By Marko Issever
Many others have already written about the importance of using a broker-dealer in EB-5 offerings. [1] Broker-dealers are more than migration agents who mostly introduce investors to issuers. [2] In major EB-5 markets such as Vietnam, India, South Korea, Brazil, Russia, Hong Kong, and Taiwan, EB-5 investors are highly educated and appreciate the difference between unlicensed and unregulated migration agents versus broker-dealers who are licensed and regulated by the SEC and FINRA. [3] [4] These investors realize that they can make their initial investment decisions, on a fully informed basis, by working with broker-dealers. [5] They know that broker-dealers are required to provide transparency, and make sure that the investment is suitable for their clients. [6]
There is a strong possibility that the Biden administration will clear the backlog for all retrogressed applicants. For EB-5, this could mean that many Chinese and Vietnamese applicants might be getting their green cards much sooner than expected. In that case, if we see a resurgence of new mainland China-born applicants, they will be well-advised to work with licensed broker-dealers who can provide full disclosure and protect their rights.
It is a requirement for broker-dealers to offer investors a menu of investment options. If regional centers ask them to represent projects that seem quite risky, they are under no obligation to include them in their offerings. Broker-dealers with expansive portfolios perform rigorous due diligence of each project before they even present them to the potential EB-5 investors. [7] Although not guaranteed, this due diligence exercise may protect the investors from getting involved with projects that will either most likely fail by not fulfilling the requisite minimum job creation requirement or experience capital loss. By keeping these kinds of riskier projects off the EB-5 market, broker-dealers may also help the issuers mitigate their litigation risk. They could also offer these issuers alternative-funding methods with a different risk-return profile, in case the EB-5 market is not a suitable one to complete their projects. As a result, everyone wins.
Broker-dealers also have to adhere to strict know your customer (KYC) rules. This way, they make sure that the potential risk of the transaction is suitable for the investor. Unless there are exemptions, the broker-dealers will ensure that they are not breaking any security laws. Again, as a result, everyone wins.
REDEPLOYMENT OF EB-5 FUNDS
One aspect of each project that EB-5 broker-dealers add value to all the EB-5 stakeholders is the redeployment strategy. At the beginning of each project, the new commercial enterprise (NCE) invests the EB-5 capital with the job-creating enterprise (JCE). Redeployment needs to occur if the EB-5 investor is not ready to receive the funds back that the JCE pays back to the NCE when they are due. In the past, before USCIS published the redeployment policy on June 14, 2017, the industry practice was to deposit such funds in escrow until the investors could receive back their capital. NCE’s can no longer do that. They need to redeploy the funds.
According to the updated general policy of USCIS, the EB-5 investor can receive back their capital at the end of the sustainment period, defined as the end of the two-year conditional green card holding period. [8] Therefore, the NCE needs to reinvest the funds until the filing of the I-829. In the past, before USCIS published this repayment policy, the understanding was that the NCE could only return the EB-5 capital upon I-829 approval.
Recently, USCIS amended its redeployment policy and brought some clarity to the obligations of NCE’s. Essentially, now regional centers have to redeploy funds within a year defined to be a reasonable time for finding a suitable investment. [9] They further added that they could deploy capital into any commercial activity consistent with the purpose of the NCE to engage in the “ongoing conduct of lawful business” evidenced in any amendments to the offering documents made to describe the further deployment into such activities. [10] [11]
Consistent with precedent case decisions and existing regulatory requirements, further deployment must continue to meet all applicable eligibility requirements within the framework of the initial bases of eligibility, including the same NCE and regional center. [12] [13] [14] Besides, because a regional center has “jurisdiction over a limited geographic area,” further deployment must occur within the regional center’s geographic area, including any amendments to its geographic area approved before the further deployment. [15] The redeployment does not need to remain with the same (or any) job-creating entity or in a targeted employment area (TEA), even if the original investment was in a TEA.
We know many regional centers that have redeployed funds outside their geographic area. The fact that USCIS plans to apply this policy retroactively for all existing I-526 and I-829 applications is unfortunate. That said, if the redeployment outside the regional center’s geographic area has occurred after the sustainment period, this policy change should not be material. It will only be problematic if the redeployment occurred before I-829 filing within the conditional residency period.
Many investors, whose regional center redeployed outside the region, could receive RFE’s or straight out denials if USCIS does not retract its new policy’s requirement to reinvest the funds within the limited geographic jurisdiction of the regional center. Broker-dealers disclose the redeployment policy at the time of the initial investment. Therefore, those regional centers that use the services of a broker-dealer could avoid such potential costly litigation.
DISCLOSURE REQUIREMENTS
Broker-dealers are responsible for reviewing and approving the offering documents. No established issuer would ever consider tapping the capital markets without the active involvement and participation of a broker-dealer or an investment-banking firm. Exemption from registration requirements cannot be an excuse for nondisclosure of material information. [16] [17]
Security counsels make sure that offering documents disclose material information. Yet, it is the responsibility of the broker-dealer to check that the disclosure is adequate and prominent. Security counsels worry about the rollover project not being disclosed in the initial private placement memorandums (PPM’s) beyond generalizations like “similar to the initial EB-5 Project,” or “another real estate development with the same or similar developer” or whatever, but still without a separate PPM of its own detailing the potential upside and risks of the reinvestment.
