The EB-5 Immigrant Investor Program, a permanent federal program established in 1990, allows foreign investors to pursue U.S. residency by investing in a project that creates jobs for American workers. In 1992, Congress created the Regional Center Program to simplify the investment process and thus attract more investors to stimulate economic growth. Unlike the EB-5 program, the Regional Center Program is a temporary program that is reauthorized periodically, usually annually. These two EB-5 investment options are referred to as direct and indirect EB-5 investments, with direct investments referring to investments in projects that are not sponsored by a regional center.
How Do Direct and Regional Center EB-5 Investments Differ?
Whatever the type of EB-5 investment an EB-5 visa applicant chooses, the basic EB-5 requirements remain the same: they must invest the minimum required amount to create 10 full-time jobs for American workers. The minimum investment amounts remain the same for both types of investors. The most significant differences between the two models are the types of jobs that count toward the job creation total, the role the regional center plays in the EB-5 visa process, and the way each model is structured.
The main difference between the EB-5 direct and indirect investment models is how investors calculate job creation. For direct investments, investors can count the jobs created by the new commercial enterprise (NCE) in which they make the EB-5 investment. These are typically the ongoing operational jobs, but they can include construction jobs if construction will take two or more years and if the construction workers are directly employed by the NCE or a wholly owned subsidiary. These employees are often referred to as W-2 employees or employees on the payroll of the business in which the investor invested.
EB-5 investors who invest in projects sponsored by regional centers can count direct, indirect, and induced job creation, which makes it easier to create the required number of jobs. Indirect jobs results from the EB-5 project’s spending in the region on goods such as materials and equipment, and services such as legal counsel, provided by local companies. Induced jobs are the jobs created by employees spending their wages. To calculate indirect and induced jobs, an economist performs an economic impact study.
The Role of the Regional Center
When making a direct EB-5 investment, the investor does not work with a regional center. Those making indirect investments must invest in a project sponsored by a regional center designated as such by United States Citizenship and Immigration Services (USCIS). Their EB-5 visa applications are closely tied to the reauthorization of the Regional Center Program and the regional center maintaining its USCIS designation.
Key Differences in the Structure of EB-5 Direct and Indirect Investments
EB-5 investments made through a regional center typically involve the creation of several entities, including a job-creating entity (JCE) that is distinct from the NCE. Because these investors can count indirect and induced jobs as well as direct jobs, the jobs created through the activities of all the entities count toward the job creation total. In contrast, direct investors can count only direct jobs, so they must invest directly into an NCE and can count only the jobs created by that NCE. Consequently, loan models are also unsuitable for direct EB-5 investment because a loan involves at least two entities—the lender and borrower.
The exception to this rule is that an investor can make a direct EB-5 investment in businesses wholly owned by a parent company. In this case, the parent company is the NCE. However, if the investment is split between, for example, three subsidiaries owned by the NCE, all three must create jobs, and a concrete job creation and investment plan must be set out in the business plan for all three businesses. Similarly, if the investor is taking advantage of the lower investment amount by establishing the NCE in a targeted employment area (TEA), all the subsidiaries that benefit from the investment must be in a designated TEA.
Calculating EB-5 Job Creation through the Direct Investment Model
Although calculating job creation from direct investments seems simple, certain types of employees are excluded from the total. For a job to count toward the employment total, an employee must be employed by the business the EB-5 investor invested in and in a permanent, continuous, full-time position that lasts at least two years. This does not mean that only employees who remain employed in a permanent, continuous position for the full two years can be counted. The important thing is that the position exists for the full period, even if it is not filled by the same employee throughout that period.
Therefore, the focus is on qualifying positions rather than individual employees. Payroll and tax records are used as evidence that the qualifying positions remained open, whether they were filled or not, for the full period required. To be considered full time, a position must require an employee to work at least 35 hours per week. Because the focus is on the position rather than individual employees, multiple employees can share a full-time role if a formal job-share agreement is in place.
The following are excluded from direct job creation totals:
- Positions filled by people who work at the job or business site who are not employed by the business in which the EB-5 investor invested, such as contractors and employees of affiliates
- Positions filled by the investor and members of their immediate family
- Part-time positions added together to create “full-time equivalent” positions
Another important factor to consider is that the positions must be filled by American workers. USCIS defines a qualifying employee as
a U.S. citizen, lawful permanent resident, or other immigrant authorized to work in the United States, including a conditional resident, temporary resident, asylee, refugee, or a person residing in the United States under suspension of deportation. This definition does not include immigrant investors; their spouses, sons, or daughters; or any alien in any nonimmigrant status (such as an H-1B nonimmigrant) or who is not authorized to work in the United States.
Furthermore, if the investor invests in a business in a TEA and invests the reduced amount, the positions must be filled by employees working in the designated TEA.
Because job creation lies at the heart of the EB-5 program, demonstrating that the EB-5 investment will likely create the required number of jobs is a crucial part of the business plan submitted with the investor’s I-526 petition.
