About the Immigration Law Counselor
The Immigration Law Counselor is an e-newsletter providing updates and counsel relevant to issues and laws surrounding immigration from the GCPC Immigration Practice Group.
Three Paths to EB-5?
When researching the options for making an EB-5 investment, clients often hear about the two EB-5 investment paths – direct and indirect. But are there really three paths? The answer to this question is yes and no. This article will detail the different options a potential investor has when deciding to make their EB-5 investment.
By far the most popular option for EB-5 is the indirect regional center investment. The indirect regional center investment allows the client to make a completely passive investment in a project that will be the sole responsibility of the developer to maintain. These investments are generally loan based, but in some instances may be equity based investments.
The EB-5 investor will not have any managerial or day-to-day responsibility. They simply invest their money and leave it in the hands of the developer to meet the immigration requirements so they can become full-fledged green card holders. It’s an affordable option because the vast majority of regional center projects are located in targeted employment areas that allow for the reduced investment of only $500,000.
What are the positive attributes of an indirect regional center investment? The reduced investment amount is what makes the regional center path most appealing to clients. Some investors also enjoy not having to worry about the day-to-day burden of running the business. While a client may have created a successful business in their home country, they may be unfamiliar with US business practices and culture and opt to have the project managed for them. For these investors, the regional center path fits perfectly into their immigration plan.
What are the negatives of an indirect regional center investment? Regional center investments will offer a low return. This isn’t to say that the project is bad – it’s just the nature of EB-5. A typical regional center project will generally yield a 0.5% – 1% return. This isn’t very high, so investors wishing to obtain a larger return should choose a different path for their EB-5 investment. Clients should be very wary of regional center projects offering them large returns. Another potential negative aspect is that the EB-5 investor doesn’t have any decision making power in the business. This may not be ideal for clients that consider themselves to be savvy investors.
So what are the options for investors not wishing to invest through the indirect regional center path? Here is where the discussion of three paths to EB-5 comes up. Many clients (and immigration attorneys) misinterpret the rules regarding a direct (non regional center) investment. Often they think the investor must be involved in the day-to-day operation and running of the business. They believe they have to live in the same city and go into the business daily to qualify for EB-5. That is one option, what I refer to as a “true” direct EB-5 investment, but it’s not the only option for direct EB-5.
So what are the two paths under the direct EB-5 umbrella? It’s first important to examine the rules regulating the requirement that the EB-5 immigrant investor be engaged in the management of the new commercial enterprise. The EB-5 Program requires the immigrant investor to be engaged in the management of the new commercial enterprise, either through the exercise of day-to-day managerial responsibility OR through policy formulation. 8 C.F.R. §204.6(j)(5).
For investors courageous enough to take the plunge and run their own EB-5 business, they can do so through the “true” direct EB-5 path. They will be responsible for the creation and day-to-day management of the business, as well as meeting all the immigration requirements. Their investment return will be based solely on their own personal efforts. This path can prove to be risky and should only be undertaken by clients confident in their ability to meet all requirements under the program.
This may work for some investors, but the majority of EB-5 clients do not want to assume full responsibility for their immigration future. These clients may benefit from a more “hands off” direct investment. This “hands off” direct investment path is great for investors wishing to invest in smaller projects that may yield significantly higher returns than the indirect regional center investment. In conformity with the rules, these investors will have a policy-making role by being a corporate officer or member of the corporate board of directors.
These investors get the best of both worlds. Unlike the regional center path they have some control over the business and typically receive a larger return. However, there is no requirement for them to run the day-to-day operations and they leave the responsibility of meeting the immigration requirements to the project developer. The EB-5 investor is free to live and work anywhere in the United States, regardless of the business location. This path is ideal for all EB-5 investors frustrated with the lack of control and low returns of an indirect regional center investment.
Immigration Practice Group