Can an EB-5 investment take the form of a loan instead of equity?

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The EB-5 program’s regulations do not require investors to make an equity investment. However, investors who want to fund an EB-5 project using a loan model need to consider several factors.

According to 8 CFR § 204.6(e), a loan made to a new commercial enterprise (NCE) does not qualify as a valid EB-5 investment. In the case of regional center-sponsored projects, an NCE can make a loan to a project’s job-creating entity (JCE) because indirect jobs will count toward fulfilling the job creation criteria. For projects following the direct EB-5 investment model, the NCE could make a loan to a wholly owned subsidiary. Moreover, loaned funds constitute a valid source of EB-5 investment capital.

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EB-5 investors who use loaned funds to finance their EB-5 projects need to trace the capital back to its source carefully in Form I-526, Immigrant Petition by Alien Investor. United States Citizenship and Immigration Services (USCIS) requires investors to show that the funds originated lawfully, so investors have to procure evidence regarding the loan terms, the personal assets used to secure the loan, and the lender. (Even though the Zhang v. USCIS court ruling set a precedent for using unsecured loans, it is much safer to use a secured loan).

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For instance, an EB-5 investor will likely have to procure a capital source statement outlining the loan terms and identifying the lender and the collateral. Bank statements showing that the loaned funds were deposited and a copy of the loan agreement may also be necessary. To show that the collateral used to secure the loan was sourced lawfully, an investor’s I-526 petition should include evidence such as certificates of ownership and appraisals for the personal assets in question. If real estate was used to secure the loan, for instance, the EB-5 investor must prove that the property was purchased using lawful funds.

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When using a loan to fund an EB-5 investment, what collateral is acceptable?

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United States Citizenship and Immigration Services (USCIS) allows EB-5 investors to use virtually any form of collateral to secure their loaned EB-5 capital—the important thing is for the loan to be secured by an investor’s personal assets. Therefore, the EB-5 project or any assets owned by its new commercial enterprise (NCE) cannot be used as collateral. Acceptable kinds of personal assets to be used as collateral include property holdings, real estate, cash, equipment, and many others.

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Foreign nationals planning to make an EB-5 investment with loaned capital should note that they will have to prove that the funds were sourced lawfully when compiling Form I-526, Immigrant Petition by Alien Investor. Due to USCIS’s high evidentiary standards regarding the lawful source of EB-5 investment capital, investors typically need to include copious evidence regarding their loans and the personal assets used to secure them.

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For example, suppose that an EB-5 investor owns a 30% share in a hotel. The investor’s share is worth more than $1,800,000. The investor decides to take out a $1,800,000 bank loan, using their share in the hotel as collateral. Then, the investor uses the loaned funds to make an EB-5 investment in a qualifying project. When compiling Form I-526 with their immigration attorney, the EB-5 investor must show that they indeed own a share of the hotel. The necessary evidence may include the hotel’s website (which shows that it is operational), a valuation letter for the hotel, and relevant certificates of title.

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This EB-5 investor does not only need to prove that they own the collateral; they must also show that they came to obtain the share in the hotel lawfully. In this case, the investor inherited the share from their father, who was the hotel’s original owner, so Form I-526 must include the father’s will and death certificate.

AT RISK PROVISIONS

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Can funds gifted to a U.S. business qualify as EB-5 investment capital?

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No, an EB-5 investor must invest funds in a qualified U.S. business—the capital must be placed at risk and irrevocably committed to the enterprise. EB-5 investment funds cannot be in the form of a gift from the foreign national to the enterprise. On the other hand, investors are allowed to use gifts as EB-5 investment capital.

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One of the most important regulations that United States Citizenship and Immigration Services (USCIS) sets out for EB-5 capital is the at-risk requirement. For EB-5 capital to be considered at risk, it must be irrevocably committed to the project in question, and there must be potential for financial loss or gain as a result of the investment. In light of this requirement, a mere intent to invest will not be accepted by USCIS when adjudicating an investor’s Form I-526, Immigrant Petition by Alien Investor.

