By Anayat Durrani
For EB-5 investors, knowing the difference between equity and debt investments can appear complex. However, experts say it is important they understand it to make informed decisions about their EB-5 investment as part of their application to obtain lawful permanent resident status in the United States.
“In very simple terms, equity investment means owning a part of the EB-5 company, and debt investment means lending money to the EB-5 company,” says Belma Demirovic Chinchoy, partner at Iyer Demirovic Chinchoy.
EB-5 investment into a New Commercial Entity (NCE) is a form of equity while investing in a Job Creating Entity (JCE) can be structured as either debt or equity.
Risks associated with EB-5 equity and debt investments
“An equity investment offers an ownership interest in the legal entity that is responsible for creating the EB-5 jobs, the JCE,” says Farah S. Abbas, principal attorney, Abbas Law PLLC. “This position may have the highest risk, and therefore also the highest potential for reward, as compared to a debt investment.”
In the case of a business that excels and leads to the highest success levels, Abbas says an equity investor can also reap the benefits of that success.
“However, when it comes to repayment, debt repayments are made before any income is shared with equity partners. So, there is a possibility that an equity investor would not receive anything from the JCE, even while other investors have gotten something,” says Abbas.
On the other hand, debt investments are made as a loan to the JCE and “is associated with the lowest level of risk and also the lowest reward,” she adds.
Abbas explains that a debt investor typically has a higher priority of repayment of principal and interest, which are based on the loan agreement terms.
“There is no participation when it comes to profits or success of the JCE. If there is default on the loan, you may be able to look to security or collateral agreements to minimize the loss,” Abbas says.
The bottom-line risk with both types of investment, Chinchoy says, is “that the operating EB-5 company is financially unable to repay the EB-5 investors.”
EB-5 investors must understand distinctions before investing
Chinchoy adds that EB-5 investors should comprehend the entities and decision-making individuals that are part of the EB-5 deal, their financial liquidity, access to other non-EB-5 capital, and the feasibility of the project.
“Each of these factors impacts an investor’s decision whether an equity or debt investment meets the investor’s risk tolerance,” Chinchoy says.
Meanwhile, Abbas explains EB-5 investors must understand the terms of their investment.
“While an EB-5 investor makes an equity investment into the NCE, he or she should understand what the investment structure is between the NCE and the JCE,” says Abbas.
EB-5 investors that are unfamiliar with these concepts, Abbas adds, should seek advice from a financial advisor “to review a particular offering’s documentation to get a better understanding of the investment structure, repayment terms, potential for profit, etc.”
For EB-5 investors, comprehending these distinctions will help them make better-informed decisions about their EB-5 investment. Besides hiring an immigration advisor, an applicant should consider seeking assistance from an experienced financial or investment advisor to assist them in evaluating an investment opportunity that meets the individual investor’s goals and needs.
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