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In Representing the Developer, what Comes First, the EB-5 Compliant Project Documentation, or the EB-5 Funding? Three Blind Mice, See How they Run (to Avoid the Worst!)



Successful EB-5 projects need to be compliant with the EB-5 rules and policies. However to attract the foreign national investors the EB-5 project must also be marketable.


The market has changed because of the time delays associated with the processing of I-526 petitions as well as I-924 applications for pre-approval of projects.


For projects to be viable and financially successful, the project, most of the time, will require the use of EB-5 funds as quickly as possible.


Funding of the project is therefore as important as preparing EB-5-compliant project documentation.


The Three Blind Mice, here, include the professional team members, the project developer, and the brokers or intermediaries sourcing the investors. The individuals in these groups all believe their roles in the EB-5 project are paramount. The professionals desire the documentation to be prepared to be immediately compliant, while the project developers do not want to start the project documentation compliance until they know they can get the funding through the brokers or intermediaries, and the brokers and intermediaries desire to force the professionals and developers to prepare documents they can easily market to investors to fund the projects. And, of course the Investors desire to obtain permanent residency in the U.S. and to have an exit strategy from the project.


The reality is that all the Blind Mice place an equally important role in preparing an EB-5 compliant and marketable project, and therefore the goal for a successful EB-5 project is the coordination of these efforts. Otherwise, there will be unnecessary time delays and confusion as to what is important to start an EB-5 project.



A Compliant EB-5 Project


The professional team members, consisting of the Immigration Attorney, Economist, Business Plan Writer, Marketing Analyst, and Securities Attorney, all understand the technical rules and policies of what makes an EB-5 compliant project. In fact, the team, who should be experienced and have the EB-5 expertise, will usually know how to prepare the documents that will be accepted by the USCIS. However, that this is only one of the steps in the right direction to make the project a successful EB-5 project.


A text book EB-5 compliant project consists of the following. Basically the supporting documents showing there is business activity and the investment funds used in the business will lead to the required job creation.


As we will determine the project needs to be more than compliant to be successful.


An EB-5 project whether it is a direct EB-5 project or whether it is associated with a Regional Center the project must EB-5 compliant with the EB-5 immigration rules and regulations, the EB-5 policies as directed by the most recent EB-5 policy memorandum. The policy memorandum came about in the early part of 2013.


The EB-5 compliant direct project will consist of a comprehensive business plan including verifiable details of the business activity, showing how the EB-5 funds will be committed and as a result lead to the creation of the required number of jobs.

The EB-5 project associated with an existing Regional Center will be compliant also by consisting of a comprehensive business plan, economic report showing the creation of indirect jobs, the security offering documents for the investors to review and sign.


A a strictly legally compliant project will not make the EB-5 project viable. The next question is what are the other steps that will make the project marketable and viable.



A Marketable EB-5 Project


The essence of an EB-5 project is that the project is able to use EB-5 investments for the funding of their projects. Therefore the project needs to incorporate information and terms of agreements into its compliant documentation that will become appealing and marketable to the foreign national investors. The investors’ expectations will in the current market require certain terms in the offering agreements in the compliant documentation and certain expectations stated in the supporting EB-5 documentation.


Remember these marketing clauses are not EB-5 requirements and only business decisions which may affect the success of the marketing of the EB-5 project.


Examples of marketable elements include that in an EB-5 regional center model the New Commercial Enterprise (NCE) which is the Fund LLC can accept the investors’ funds as an investment. The Fund LLC will then loan the funds to the job creating entity and the required jobs will be created.


The loan can be repaid back from the Job Creating Entity (JCE) with either corporate guarantees and/or collateral assets of the project to be used for taking out the loan from the NCE for the benefit of the JCE.  In this instance, the project will be more marketable if the investors are in the first position for repayment of the loan. That is, if the loan is not repaid by the JCE to the NCE, the NCE will be able to sue the JCE, sell the assets used as collateral for the loan, and the investors will be able to first collect the proceeds from the sale of the collateralized assets.


Another example is that there needs to be a showing that more jobs will be created than are required.



