However, many businesses and project developers have wasted hundreds of thousands of dollars and years of time believing
that they could easily get their project funded with this lowcost capital. It is, in fact, not so easy. To better understand the
challenges of securing low-cost EB-5 capital, developers must
consider what EB-5 investors need and what they want. These
considerations are key to understanding if your project will
fulfill investor demands and whether you can successfully raise
EB-5 capital for your project.
What do investors need? Their investment is primarily
motivated by a desire to move to and settle in the United
States. They can move to the United States if they invest into
a qualifying business and get approved for their green card via
an I-526 petition. They can stay in the United States only if
their investment creates 10 permanent, full time jobs for U.S.
residents, generally within two years of the funds being invested
(per investor subscribed). Because of these requirements, the
investor and his/her entire family is relying on the EB-5 project
or business to create at least 10 qualifying jobs. That is what
they need.
What do investors want? They want their money back in a
reasonable time (around five years) and usually with some return on their investment. Currently, that return on investment
is around 1 percent per year, making EB-5 capital a very attractive funding option for investors. However, a developer will
often recruit investor representatives, or agents, who will charge
the developer between 2 and 5 percent (sometimes higher) per
year on the funds raised to help place investors. Therefore, EB-5
capital, often structured as equity in the capital stack, is closer
to bank debt rates. Still, it is a lot less expensive that traditional
equity capital. While there is no requirement in the regulations
to repay investors—in fact, investments must be made with the
understanding that the capital is at risk—it is common practice
to repay investors at least their principal amount, and investors
will be looking for such an exit strategy when shopping for an
EB-5 project.
Increased investor scrutiny
EB-5 investors are becoming increasingly more sophisticated
in their project risk assessment capability and due diligence
activities. For a number of years, many projects that were inappropriate for EB-5 because of venture-capital-like investment
risks were promoted and sold to unsophisticated investors.
Additionally, some fraudulently structured projects were sold
to investors and indictments have been issued as a result. Now,
various U.S. governmental agencies (the SEC, FBI and others)
are paying closer attention to EB-5 offering documents and the
claims that they put forth. Additionally, EB-5 investors are becoming much more sophisticated in assessing how their “needs”
and “wants” will be satisfied. At the same time, however, there
is significant and growing investor interest in the EB-5 program
and investors are clamoring for safe investment opportunities.
One Chinese official, speaking in September of this year to
U.S. EB-5 project sponsors at an EB-5 conference in Xiamen,
China said that the Chinese EB-5 market is atMichael Homeier billion
least a $50
dollar business. Further, they have already licensed 800 agents
to sell EB-5 programs and have many times that number of
agents seeking a license. The Chinese officials were also quick
to point out (and quite emphatically) that the U.S. project developers must better understand the needs of the EB-5 investors
and only provide safe and appropriate EB-5 projects.
Structuring a sound EB-5 offering
The appropriate EB-5 project will have a credible certainty of
creating at least 10 jobs per investor within the regulated time
frame. Further, it will also be able to demonstrate a very high
certainty of returning the invested funds—usually within five
years—without offering any guarantees. Therefore, EB-5 funds
are not appropriate for speculative projects, nor for venture capital projects, nor for unproven business models. Only projects
with a proven business model, with a proven management team
and with very high cash flow predictability ratios are appropriate
for the EB-5 investors. Why? Because the ability of an investor’s
family to stay in the United States is entirely reliant on the jobs
being created, and being created on time.
Job creation. EB-5 investors (and the astute agents promoting EB-5 projects) are becoming increasingly aware of ways
to evaluate business models and determine the job creation
predictability. However, job creation methodologies must be
evaluated for each project, on a case-by-case basis, as they may
contain a mix of direct, indirect or induced jobs, as well as
operational and construction jobs. Rather than looking at specific projects and/or types, let’s review things that professional
financiers look at.
Track record. After assessing the: 1) local market demand