The EB-5 direct investment program allows foreign investors to obtain US green cards by investing in projects that create American jobs. As the name suggests, EB-5 direct investments involve the investor’s capital going directly into a new commercial enterprise, rather than investing through a regional center. When evaluating EB-5 direct investment projects, investors should carefully examine factors like the business plan, job creation methodology, and track record of the project developers. Thorough due diligence is essential to avoid potential fraud or failure to meet USCIS requirements. This article provides an overview of key considerations for assessing EB-5 direct investment projects, drawing on examples from past projects that encountered issues.
Scrutinize the business plan and financial projections
The business plan lays out the fundamentals of the project – what the business is, how it will make money, market analysis, etc. Investors should review financial projections for reasonableness. For example, is revenue growth realistic for that industry? Are projected expenses in line with the business model? Do the projections show the company will be profitable within a reasonable timeframe? If the business plan lacks detail or the financials seem overly optimistic, it may indicate issues with the viability of the project.
Validate job creation methodologies
For EB-5 direct investments, the investor’s capital must directly create at least 10 full-time jobs per investor. USCIS will scrutinize the economic methodologies used to estimate job creation. Job counting should adhere to USCIS requirements and be backed by sound economic reasoning. Investors should beware of methodologies that seem to overstate job creation numbers or count jobs that don’t meet EB-5 standards.
Assess developers’ track record and transparency
Projects sponsored by developers with a history of successful EB-5 projects can give more confidence. Investors should research the backgrounds of key principals for red flags like bankruptcies or litigation. The willingness of developers to provide documents like prior business plans and USCIS correspondence can also signal transparency.
Verify proper use of investor funds
To comply with EB-5 rules, investor funds must be used for allowable expenditures to implement the business plan. Questionable use of funds, like personal expenses for developers, should raise concerns. Investors should confirm proper oversight, such as an independent fund administrator to track the funds.
Evaluate collateral and security measures
For additional protection, EB-5 direct projects may provide collateral like liens on real estate holdings. However, the value and marketability of collateral should be verified. Other security options can include escrow provisions, guarantees of job creation and guarantees of EB-5 approval or refunds if the I-526 is denied.
EB-5 direct investment projects allow investors to have greater control over their investment, but also require extensive due diligence. By thoroughly evaluating factors like the business plan, job methodologies, developer track record, use of funds, and collateral, investors can identify and avoid problematic projects.