Combination of Compliance and Marketability: Part 1 for Success


It is the goal of the project developers to obtain EB-5 investment funding for the project. However, as we will see, the project developers will realize that they have to follow the directions of the brokers or intermediaries sourcing the investors. The brokers and intermediaries usually know the market for the investors they are dealing with and know what clauses need to be inserted in the EB-5 compliant documentation to make it easy for themselves to sell the project to the investors.  What do the investors really want to see in the EB-5 compliant documentation?



Funding before Approval of I-526 Petition: Part 2 for Success


Currently, there is one major factor that will have an effect on the financial and business viability of the EB-5 project. The time delay between the filing of the I-526 and the approval of the I-526 petition is now significant and consequential.


In the past couple of years, all EB-5 projects being marketed to investors stated that upon the approval of the I-526 petitions, the investors’ funds would then be transferred from an escrow account to the NCE as an investment and the NCE would then lend (if in a loan model) the funds to the JCE. Alternatively, in an equity model, the approval of the I-526 petition would lead to the funds being transferred to the NCE which is also the JCE.


As stated, because of long time delays, which could be twelve months, more or less, before the adjudication and approval of the I-526 petition, it is detrimental for the EB-5 project to wait this long before using the investors’ funds.


Therefore, the EB-5 project principals have to convince the brokers and intermediaries to explain to the investors that for the investors to commit to their EB-5 project, their EB-5 funds will be used at the time of filing the I-526 petition.


These circumstances have now convinced most brokers and intermediaries to convey this stipulation to investors and these investors are agreeing to allow the funds to be used.


In fact, the rules and regulations and policies state that the EB-5 investor can be in the process of investing or have invested the funds at the time of filing the I-526 petition.



Avoiding Denials and Return of Funds: Part 3 for Success


The team of professionals and the project developers are now of the opinion they have an EB-5 compliant project and marketable to the investors. That is, they believe the EB-5 compliant documentation will be approved by the USCIS and the brokers and intermediaries believe that the marketable EB-5 project will attract investors to the project.


In compliance with the SEC regulations, the intermediaries and brokers, who have operations only in foreign countries; can accept finder’s fees by the EB-5 project for referring investors to the EB-5 project. These fees will usually only be agreed to be paid by the EB-5 project to the brokers and agents when the I-526 petition is approved. It is important to note that the finder’s fee will not be paid to the broker or intermediary if there is a denial of the I-526 petition and in order to make the EB-5 project marketable there is usually a stipulation that the EB-5 project will return the funds to the investor within a set period of time if the I-526 petition is denied.


Therefore, it is paramount that the project developers, brokers and intermediaries, and the U.S. Immigration attorney works together and coordinate their efforts in developing a strategy as to the preparation of the I-526 petition to lead to an approval by USCIS and avoid a denial.


The I-526 petition in the EB-5 Regional Center context will consist of three parts consisting of the regional center approval documentation, the EB-5 compliant project documentation, and the authentication of the source of investor’s funds.


Before the investor decides to commit their funds to the EB-5 project, the EB-5 compliant project documentation and designation of the regional center has already been achieved. However, the individual investors’ authentication documents showing the authentication of their funds and how they were transferred to the escrow account of the EB-5 project have not been prepared.


One of the dilemmas for the EB-5 project developers and the brokers and intermediaries is that certain groups of investors desire to use their own immigration attorneys who may not have the expertise or experience in the EB-5 practice area, especially for authenticating the source of funds. For the benefit of the EB-5 project developers and the brokers and intermediaries, it is highly recommended that experienced EB-5 attorneys are retained by the investors to assist and advise in the preparation of the authentication of the source of funds and to coordinate these efforts with the brokers and intermediaries and investors so that an approvable I-526 petition can be filed and approved by the USCIS.


It is also in the best interest of the EB-5 project developers that if a group of investors decide that they must have their own immigration attorney represent their I-526 preparation and filing, that the project developers retain their EB-5 immigration counsel to review the I-526 petition prepared by other immigration counsel, to ensure quality control and consistency of the I-526 filings.


As stated, the ultimate goal for all the Blind Mice, the project developers, the team of professionals, and the brokers and intermediaries and investors, is to obtain approval of the I-526 petition. Hence, to avoid the worst, a denial of the I-526 petition.




If there was USCIS predictability, expedited and quick processing and clarity, then the process and timing of committing EB-5 funds and approval of compliant EB-5 projects will be very different.


Three blind mice, the race against the clock, 2014.