Complying With Direct EB-5 Investment Regulations: Three Guidelines for Business Leaders

Business leaders in today’s fast-moving economic landscape regularly need to expand their operations, improve their services, and enter new markets—and a reliable funding source is essential to accomplishing all of these goals. However, the frequent vagaries of the economy brought about by the COVID-19 pandemic can make it more challenging than ever to find an adequate source of capital. As numerous businesses across various industries can attest to, the EB-5 visa program may be an ideal solution: billions of dollars of EB-5 capital have already been used to aid the U.S. economy and reduce nationwide unemployment.

The EB-5 investment industry is overseen by United States Citizenship and Immigration Services (USCIS), which closely regulates EB-5 offerings. The agency’s numerous legal and economic criteria for EB-5 businesses, including the requirement to create at least 10 jobs per investor, may at first seem daunting to individuals who are new to the industry.

Business leaders must also keep in mind that the EB-5 program offers two investment types: the regional center-sponsored and direct investment models. When structuring a direct EB-5 offering, business owners must keep in mind the unique regulations governing the direct investment model, carefully track hiring documentation, and follow industry best practices.

1. Key Differences Between Regional Center and Direct EB-5 Investment

EB-5 investors in a regional center-sponsored offering purchase equity in an investment fund managed by a regional center (a USCIS-approved service agent for the EB-5 industry). The capital is then loaned to a job-creating entity or used to buy equity in it. In addition to standard W-2 positions, regional center projects are also allowed to calculate indirect and induced employment using an econometric model. All three employment types count toward fulfilling USCIS’s job creation requirement.

In the direct EB-5 model, foreign nationals invest in a business straight away without the intermediation of other entities. Further, these offerings are usually smaller in scope than their regional center counterparts and can take on only one investor. The foremost difference between the two investment types is that direct EB-5 businesses can count only W-2 positions that appear on their payroll. As a result, employees of affiliated companies, independent contractors, and part-time positions do not count as direct EB-5 jobs.

2. Tracking Direct EB-5 Hiring Documentation

The job calculation criteria for the direct EB-5 industry entails that businesses must keep detailed employment records. They should strive to gather as much evidence as possible demonstrating that (1) each EB5 investment created at least 10 jobs; (2) the positions lasted for a minimum of two continuous years; and (3) the positions were full time (at least 35 hours per week). Such documentation includes each worker’s W-4 forms, payroll records, salary statements, timesheets, any employment agreements, and similar information. It is particularly important to retain each employee’s Form W-2.

USCIS also sets out criteria determining what kinds of workers are eligible. In its Policy Manual, the agency states that direct EB-5 positions must be filled by “a U.S. citizen, a lawfully admitted permanent resident, or other immigrant lawfully authorized for employment in the United States.” Employers should thus retain each worker’s Form I-9, Employment Eligibility Verification. Still, since Form I-9 does not necessarily prove that a worker is authorized, and businesses are not allowed to ask for certain immigration information, it may be advisable to hire only U.S. citizens or permanent residents.

3. Best Practices for the Direct EB-5 Industry

Foreign nationals evaluate potential EB-5 investment opportunities primarily based on the latter’s adherence to USCIS standards. Consequently, a best practice for EB-5 businesses is to provide a job cushion, aiming to create more than the minimum number of positions. In fact, EB-5 businesses that are already operational and have created several jobs are more likely to attract investors.

The track record of an EB-5 business’s sponsor is another crucial factor. Investors favor sponsors with high I-526 petition approval rates; a sponsor with a 100% approval rate is very likely to raise EB-5 funding. Conversely, if any of its previous I-526 petitions have been denied, a sponsor should be able to provide a reasonable explanation. Sponsors that have already worked with several EB-5 businesses and release financial reports regularly are perceived as more reliable.

Investors also ascribe importance to an EB-5 offering’s financial safety, meaning that direct EB-5 businesses should be financially viable and demonstrate that they are likely to succeed in their respective markets. Virtually any for-profit enterprise can qualify for EB-5 investment funding, and many direct EB-5 businesses operate in the retail, hospitality, wholesale, and restaurant industries. A comprehensive business plan featuring economic projections, market data, and descriptions of the jobs to be created is essential. Financial safety will also be enhanced if EB-5 funding constitutes a relatively small percentage of the total capital structure and if the operator contributes a significant amount of funds.

Regarding investor repayment strategies, many direct EB5 investment offerings choose to employ a preferred return investment structure, thereby ensuring that EB-5 investors will be the first to receive the business’s profits. Business owners may also choose to use a cash flow sweep—that is, excess cash—to repay their investors once these are eligible.

Admittedly, creating a direct EB-5 offering in compliance with USCIS guidelines is a lengthy process that requires careful execution and an intimate knowledge of the EB-5 program. Still, numerous business leaders have been able to surmount these challenges with the help of industry consultants and now enjoy direct EB-5 funding at below-market rates.