What the EB-5 “At Risk” Requirement Means

The EB-5 At Risk Requirement

Since its inception in 1990, the EB-5 Immigrant Investor Program has enabled many foreign nationals to obtain U.S. permanent residency. By making a qualifying investment in a new commercial enterprise (NCE) within the country, EB5 investors can be eligible for a Green Card. The minimum EB5 investment amount depends on the location of the project: $1,050,000 for standard investments and $800,000 for investments in targeted employment areas (TEAs).

Naturally, there are program regulations that prospective investors must follow. One of the main criteria involves the “at-risk” requirement. EB5 investors must thoroughly understand this requirement for their invested capital to qualify under the E-B5 program. In this article we will cover what it means for EB-5 capital to be at risk.

What Does “At Risk” Mean?

The underlying purpose of the EB-5 program is to stimulate the U.S. economy and create new jobs for U.S. workers. To ensure that EB-5 investment amounts will be used for these purposes, they are required to remain “at risk” for the duration of an EB5 project. While this may suggest that investors must choose risky EB5 projects, this is not the case. In actuality, this requirement serves to prevent foreign nationals from simply “buying” a visa; any investors who wish to obtain permanent residency via the EB-5 program must contribute to the economy and be open to either financial loss or gain. Every EB-5 project must entail a degree of financial risk.

EB-5 visa applicants must demonstrate that they are actively investing in their chosen EB5 project and that there is no guarantee that any or all of their investment funds will be returned to them. If any portion of the capital is protected against loss and not at risk, the investment does not qualify under the EB5 program.

An investor must prove that his or her investment capital is at risk in the I-526E petition, the first application investors file to receive an EB-5 visa. An intent to invest does not qualify funds as at risk. Investors must make their investment prior to filing Form I-526E. Approval of this petition results in a two-year conditional permanent resident status.

(All EB-5 investors previously filed Form I-526; now, Form I-526E is used by investors in regional center-sponsored projects, the most popular investment options in the EB-5 industry.

Conducting At-Risk Due Diligence

Conducting proper due diligence when evaluating EB-5 projects is highly recommended for prospective investors. Doing so can minimize the financial and immigration risk for EB5 applicants. Moreover, due diligence can help reveal project provisions or circumstances that do not comply with the at risk criteria.

Here are several questions for investors to consider when evaluating a project’s at-risk requirement compliance:

  • Do the business plan and offering documents demonstrate potential for both financial gain and loss?
  • Does the investment agreement contain ownership terms?
  • Is the investor guaranteed a rate of return?
  • Is the investor guaranteed eventual ownership of an asset that will have to be subtracted from the EB-5 investment amount?
  • Is the NCE obligated to provide the job-creating entity (JCE) with the full EB5 funds? Are there any fees in place that could impact the amount of funds the job-creating entity receives?
  • Does the business plan detail the time and manner in which the job-creating entity will use the EB5 capital?
  • Does the business plan indicate ongoing business activity?

These questions are crucial when selecting an EB-5 project in which to invest. Later, when investors file Form I-829, the final petition for a permanent EB-5 visa, investors must prove that their investment amount has remained at risk for the entire period of their conditional permanent residence in the United States.

At-Risk Criteria for the E-2 Visa

The E2 visa is another popular immigration route into the United States. While the E-2 and EB-5 options have major differences, they share a key similarity: the invested capital must be “at risk”.

Unlike the EB-5 visa, there is no official minimum investment amount to qualify for an E2 visa. Instead, the investment must be considered substantial enough to cover the cost of either buying or establishing a business. Additionally, the investment funds must be considered at risk to qualify for this visa.

EB-5 At-Risk Criteria

In the 1990s, four significant rulings were made by the Administrative Appeals Office in an attempt to better regulate EB-5 applications. These are Matter of Soffici, Matter of Hsiung, Matter of Izummi, and Matter of Ho, which clarified and established various EB-5 program regulations.

This section will focus on Matter of Izummi and Matter of Ho, as they contain details regarding the EB-5 at risk criteria.

Matter of Izummi

Matter of Izummi, and provisions in the USCIS Policy Manual 6(G)(2)(A) that cite Matter of Izummi, cover most of the details of the at-risk requirement. Investors must consider the transfer of investment amounts, ownership and use of assets, and contractual obligations.

Transfer of investment amounts:

  • The full requisite amount of investment capital must be made available to the NCE. Any portion of the investment not made available is not considered at risk and does not comply with the at-risk requirement.

Ownership and use of assets:

  • If an EB5 investor is granted ownership or use of an asset, the value of the asset will be subtracted from the investment amount. Such guarantees are only permitted if the value of the asset does not cut into the minimum at risk investment amount.

Contractual obligations:

  • For an EB5 investment to be at risk, there must be a chance of financial loss and gain. Therefore, the project developer cannot make any guarantees concerning the financial outcome of a project.
  • Contractual rights to repayment are not allowed.
  • Investors must acknowledge the possibility of significant financial loss.
  • Profit distributions are allowed as long as they are not guaranteed and are not a portion of the investor’s minimum investment amount.

Matter of Ho

The Matter of Ho ruling details an additional rule for the at-risk requirement.

For an EB-5 investment to qualify as “at risk”, the investor must prove that the project has undertaken business activity. Simply establishing an NCE and signing a commercial lease are not sufficient enough to prove the investment is at risk. Without the presence of ongoing business activity, USCIS cannot verify whether the at risk investment will be used to stimulate the economy and create jobs.

Real-Life Examples of the At-Risk Requirement

In this section we will cover various real-life examples of United States Citizenship and Immigration Services (USCIS) enforcing the at risk requirement.

No Chance for Profits

According to program regulations, an EB5 investment must offer the investor a chance to gain profits. One investor’s I-526 petition was denied by USCIS because the contract she signed with the NCE did not grant her rights to any profits. This contract did not satisfy the at-risk requirement, which resulted in I-526 denial.

As long as an investment offers a chance for profit, there are no rules regarding the quality of the investment itself. USCIS once denied an I-526 petition because the terms would make it extremely difficult for the investor to make a profit. However, the Administrative Appeals Office (AAO) disagreed with this decision, as there was still a chance for financial loss or gain despite how weak the investment was.

Funds Not Made Available to the JCE

In addition to proving the transfer of the investor’s capital contribution in full, investors must also demonstrate that the funds are made fully available to the JCE. In one instance of at-risk requirement enforcement, an investor had transferred her investment amount to an escrow account for the NCE to loan to the JCE. However, the loan agreement did not require the NCE to loan the funds to the JCE. Furthermore, construction on the JCE had been completed while the investment funding was still in escrow. As there was a lack of reasonable need for the funds, and considering the lack of obligation for the NCE to loan any to the JCE under the loan agreement, the investor’s I-526 petition was denied.

Why the At-Risk Requirement is Important

The at-risk requirement is a necessary aspect of EB5 program regulations. It serves to ensure prospective investors will actually stimulate the U.S. economy and create jobs, rather than simply buying a Green Card. It is crucial for EB5 investors to comply with the at-risk requirement, as failure to do so will result in I-526E denial and delay the immigration process. However, those who satisfy the requirement and EB5 regulations will be eligible for conditional residency status, which brings investors one step closer to obtaining permanent residency in the United States. In addition, certain EB-5 projects allow partial investments in installments while complying with the at-risk requirement and offering a low financial and immigration risk with a solid business plan.

As a leader in the EB-5 visa investment field, EB5AN has helped thousands of investors secure permanent U.S. resident status. If you are interested in obtaining U.S. residency by investment, schedule a free call with EB5AN today.