Broker-dealers do not implicitly endorse any offerings that they are marketing to the investors. That said, they could choose to walk away from an offering due to inadequate disclosure. In many instances, the broker-dealers could also work with issuers to reengineer the offering by, for example:
- making changes to the priority of payments in the waterfall
- increasing the equity contribution of the project owners
- decreasing the debt amount senior to the EB-5 investors
These are some concrete examples as to how the broker-dealers can ensure that the risk-return profile of the offering aligns better against other offerings in the marketplace. As a result, the active involvement early on of a broker-dealer creates a win-win situation for all parties involved. Investors win because they get an unbiased, regulated entity whose responsibility is adequate disclosure. Issuers win because they can get their offering structured with a fully disclosed risk/return profile. They achieve efficient execution and avoid costly litigations by unhappy investors and their attorneys.
REDEPLOYMENT CONSIDERATIONS POST-NOVEMBER 21, 2019
When an EB-5 project is completed and sold or refinanced, such that the JCE or its affiliates can pay-off the loans extended to it by the NCE or its affiliates, the funds cannot sit idle in an escrow account, as they need to be at-risk. [18] Otherwise, the investors could jeopardize the whole immigration benefit of their EB-5 application. A well-thought-out redeployment strategy is a way to fulfill the “capital at-risk requirement.” [19]
Many investors conduct rigorous due diligence at the initial stage of project selection but are unaware of the redeployment risk until they can get their capital back. Without a doubt, the first investment step is crucial. Often, it is the determining factor whether the selected project will create the requisite jobs. Nevertheless, in addition to obtaining permanent residency, investors have two additional objectives when making their EB-5 investment:
- Preservation of their capital
- Return on their capital
The required attention on redeployment strategy has become especially important with the amendments announced last year, July 24, 2020, and post-November 21, 2019 because now both the minimum investment amounts (from $500,000 and $1 million to $900,000 and $1.8 million, respectively) and processing times have risen sharply. [20] [21] As a result, investors are now hoping to receive not only their capital back but an additional investment return, in line with other similar risk investments, as well. The success of these two other objectives largely depends on a well-thought redeployment strategy.
Regulations demand that regional centers reinvest/redeploy capital into new similar risk projects. This activity can reduce regulatory risk. However, while doing that, it leaves the EB-5 investor powerless. As mentioned above, going into the original EB-5 investment, the investor conducts a very rigorous due diligence study.
Among other things, they check:
- the loan-to-value ratios of the EB-5 loan and the senior loan
- the geography of the project to make sure that it fits the new definition of TEA
- the developer’s experience in new development projects and access to requisite capital so that the developer’s interests align with that of the EB5 investors.
- the availability of a sound lender who conducted rigorous due diligence and concluded that the project was viable
- the developer’s track record of the number of I-526 approvals, I-829 approvals, and conditional green cards obtained, as well as the record of capital, returned.
After completion, sale, or refinance of the project, unless the investors file their removal of conditions application, the NCE can neither place idle funds in escrow nor return the same to the investors. They need to redeploy. At this point, if the NCE redeploys those funds to another substantially riskier project, the initial credit analysis of the initial project becomes a futile exercise.
Broker-dealers could encourage regional centers to employ a redeployment strategy that favors diversification and increase the likelihood of capital preservation. In many instances, the NCE’s redeploy the funds during the sustainment period without the obligation to share the additional income they earn with the investor. Broker-dealer involvement at the project selection stage would help investors become aware of these conditions of their investment. Broker-dealers could confirm that the PPM contains details of the reinvestment policy, such as the profit-sharing aspect of any future redeployment activity.
Before affecting redeployment, broker-dealers would also ensure that the regional centers know their notice or consent requirements. They could also advise regional centers to employ best practices by:
- getting the investors involved in the decision-making process by giving them reinvestment options to choose from even if the documents do not obligate them to seek consent from them,
- providing independent verification of the soundness of these options,
- ensuring that the regional centers conduct the same due diligence in the reinvestment process as the original structuring of the transaction to prevent the reinvestment diluting the collateral backing the EB-5 after redeployment.
The investors would then feel much more protected. When a regional center seeks consent from the investors, those investors could get an unbiased opinion from the broker-dealers on the redeployment strategy.
HOW CAN BROKER-DEALERS PROTECT NCE’S FROM LITIGATION RISK?
