limit 10 . So , for depositors with less $ 250,000 there is no concern about lost funds , and they are usually available next business day when a bank is taken over . However , its more complicated in the case of EB-5 .
First of all , EB-5 investors are each depositing $ 800,000 or more . Therefore , everything over the first $ 250,000 at any particular bank is uninsured and at risk in the event of bank failure . Many banks now offer deposit sweep products that split the EB-5 investors deposits among a number of different banks . While this solves the challenge of protecting the EB-5 deposit amount , it complicates getting access to all the funds in the event that there is a bank failure at the primary bank .
Moreover , in the event that the failed bank was acting as the escrow agent on the account , it will take even more time for the situation to be worked through . The FDIC will most likely transfer the escrow contract to another bank or terminate the escrow agreement and have funds returned . Either way , this is not ideal . While an FDIC sweep product helps with fund security , it creates additional legal and liquidity complications in the event of a bank failure .
SEPARATING THE ESCROW AGREEMENT FROM THE DEPOSIT TAKING BANK CAN HELP
Options like insurance may be choices . But given that there are so few banks that will take EB-5 deposits , and those that do are smaller - what other options really exist ?
Most importantly , the third-party escrow agent is regularly monitoring the financial stability of the banks in its network and can move deposits in advance of any perceived trouble .
WHAT DOES THE RECENT BANK INSTABILITY SHOW US ?
EB-5 investing can be risky . Over the years , much has been documented about doing due diligence on projects , developers and Regional Centers . The recent bank instability in the U . S . serves as a good reminder that there is also risk involved in how the treasury management and banking elements of an EB-5 offering are structured .
The banks that are active in EB-5 are almost always small banks , and small banks are historically more likely to fail 11 . While ensuring that the bank holding EB-5 funds is FDIC insured , that , on its own , is not enough . There are also complex liquidity and contractual issues with escrow or deposit control agreements that are ignited when a bank is taken over by the FDIC .
One step that an EB-5 fund can take to provide 100 % FDIC coverage ( as in an insured cash sweep product ) and avoid the potential liquidity problems , is to use an independent third party ( i . e . non-bank owned ) escrow agent . It goes without saying that the escrow agent must be an expert in EB-5 . By separating the escrow agent role from the deposit taking role the EB-5 fund manager has maximum flexibility to help ensure that investor funds are protected and available when necessary .
One approach is to consider using an independent third-party escrow agent / escrow administrator . The benefits of this became very visible to those EB-5 fund managers that had embraced this approach during the recent bank failures .
The third-party escrow agent , since it is not part of the bank , does not get caught up in the complexity of an FDIC takeover . The best such escrow agents have relationships with hundreds of different depository banks and therefore can often provide more deposit alternatives than the EB-5 escrow banks .
" Since incorporating this structure into our EB-5 fundraising process , we have discovered that the flexibility offered by this approach offers a greater protection to our investors compared to the conventional escrow bank method ," stated Christine Chen , Chief Operating Officer at CanAm Enterprises . " For instance , during the recent banking turmoil , we promptly repositioned our investors ' deposits and were the first to announce their full FDIC insurance coverage . This demonstrates our unwavering commitment to placing our clients ' needs at the forefront of our core values ."
Like the insured cash sweep products that many banks offer , the third-party escrow agent can spread deposits across multiple banks , providing 100 % FDIC coverage . However , the escrow agent can be deliberate about the specific banks involved in holding portions of those deposits , even selecting banks to help secure favorable rates on a construction loan for an EB-5 project .
Reid Thomas brings decades of leadership experience in both public and private companies , primarily in high-growth Silicon Valley technology companies . Thomas has been instrumental in the rapid growth of JTC Americas ’ EB-5 and Opportunity Zone businesses , working to develop the purpose-built software solutions and dedicated client services teams , which have propelled the company into leadership positions in both industries .
Sources :
1 NY Times Article – May 1 2023 “ 3 Failed Banks This Year ….” By K . Russell & C . Zhang
2 www . banks . fdic . gov – 2022 data on Commercial Banks
3 Data taken from JTC Group proprietary database of EB-5 industry data . Data collected between 2010-2023
4 Article by Brian Martucci , www . moneycrashers . com April 12 , 2023
5 Data Sourced from https :// www . mx . com / blog / biggest-us-banks-by-deposits /
6 Estimate based on JTC historical trend data
7 ( https :// www . mx . com / blog / biggest-us-banks-by-deposits /).
8 Data sourced from FDIC . Gov / Bank / Historical / Bank
9 NY Times Article - March 12 , 2013 , “ Signature Bank Collapse Fueled by Crypto Bets ….” By M . Goldstein & E . Flitter
10 https :// www . fdic . gov / resources / deposit-insurance / brochures / deposits-at-a-glance /
11 https :// www . forbes . com / - December 2013 Article “ big-banks-versus-small-banks-size-doesntmatter ”
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