Creating a Plausible Business Plan for EB-5 Direct Investments
The business plan should demonstrate to the USCIS adjudicator that a concrete and plausible plan exists to create the required number of jobs within at least 2.5 years of the I-526 being approved. The jobs created should be the direct result of the EB-5 investment into a new enterprise and not into a business that is simply under new ownership. The jobs must also meet specific needs of the business, and the salaries related to them must be suitable.
To properly address the job creation requirement, the business plan should include job descriptions, a hiring schedule, and a detailed overview of the staffing plan. This must be coupled with a comprehensive description of how the investment in the business and the business itself meet the requirements of the EB-5 program. Aspects such as the description of the business and the financial projections should be clear and detailed enough to demonstrate this.
Common EB-5 Direct Investment Types
Because of the requirements relating to EB-5 direct investments, some EB-5 projects are better suited than others to direct investment. The key deciding factor is that the commercial enterprise in which the investor invests must be feasible, truly in need of the investment, and clearly capable of creating the right number and types of jobs.
EB-5 investors have a variety of options when it comes to direct investment. Popular options include restaurants, retail, and wholesale trade businesses. However, direct EB-5 investment is also suitable for service, manufacturing, agricultural, and technology concerns. The investor can even establish a new branch of a franchise such as a salon or convenience store, buy and expand an existing business, or invest in a troubled business. In the case of an investment in a troubled business, new and preserved jobs count toward the job creation total, but they must have been created or preserved because of the EB-5 investment.
Making an EB-5 Investment in an Existing Business
Investing in an existing business it possible but complicated because the investor must meet additional requirements related to the business being an NCE and to job creation. A transfer of ownership does not turn an existing business into an NCE. Instead, the EB-5 investor must demonstrate that it qualifies as an NCE because (i) the business will be reorganized or restructured in a way that results in a new business or (ii) the expansion of the business through the investment will increase the net worth or staff count by at least 40%.
A business can be restructured or reorganized to form an NCE only if the original business was established after November 29, 1990. Furthermore, cosmetic changes, remodeling, or rebranding are not viewed as restructuring or reorganizing, and the changes must be more comprehensive. For example, turning a restaurant into a nightclub or even a budget hotel into a high-end boutique hotel would qualify, but remodeling a restaurant and changing its name or switching a hotel from one budget franchise to another would not.
Meeting the job creation requirements also differs. The investor has several options. If the investor can demonstrate that the business had folded when they made the investment and that they bought only physical assets and not, for example, branding or customer lists, the investor can count all new jobs as job creation. If not, jobs created by the previous owner must be deducted from the total.
Alternatively, the investor can provide documentary evidence of employment levels before they invested in and acquired the business and then provide a clear, plausible plan of how they intend to create 10 new qualifying positions while preserving all existing positions.
Lastly, the investor can show that the business meets the USCIS definition of a troubled business to include preexisting jobs in the job creation total:
A troubled business is one that has been in existence for at least two years and has incurred a net loss during the 12- or 24-month period before the priority date on the immigrant investor’s Form I-526. The loss for this period must be at least 20% of the troubled business’ net worth before the loss. When determining whether the troubled business has been in existence for two years, USCIS will consider successors in interest to the troubled business when evaluating whether they have been in existence for the same period of time as the business they succeeded.
The type of business in which the investor invests will also affect the investor’s role in the management of the NCE.
The EB-5 Investor’s Role in the Management of the Business in which They Invest
To adhere to the requirements of the EB-5 program, an investor must be involved in the management of the NCE, but the level of involvement ranges from involvement in the daily operations to playing a role in policy formation. Although some investors prefer a more hands-on management approach, investors who lack management experience or who simply do not want to live near the business can assume the same responsibilities typically assigned to a limited partner.
The differences in the ways direct and indirect EB-5 investments are structured influence investors’ role in the management of the NCE. When investing through a regional center, the investor can become a member of an entity designed to manage the loan that constitutes the EB-5 investments. Consequently, an investor who invests through a regional center can take a more hands-off approach. When investing directly, investors must be directly involved in the management of the NCE, but they can limit their involvement to policy decisions.
How Many Investors Can Invest in a Project that Includes a Direct EB-5 Investor?
A project that includes direct EB-5 investment can have multiple investors that include EB-5 and other investors. The main concern is that the NCE must be able to generate the required number of jobs for each EB-5 investor; domestic and other investors do not need to be considered in the allocation of job creation.
While no formal policy dictates that non-EB-5 investors must document the sources of their funds, USCIS can request information about and documentation from these investors. USCIS began to issue requests for evidence relating to the lawful sources of funds for other investors in 2019.
Choosing an EB-5 Investment Model
While regional center investment has historically been a popular choice for EB-5 investors, the lapse in the authorization of the Regional Center Program in July 2021 left many investors searching for other investment options. Choosing between regional center and direct EB-5 investment is one of the most important steps in the EB-5 investment process, and investors cannot change from one to the other once they have made their investment. Because of the implications of each model, it is best to consult an immigration attorney with EB-5 experience or an EB-5 professional for guidance when choosing an EB-5 project.
Special thanks to Suzanne Lazicki, author of the Lucid EB-5 Blog, for her work on direct EB-5 investment.