The purpose of the EB-5 “at risk” eligibility requirement is to ensure that an EB-5 investor’s investment capital is actually used to fund a new commercial enterprise (NCE) that will create jobs and stimulate the economy. While the name of the requirement might suggest that investors are required to invest in risky projects, it actually refers to the risk of financial loss and the opportunity for financial gain that an EB-5 investment must incur.
Intent to invest or arrangements for potential investments are not sufficient evidence of an at-risk investment. This means that EB-5 investors must make their investments prior to filing their I-526 petitions and prove in their applications that their investment meets the “at risk” requirement.
Detailed information about the EB-5 “at-risk” requirement can be found in Matter of Izummi, stipulations in the USCIS Policy Manual 6(G)(2)(A) that reference Matter of Izummi, and Matter of Ho. The rules that govern the “at-risk” requirement are as follows:
- Contractual Obligations
- Project developers cannot make any guarantees related to the final financial outcome of the projects.
- Contractual terms related to repayment are prohibited.
- Investors must accept the possibility of substantial financial loss.
- Investors may receive profit distributions as long as they are not guaranteed and not part of the investors’ minimum investment amounts.
- Ownership and Use of Assets
- Guarantees of ownership or use of an asset are permitted if the required EB-5 minimum investment amounts are still met after the expected value of the asset has been deducted from the amount of the qualifying EB-5 investments.
- Transfer of Investment Amounts
- Investors must transfer the full investment amount to the NCE.
- Evidence of Business Activity
- Investors must prove that business activity is occurring on the project to validate its legitimacy and demonstrate that their investment is being used to stimulate the U.S. economy.
Examples of “At Risk” Requirement Enforcement
The ways United States Citizenship and Immigration Services (USCIS) enforces the “at risk” requirement can be seen in the real-life examples below.
No Opportunity for Financial Gain
Just as EB-5 investments must incur the chance of financial loss, there must also be opportunity for financial gain. USCIS denied an I-526 petition because the investor was not granted rights to NCE’s profits in the contract she signed, which did not satisfy the requirement of an at-risk investment.
It should be noted, however, that the quality of the investment does not factor into the requirement. USCIS denied an I-526 petition due to the extremely low likelihood of the investor making a profit. However, the Administrative Appeals Office (AAO) did not agree with the denial, since there was still opportunity for both financial loss and financial gain, regardless of how weak of an investment it was.
Job-Creating Entity Did Not Have Access to Funds
USCIS denied an I-526 petition because, while the full investment capital was transferred to an escrow account for the NCE to distribute to the job-creating entity (JCE), there was nothing in the loan agreement that required the NCE to provide the funds to the JCE. Additionally, construction on the JCE was completed while the investor’s capital was still in the escrow, so there was a lack of reasonable need for the funds.
No Obvious Business Activities
USCIS denied a JCE’s application for exemplar status when it was unable to determine during a visit to the project site that any business activities were being conducted. The JCE appealed USCIS’s decision. USCIS ultimately approved the project for exemplar status after the JCE provided evidence of business activities, including building permits, inspection records, and construction contracts.
“At Risk” Requirement Due Diligence
As noted earlier, the “at risk” requirement does not mean that EB-5 investors should invest in risky projects. Investors must conduct due diligence to minimize their financial and immigration risk. In this vein, EB-5 investors must also keep in mind the “at risk” requirement and any conditions and situations that might violate it. The following questions will help investors determine whether an EB-5 project satisfies the “at risk” requirement:
- Is there clear evidence of the potential for both financial loss and gain in the business plan and offering?
- Are there ownership terms or something similar in the investment agreement?
- Does the NCE guarantee a rate of return?
- Does the NCE guarantee ownership of an asset that will need to be subtracted from the qualifying EB-5 investment amount?
- Does the investment agreement require the NCE to provide the JCE with the full EB-5 funds? Are there any fees in the agreement that will affect the amount of funds the JCE receives?
- Is the use of the EB-5 capital by the JCE laid out in full, in terms of time and methods, in the business plan?
- Are ongoing business activities made clear in the business plan?
The I-829 petition has its own “at risk” requirement that follows somewhat different rules than those for the I-526 petition. One of the rules for the I-829 petition is that EB-5 investors must prove that their investment funds have been at risk the whole time that they have been a conditional permanent resident in the United States.