Broker-dealers could help regional centers in the deal structuring and the redeployment phases by employing best practices. In the deal-structuring, broker-dealers could recommend them a redeployment strategy that is fair, equitable, and appealing to EB-5 investors. With a sound redeployment strategy, their offering would undoubtedly become more competitive and successful. As impartial third parties, broker-dealers, comfort investors that their reinvestment options are compliant with the criteria outlined in the offering documents. The presence of broker-dealers grossly reduces litigation risk resulting from the unforeseen losses due to reinvested funds. [22]
Let’s hope that the EB-5 program, now scheduled to expire by June 30, 2021, will be reauthorized. Unlike in the previous years, the program is no longer part of the omnibus budget bill. In December 2020, when Congress passed a $900 billion COVID-relief package and a $1.4 trillion government funding package, they secured federal agency operations through September 2021. [23] However, this time, they left the EB-5 outside this extension. The repercussion of an expired program for EB-5 applicants between now and June 2021 is significant. Broker-dealers could explain this risk to them and shield all the EB-5 stakeholders such as regional centers, NCE’s, JCE’s, developers, to name a few, from costly litigation due to nondisclosure.
Investors invest in the projects at different times during the subscription period. Their exit dates depend on several factors, including retrogression considerations. The regional centers should have sufficient funds to return capital on a timely basis to investors from countries experiencing no retrogression. They should also have redeployment options for the others who need to stay invested. While the NCE’s perform this portfolio management function, having the advice and verification service of independent broker-dealers is crucial. [24]
Broker-dealers are not glorified migration agents who direct investors to projects according to the compensation they receive. On the contrary, they have to present alternative vetted investment options to clients, among projects for which they have conducted rigorous due diligence. They are responsible to fully disclose the salient risk characteristics outlined in the offering documents of the projects they market. From a redeployment point of view, broker-dealers can act as the unbiased third-party verification agent that ensures that the NCE’s follow the rules outlined in the offering memorandums. Overall, their presence in the process adds value to both the investors and the regional centers. All players have a lot to gain from their active involvement and participation.
[1] https://iiusa.org/blog/wp-content/uploads/2019/07/A-Broker-Dealer-Perspective-on-How-EB-5-Issuers-Can-Safely-and-Effectively-Work-with-Sales-Intermediaries.pdf
[2] https://therealdeal.com/issues_articles/eb-5s-gatekeepers/
[3] https://www.theatlantic.com/business/archive/2015/09/should-congress-let-wealthy-foreigners-buy-citizenship/406432/
[4] https://www.eb5daily.com/2019/11/fy-2019-top-countries-of-eb-5-number-use-more/
[5] https://medium.com/henley-partners/the-changing-face-of-the-eb-5-how-emerging-markets-are-the-new-driving-force-94d7b10619e0
[6] https://www.sec.gov/news/press-release/2018-253
[7] https://www.finra.org/rules-guidance/guidance/reports/2018-report-exam-findings/reasonable-diligence-private-placements
[8] https://www.uscis.gov/policy-manual/volume-6-part-g-chapter-5#footnote-4
[9] https://www.uscis.gov/policy-manual/volume-6-part-g-chapter-2#footnote-34
[10] https://www.uscis.gov/policy-manual/volume-6-part-g-chapter-2#footnote-36
[11] https://www.uscis.gov/policy-manual/volume-6-part-g-chapter-2#footnote-37
[12] https://www.uscis.gov/policy-manual/volume-6-part-g-chapter-2#footnote-38
[13] https://www.uscis.gov/policy-manual/volume-6-part-g-chapter-2#footnote-39
[14] https://www.uscis.gov/policy-manual/volume-6-part-g-chapter-2#footnote-40
[15] https://www.uscis.gov/policy-manual/volume-6-part-g-chapter-2#footnote-41
[16] https://www.sec.gov/smallbusiness/exemptofferings
[17] https://fas.org/sgp/crs/misc/IF11256.pdf
[18] https://www.uscis.gov/policy-manual/volume-6-part-g-chapter-2
[19] https://www.lexology.com/library/detail.aspx?g=fc5371da-be22-4b33-bb69-461001b39415
[20] https://www.uscis.gov/eb-5
[21] https://www.federalregister.gov/documents/2019/07/24/2019-15000/eb-5-immigrant-investor-program-modernization
[22] https://www.mintz.com/insights-center/viewpoints/2841/2018-02-limiting-securities-litigation-risks-eb-5-offerings-what
[23] https://www.eb5investors.com/magazine/article/redeployment-lessons-learned-how-to-protect-eb-5-investors-and-reduce-litigation-risks-to-eb-5-sponsors
[24] https://www.eb5investors.com/magazine/article/redeployment-lessons-learned-how-to-protect-eb-5-investors-and-reduce-litigation-risks-to-eb-5-sponsors
Marko Issever
Marko Issever, the founding CEO of America EB5 Visa, leads EB-5 capital-related activities at Riverside Management Group, connecting international investors with EB-5 issuers. He recently launched CBP Invest, a global immigration company, advising clients in second-country citizenship in countries like Grenada, Turkey, Portugal, Spain, Malta and Greece. Previously, Issever was a managing director at BNY Mellon, leading the firm’s financial institutions derivative sales business globally. Issever speaks Turkish and Ladino Spanish fluently. He earned his MBA in finance from The Wharton School of the University of Pennsylvania. He is a graduate of Bogazici University and Robert College, located in Istanbul.
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