By Benjamin Tan
We are all familiar with the traditional ways of raising capital, namely traditional institutional and private investor financing. However, there is a third and lesser known form of raising capital from foreign investors under the “EB-5” or “Immigrant Investor” program.
What is the EB-5 Program?
The EB-5 is a government-sponsored program that was introduced with the Immigration Act of 1990. The program permits foreign nationals to earn their green cards by investing either $500,000, if in a Targeted Employment Area (TEA), or $1,000,000 in a qualifying business enterprise that will create at least 10 new U.S. jobs per foreign capital investment. The purpose of the program is to stimulate the U.S. economy through job creation and capital investment by foreign investors. Under a pilot immigration program first enacted in 1992 and regularly re-authorized annually since, certain EB-5 visas are also set aside for investors in Regional Centers designated by the United States Citizenship and Immigration Services (USCIS) based on proposals for promoting economic growth.
The EB-5 Application Process
The initial application requires the foreign national (applicant) to file an I-526 application with the USCIS which includes information about the investment, a source of funds report and the application to change non-immigrant status. After the initial application, the foreign national receives a conditional green card, which will be converted into a permanent green card if he can prove the creation and sustenance of new U.S jobs required by the program after two years.
Why Use It?
The primary advantage of using the EB-5 program is the low cost of capital as compared to traditional forms of financing. Because new companies are viewed as “higher risk”, traditional forms of financing often dictate fairly rigorous terms in favor of the investors. Conversely, as the sole aim of an EB-5 financing is to obtain a green card for the foreign national, the return on investment is of secondary importance. This often means less time and effort spent on due diligence and lower cost of capital.
The ways to raise capital through the EB-5 program are through a regional center investment or a direct investment.
A regional center is an investment promotion entity approved by USCIS that is involved with the promotion of economic growth, improved regional productivity, job creation and increased domestic capital investment in a designated geographic area. You can either create your own regional center or submit your project to an existing one for sponsorship. The latter is more favored as you do not have to go through the whole I-924 regional center application process, which can be lengthy and expensive. Further, the job creation requirement under the regional center method allows the inclusion of indirect jobs. For example, if you are building a factory, you are allowed to count the jobs “created” through the hiring of the general contractor and his employees. An economist will use a formula to calculate jobs created.
The second way of raising capital through the EB-5 program is through a direct investment, not unlike a PIPE. The direct investment requires a foreign investor to establish and directly invest in a business. This method is less attractive since the jobs created must directly relate to the business and the foreign investor is required to be materially involved in day to day operations of the business.
Structuring the Foreign Investment
The foreign investor can invest directly in your venture or provide a loan.
Under the direct investment structure, EB-5 investors invest directly into an investment entity where they become equity partners and are entitled to a percentage of the profits and losses. This structure is usually used when you are using capital to fund a business since the EB-5 investors feel more confident investing directly and controlling a business.
Another corporate structure and having particular interest to private equity funds is the loan method (i.e. regional center). Under this structure the capital raised through the EB-5 investors is invested into an intermediary entity (usually an LLC/LP) which then loans the funds to the investment entity that invests in the business that qualifies for the program. This can be achieved by making the collateralized loan through an intermediary entity and future payback of the loan through a sale or refinance of the investments assets.
Is the Program Right for You?
The EB-5 Program is not without its own complications. Unlike a traditional financing, EB-5 capital involves several players. First you would need an economist to create the econometric/job impact report that defines the amount of capital that can be brought into a project based on the amount of jobs that are directly created by the new business. Second, you would need EB-5 compliant business plan writer and finally you will need a securities and corporate attorney to ensure that the business and investment are compliant with both federal and state securities and corporate laws.
Also, one has to factor in dealing with the USCIS and the SEC as well as the waiting and processing times for each step of the green card application process. Investor funds are held in escrow until USCIS approval. This probably the most unpredictable aspect of the entire process as the waiting time depends on the workload of the USCIS. If funding is time-sensitive, some companies have resorted to traditional forms of financing first and then pay these off with cheaper money from the EB-5 Program when they come through.
Sichenzia Ross Friedman Ference LLP Bio Description:
Sichenzia Ross Friedman Ference LLP (“SRFF”) is a nationally ranked corporate and securities law firm that provides experienced, professional representation in all matters involving the securities industry, as well as in all general corporate and litigation matters. The Firm has been recognized as an industry leader in representing issuers, investors and placement agents in PIPE (Private Placement in Public Equity) transactions for the past ten years. SRFF’s clients range from start-ups to established, listed companies. They include private and public corporations, partnerships, broker-dealers, bank-affiliated broker-dealers, investment advisors, registered personnel, public and corporate customers and investors, partnerships and other entities. SRFF also advises institutional investors on transactions involving complex securities law considerations. SRFF’s practice includes the representation of clients located in the United States and throughout the world.
Benjamin A. Tan, Esq.
Sichenzia Ross Friedman Ference LLP
(212) 930 - 9700 ext. 609
Richard A. Friedman, Esq.
Sichenzia Ross Friedman Ference LLP
(212) 930 - 9700 ext. 448
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