EB5 Investors Magazine - