EB-5 Investment Transparency: A Guide to Understanding Risks and Identifying Red Flags

  Author: Samuel B. Silverman

I’m Sam Silverman, one of the managing partners and founders of EB5AN. One of our core values at EB5AN is transparency, and in this article, I’m excited to share how you can assess whether an EB-5 project is being transparent in its risk disclosures.

Experience has taught me that EB-5 investors are often unaware of the risks of an investment if an EB-5 project isn’t transparent about these risks. Many EB-5 investors do not know what questions to ask.

If you don’t know the risks of an investment, you can’t make an informed choice. I don’t want you to be uninformed.

In this article, you’ll learn the basics of EB-5 project risk through an easy-to-follow framework. This framework will help you identify high-quality EB-5 projects that have less financial and immigration risk.

I want to emphasize that no investment framework will work 100% of the time. Every EB-5 project is unique and has various risks that need to be understood.

But if you carefully read this article and follow its simple suggestions, you’ll be in a much better position than most EB-5 investors to recognize and evaluate project immigration and financial risks.

This article will show you the most important questions to ask project sponsors and what good and bad answers look like. You’ll be able to easily apply this framework from project to project.

I founded EB5AN in 2013 after spending time in China during the early days of the EB-5 program. I saw many high-risk EB-5 investments in new real estate development projects get funded successfully. Developers raising EB-5 capital at this time were desperate for investment. They could not source capital from traditional U.S.-based real estate investors because of the high-risk nature of their projects.

Many of these projects later faced bankruptcy. Investors lost their money. The projects failed to create sufficient jobs, and EB-5 investors could not get or keep their Green Cards.

These projects failed for many reasons, some of which I’ll discuss below.

Over the last 10 years, I have reviewed hundreds of EB-5 projects from across the country. I’ve developed a list of questions to help potential EB-5 investors identify the most important issues when evaluating EB-5 projects. That list is available as a download in this article. In the sections that follow, I’ll provide you with some context and instructions for how to make the most of this list.

Download EB-5 Investment Diligence Question List

Basics of EB-5 Investment Risk

The EB-5 program requires investment funds to be “at risk” for an investor to qualify for a Green Card. This means that EB-5 investors must face the financial risk of losing their investment.

No Project Is Risk Free

No EB-5 project will be 100% free of financial and immigration risk. The level of risk, however, can vary among EB-5 projects. Even if a project meets all EB-5 program requirements, it may be high risk. In fact, many EB-5 projects carry levels of risk far above that required to satisfy the at-risk requirement of the EB-5 program.

Hundreds of project sponsors and EB-5 regional centers offer projects to investors. Most of these projects meet the EB-5 program’s Green Card requirements as long as they follow their business plan. Project success, however, depends on a wide array of factors, including the project’s structure, the construction timeline, and the developer’s track record.

It’s important to note that USCIS, the U.S. government agency that oversees the EB-5 program, focuses on the at-risk and job creation requirements of the program. USCIS is not concerned about whether or when an EB-5 investor will receive his or her invested capital back.

As a result, EB-5 investors should take time to review multiple EB-5 projects. Since each project’s risks will be different, evaluating several projects helps an investor identify the project that is most likely to result in successful immigration and a return of his or her investment.

A recent Government Accountability Office report noted that less than 1% of EB-5 investments were lost due to fraud. This is a small number. The key word, however, is “fraud.”

The actual percentage of EB-5 investors who lose funds is much higher than 1%.

Not many EB-5 investors lose money due to fraud or illicit activity by a “bad actor.” Instead, they invest in high-risk EB-5 projects, often unknowingly. Then the project does not perform well and faces financial issues.

Often when a project is a financial failure, it also fails to create enough jobs for EB-5 investors to meet the EB-5 program’s job creation requirement. In this way, financial risk is tied directly to immigration risk for EB-5 investors.

Why Do Risky Projects Attract Investors?

Why would an EB-5 investor choose a project with more risk? Usually, these investors either do not know when the risk of a project is higher than what is required by the EB-5 program or they do not carefully compare different projects before investing.

To participate in the EB-5 program, investors must be foreign nationals born outside of the United States. Some EB-5 investors may already be in the United States on other visa types such as H-1B, F-1, E-2, etc. Most, however, are living outside the United States when they invest.

Many EB-5 investors have little experience with the United States. Even fewer understand U.S. real estate development projects or U.S. securities laws.

Additionally, while EB-5 investors hire immigration attorneys, these attorneys check whether a project meets EB-5 requirements. They do not generally provide advice on the financial feasibility or the investment risks of a project.

Many EB-5 investors invest large sums of money in a country and industry they don’t know well, and they have to deal with complex U.S. securities laws they are not familiar with. Most EB-5 investors simply are not equipped to make good EB-5 investment decisions. As a result, many development projects that are unable to obtain financing from public or private markets in the United States successfully raise EB-5 financing.

EB5AN’s Approach to Protecting EB-5 Investors

While living in China in 2011 and 2012, I watched as projects raised EB-5 capital from investors who simply did not understand the risks involved. Many investors lost their money and immigration status. I wanted to provide a better option, so my partner, Mike Schoenfeld, and I founded EB5AN. We decided to identify projects that needed below-market investment capital but were not dependent on those funds to be successful. We then structured EB-5 investments for these projects with a focus on investor safety and success.

Our approach works. Our EB-5 investors have benefited from our conservative and transparent approach to EB-5 investment. Now, ten years later, we have built one of the largest EB-5 regional center platforms, with over 10 regional centers serving more than 30 states and U.S. territories.

Every regional center EB-5 project for which we act as a fiduciary for EB-5 funds has been successful.

  • Each of these projects is either completed or on track.
  • All EB-5 capital is either repaid or in good standing.
  • All EB-5 job creation requirements are either met or on track.

We are one of the few—if not the only—large-scale regional center operators that have not lost any regional center investment funds, had USCIS project denials, faced bankruptcy, defaulted on a loan, been fined by the SEC, or been sued by EB-5 investors.

One of the reasons our approach has been successful is that it addresses the main concerns of EB-5 investors. The number one question I hear from EB-5 investors is, “How do I keep my investment safe and make sure my family gets Green Cards?” The answer is that investors need to become familiar with U.S. securities laws and real estate development investment. This may sound daunting, which is why we have created this resource—to help make this essential task easier.

In the following section, we will briefly cover U.S. securities laws as they relate to EB-5 investments. Understanding these laws is vital to understanding the risks that come with EB-5 investment, how these risks are disclosed, and how to avoid unnecessary risks.

Basics of U.S. Securities Laws

EB-5 Investments Have Lower Compliance and Regulatory Standards

U.S. securities laws were made to protect American investors. One goal of these laws is to ensure that investors are not exposed to high-risk investments. These laws are more relaxed for accredited investors who meet certain income and net worth requirements.

EB-5 investors are foreign nationals, not U.S. citizens. And almost all EB-5 projects require EB-5 investors to be accredited investors. Because EB-5 investors are accredited foreign investors, EB-5 projects are subject to less stringent standards.

Risks Can Be Extreme as Long as They Are Disclosed

EB-5 investments are mostly structured as private offerings. This means they are not marketed to the general public and do not need to register under U.S. securities laws. Private offerings are required only to accurately disclose to potential investors the key risks of the investment. This means that an EB-5 project can have an unlimited amount of risk as long as all the risks are disclosed in writing.

As mentioned earlier, EB-5 investor funds must be at risk of loss. That risk, however, does not need to be high to qualify an EB-5 investor under the program.

This point is crucial. Consider two real-life EB-5 projects available in the market today:

1. Home Project EB-5 Loan

This project is building single-family homes in a growing area. Construction activities have been ongoing for several years.

This project has been approved by two senior lenders for construction loans. It has already created more than one thousand EB-5 jobs. More than $200 million has already been spent on project development costs, and over 500 homes have already been sold. The project is already profitable.

EB-5 funds are being loaned to the developer. This loan is secured by a parent company guaranty from a diversified parent holding company with hundreds of millions of dollars in assets. Additionally, the developer has repaid billions of dollars in debt and has never failed to repay any loan. In more than 25 years of operation, the developer has never failed to complete a project.

2. Rental Project EB-5 Loan

This project plans to buy land to develop a hotel and apartment complex. The project does not have a funded senior loan in place and has not started construction. As a result, few, if any, EB-5-eligible jobs have been created.

The success of this project is tied to future rent payments. Rental rates are projected two to three years into the future, and those rates may not be feasible when units finally become available to rent.

The developer has no track record of repaying an EB-5 loan, which is not secured with any collateral. To repay the EB-5 loan, the developer will have to successfully refinance its construction loan. At that time, financing may not be available at an affordable interest rate or at all.

Also, all the parties involved in the transaction are related, which creates conflicts of interest that add risk to the investment.

Both projects meet the at-risk requirement of the EB-5 program. However, the rental project is far riskier. That project may eventually succeed, but the home project is showing success right now. The rental project offers no protection for investors, while the home project’s loan has a repayment guaranty. The rental project’s developer has no track record. The home project’s developer has a long record of success.

Checking Offering Documents for Risks Is Essential

Selecting a low-risk EB-5 project can be difficult. How can you know whether a project is high risk like the rental project from the example above?

To learn key project details, like the status of construction and what financing is currently in place, you will need to ask a lot of questions. Ultimately, the information you need to know should be found in the offering’s documents.

In many cases, what is missing in the offering documents is even more important than what is in them. Having a list of questions before you begin to review a project’s offering materials is critically important. With such a list, you can see what issues are not addressed in the offering documents that you need to ask the project’s sponsors about.

An EB-5 project salesperson will be quick to tell you every positive detail about a project. They may tell you verbally that a project has a senior loan in place and that the developer is financially strong.

Under U.S. securities laws, only the project details and disclosures written in the project’s offering documents really matter. If you are told something about a project but it is not written in the offering documents or provided to you in writing by the EB-5 project sponsor, then you should consider it unverified and untrue. When making investment decisions, do not rely on any information you receive that is not in writing.

Before making a decision, carefully review the full set of offering documents. Set aside time to read every disclosure. Even if you are not an investment expert, this will be time well spent.

Following are three example situations that we often see.

Example 1: Senior Loan Risk

A salesperson for an EB-5 project might tell you that a project has secured a senior loan. The offering documents, however, may reveal that one of the project’s risks is actually obtaining this loan.

The offering documents might say something like the following:

“Development Risk: The project has not yet obtained a commitment from a senior lender, and without such commitment, the project may not have sufficient funds to be successfully completed.”

In simple terms, this means the project does not have a senior loan yet. If the project fails to secure this loan, it likely will not be built. As a result, EB-5 investors in the project may not qualify for their permanent Green Cards because the project will not create enough jobs. EB-5 investors may also lose part or all of their investments.

Until recently, the United States has been in a low interest rate environment. Real estate developers have had easy access to bank loans. As interest rates go up and credit markets tighten, even experienced developers are struggling to secure construction loans. Refinancing loans after construction is complete has also become more challenging and more expensive. As a result, the risk profile of EB-5 deals has changed. The types of EB-5 projects that are most likely to achieve EB-5 investor goals has also changed.

If an EB-5 salesperson claims that the loan for a project has been signed and funded by a bank but will not show you a copy of the loan agreement and bank statements, beware. This is a big red flag.

The salesperson may say, “Sorry, we cannot share that with you.” This kind of response suggests that they are likely hiding something. The loan agreement and bank statements are key documents for investors and can be provided. These documents allow potential investors to evaluate the investment’s feasibility and credibility. You should be able to look at these documents before making a decision to invest or not.

Example 2: Repayment Risk

A project’s offering documents might state that the entity promising to repay EB-5 funds may not be able to do so under certain circumstances.

The disclosure in the offering documents will look something like the following:

“Exit Strategy: Successful repayment of the EB-5 loan is solely dependent on future cash flow from hotel and apartment operations and/or a successful liquidity event that yields sufficient net proceeds to repay the outstanding EB-5 loan balance. If the project is unable to realize sufficient cash flows or experience a liquidity event, EB-5 investors may face a loss of part or all of their investment capital.”

In simple terms, this means that the hotel or apartment project may not earn enough money once it is open. The project has to pay its operating costs, which include interest payments that will likely be higher than planned. In this scenario, the EB-5 loan is likely to go into default. If that happens, the EB-5 investors may lose part or all of their investment capital.

This risk is extremely common in hospitality or multifamily projects. These types of projects often do not have repayment guarantees from separate guarantor companies that are distinct from the project development company. You should be wary of such projects as they are much more financially risky.

Example 3: Developer Risk

A salesperson for an EB-5 project may tell you that the developer is financially strong. They might try to assure you that your investment funds are safe and you will surely be repaid. Knowing that you should not rely on unverified information, you ask to look at the financial statements of the project development company and any separate guarantor company.

The salesperson might decline to provide this information and provide all sorts of excuses for why it cannot be shared. Do not fall for this. These documents can be legally shared, and EB5AN makes them available to potential EB-5 investors. Without this information, you will not be able to gauge the financial strength of these companies. As a result, you will not be able to accurately assess the financial risk of investing in this project. You should avoid projects where the level of risk is completely unknown.

Alternatively, if the salesperson provides the financial statements you request, carefully review them. If they reveal that the project development company or guarantor is not as financially strong as suggested, you should avoid investing in this project.

EB-5 Investment Diligence Question List

Choosing an EB-5 project is a major investment decision. Finding the right project may seem daunting.

I developed the EB-5 investment diligence question list to help potential EB-5 investors like you filter out risky projects. You should be able to invest in a project with confidence that it will qualify you for a Green Card and that you will get your money back. This list of questions will help you do that.

Download EB-5 Investment Diligence Question List

This document provides a simple list of questions for you to send to a project’s sponsor. If answered candidly in writing by an EB-5 project with relevant supporting documents, the responses you receive will help you assess how much immigration and financial risk a project has.

But please don’t settle on the first project you look into. You won’t really know how risky a project is until you compare it with other projects. These questions will help you understand how EB-5 investments work and will allow you to compare projects to find the lowest risk option.

Keep in mind that some EB-5 project sponsors might be hesitant to answer all of the questions fully. This in itself can be a red flag. Honest, detailed responses in writing suggest that a project has nothing to hide.

The EB-5 investment diligence question list provides a good starting framework to help you understand which characteristics of an EB-5 project are important. But the list of questions is useless if you don’t know how to interpret the answers you receive. Take your time as you look through this section. Bookmark this page and come back to it as you examine different projects.

Under each category below you will find a series of questions and then some potential responses. The “best answer” means low risk in that category, while the “worst answer” means high risk. The answers you receive from a project will likely fall somewhere in between “best” and “worst.”

Questions about the Project Developer:

Questions about the EB-5 Investment:

Questions about Project Feasibility:

Questions about Project Financing:

Questions about Conflicts of Interest:

Maximize Your Immigration and Financial Safety with EB5AN

As an EB-5 investor, you should be careful when choosing a project to invest in. Every project has financial and immigration risks, but some projects are much riskier than others. I hope that with the context provided by this article and the downloadable question list, you will find a low-risk project that is right for you.

I would encourage you to look for projects being developed by experienced developers. They should be transparent and provide you with answers to all of your questions. They should have strong financials and proven economic feasibility. Their success should not depend solely on future projected revenue.

By using the information in this article and carefully looking at more than one project, you can invest with greater confidence. You can’t remove all risk, but you can take simple steps to improve your chances of successfully immigrating and getting your money back.

As a company, EB5AN has spent a decade promoting transparency and providing free EB-5 information. Our website has detailed content, and we have posted hundreds of informative videos on our YouTube channel. We’ve conducted numerous webinars with experts from across the EB-5 industry to give investors like you all the information you need to make informed choices.

At EB5AN, we structure EB-5 investment projects to meet our strict immigration and financial risk criteria. Our team consists of highly experienced real estate and finance professionals. We know how to carefully diligence real estate development projects to eliminate unnecessary risk. Our focus is on finding the highest quality EB-5 investments to help our EB-5 investors get their Green Cards and a timely return of their money.

For more information on how we can help you successfully get a Green Card through EB-5 investment, schedule a free consultation.