her as a gift. The investor needs to provide detailed documentation of the lawful source of the money being invested, making EB-5 investors one of the most highly scrutinized groups of immigrants to the United States.
Popularity of EB-5
While the EB-5 program has been around for over 20 years, it has gained popularity in the wake of the 2008 economic downturn. Since traditional financing began to disappear, U.S. business looked to alternative sources of funding through EB-5.
An overwhelming majority of EB-5 investors are from mainland China, which has seen an unprecedented economic growth. Concerns about the country’s environmental conditions have led many families to consider migration. Better opportunities and education for their children is another strong motivator. Closing of a similar investment program in Canada, which was popular with Chinese investors, also helped drive EB-5’s popularity.
In fiscal year 2014, a total of 8,308 visas were issued to Chinese investors, making up the majority in the EB-5 category, with South Koreans coming in second at 162 visas. EB-5’s popularity has resulted in the creation of an industry of investment consultants, immigration specialists and specialized relocation agents that cater specifically to Chinese investors.
The increased demand is demonstrated in the current wait time of two to three years in obtaining conditional permanent residence for Chinese nationals, compared to the one year in the preceding years. EB-5 is limited to 10,000 visas (shared between all countries) per year, a number that includes visas granted to an investor’s spouse and unmarried children under 21. Despite the long wait times, Chinese investors continue to make up the majority of investors.
Steps in the EB-5 Process
The EB-5 process begins with the investor’s submission of an I-526 petition with the U.S. Citizenship and Immigration Services (USCIS). USCIS will review the petition and supporting documents to ensure that both the project documents and the investor’s source and path of funds documents comply with immigration laws and regulations.
Upon I-526 approval, the investor and family will be eligible to apply for their immigrant visas at a consulate overseas, or if in the United States on a valid visa, file for adjustment of status. During this second step, the investor and family members will be subject to additional background checks. If approved, the investor and his or her family will be granted conditional permanent residence for two years.
Before the expiration of the two-year conditional residency period, the petitioner must file form I-829 with USCIS to remove the conditions on residency. In this last step of the EB-5 process, the investor simply has to document that he or she did not violate any immigration laws while the new commercial enterprise will have to show that the investment proceeds have been sustained and the requisite jobs have been created. U.S. citizenship is optional, but can be requested five years after the investor becomes a conditional permanent resident.
ReAuthorization of EB-5
There has been a significant increase in EB-5 petition filings as the legislation authorizing the regional center program is set to expire Sept. 30. Although Congress has reauthorized it in recent years, members of both parties have proposed a series of substantial reforms this time around. Sens. Chuck E. Grassley, R-Iowa, and Patrick J. Leahy, D-Vermont, the chairman and ranking minority member of the Judiciary Committee, respectively, proposed legislation that would extend the EB-5 regional center program for a period of five years, but change key aspects of the program. Many industry experts do not believe that this bill in its present form will pass the Senate and the House of Representatives and be signed into law by the president. There are likely to be significant changes in the language of the bill before it could become law.
Not a surprising or an objectionable change, but certainly significant, is the proposed increase in the minimum investment amount to $800,000 for investments in a high unemployment or rural area (TEA), and $1.2 million for investments not in a TEA.
Not all proposed changes have been so readily accepted. The senators have proposed new restrictions on the use of some lawful sources of funds, such as loans secured by family property. In the EB-5 community, the concern is that the proposed restrictions could lead to incongruous results. To fund their EB-5 investment, a significant number of investors take loans, secured by an asset of equal value that he or she owns. More often the asset is real estate mortgaged to a bank, sometimes an employer or even a private company, in which the investor has a shareholding. However, the proposed legislation as drafted appears to eliminate loans from any other source other than a bank or a reputable lending institution. While that is predominantly how it may work in the United States, in China, a loan from one’s employer or a company that the investor is a shareholder in is not at all uncommon.
Another limitation according to the proposed legislation is that gifted funds can only be used for EB-5 investment if gifted by a parent, spouse, child, sibling or grandparent. This eliminates any possibility of a gift from a loved one who does not fall in the above familial category.
Some proposed changes are encouraging, especially the shorter processing times. Currently, USCIS is adjudicating I-526 petitions in about 14.2 months, and 13.6 months for I-829 petitions. Whereas under the proposed legislation the suggested processing times are limited to 150 days for an I-526 petition, on average, and I-829 processing is limited to 180 days.
The bill also includes proposed changes aimed at reducing opportunities for fraud and abuse and bringing more oversight and efficiency to the program. For instance, the bill adds major reporting, self-certification, and compliance requirements, and adds a $20,000 per year fee to each regional center to support an EB-5 integrity fund, which will be used for audits, site visits and investigations, both in the United States and abroad.
The bill requires compliance with securities laws, certification of compliance, and maintenance of policies and procedures for ensuring the compliance of parties affiliated with the regional center or investment company (defined broadly to include attorneys, promoters and others).
The bill presents a fair level of ambiguity and uncertainty, and will likely undergo many changes. To make things more interesting, there are two other bills in the U.S. House of Representatives, and no one knows which bill will become law. This has created a fair level of anxiety among the EB-5 community, but has not dimmed the interest of foreign investors, who are keen to file before Sept. 30, with hopes that their petitions will be adjudicated under current rules.
The U.S. Government Accountability Office recently released a report on the EB-5 program that criticized USCIS for being unable to fully quantify the job creation benefit of the EB-5 program. While USCIS has reported the program has brought in over $11 billion in investment and created almost 74,000 jobs since its inception, that calculation was based only on the minimum statutory requirement of creating 10 jobs per investor. GAO reviewed petition files and found that projects often create more than the 10-job minimum—more than twice that in some instances. Given the substantial impact of the program on the economy, Congress should extend the program and continue to attract high-net-worth investors to the United States.
This article was published in The Legal Intelligencer on August 19, 2015.