 

Moreover, all EB-5 investments must be made before the investor submits their I-526 petition.

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EB-5 project developers are not allowed to make guaranties regarding the financial outcome of an investment—this would compromise the at-risk status of the funds. Moreover, any contracts guarantying repayment are unacceptable and would likely result in an investor’s I-526 petition being denied. Investors must transfer the full investment amount into the project’s account. (Partial investments would be an exception; in these cases, foreign nationals are allowed to invest in installments throughout a set period.) The minimum investment amount for targeted employment area (TEA) projects is $900,000, while non-TEA projects require a minimum investment of $1,800,000.

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Of course, each investor’s situation will vary, so an immigration counsel’s guidance will be invaluable to ensure compliance with USCIS regulations. Before choosing an EB-5 project, investors should ensure that the project’s new commercial enterprise (NCE) guarantees a rate of return and that the business plan clearly outlines ongoing business activities. EB-5 capital must remain at risk until USCIS adjudicates Form I-829, Petition by Investor to Remove Conditions on Permanent Resident Status.

HOW EB5 WORKS

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How EB-5 Capital Works

 

The NCE and JCE are each required to submit several documents to the USCIS as part of an EB-5 investor’s application.

The NCE is required to submit the following documents:

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1. USCIS letter of regional center approval designation

2. A detailed USCIS Matter of Ho-compliant business plan

3. Verifiable third-party evidence with supporting data that the project falls within a targeted employment area (TEA) if the investment is $900,000 and not $1.8 million

4. An economic/job creation analysis showing how the required jobs will be created

5. Legal offering documents

   • Private placement memorandum (PPM)

   • Articles of entity formation and certificates of good standing

   • Partnership agreement

   • Subscription agreement

   • Escrow agreement with capital release terms

   • Investment/loan agreement between the NCE and JCE

   • Collateral agreement for the investment/loan

   • Additional supporting documentation

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The JCE is required to submit the following:

1. Title deed (if the investment is a real estate transaction)

2. Credible and recent market analysis or feasibility study

3. Bank loan commitment

4. As-built, third-party appraisal

5. Proof of the developer’s capital commitment to the project

6. Proof of any other capital or lending instruments to be used in the transaction

7. Information on the project developer’s track record

8. Exit strategy for the investment (loan repayment, refinancing, sale, etc.) 

These lists are not comprehensive. Each EB-5 investment project is unique and requires a custom set of documents for the project sponsor to accomplish its goals and for each investor to successfully receive the USCIS approval of his/her I-526 immigration petition.

Common Mistakes to Avoid:

Below is a nonexclusive list of some of the most frequent mistakes we see when reviewing EB-5 project documentation and assembling the full package of documentation for an EB-5 project.

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Inconsistencies Across Documents Within the EB-5 Project Documentation Package

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One common mistake is that job creation numbers, projected revenues, and development cost numbers do not match across the business plan, private placement memorandum, and other supporting documentation. This is a critical mistake because the USCIS will not approve a set of EB-5 project documents that is not completely consistent across all elements of an investor’s I-526 application. These types of errors are common when several different vendors (attorneys, economists, business plan writers, etc.) are involved in assembling the package of EB-5 documentation. We recommend working with a single company to complete the EB-5 project documentation package to minimize these types of critical errors.

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Failure to Consider the Marketability of the EB-5 Project Given Current Market Conditions

EB-5 projects must be designed and constructed from the beginning with the EB-5 investor marketplace in mind. Since there are more projects on the market than there are investors, designing a project with a structure and a job cushion that will be attractive to investors today is vital. Having a current knowledge of attractive project structures, capital security, loan term, escrow release terms, and investment returns in the market today is critical for putting together an EB-5 project that will be appealing to potential EB-5 investors.

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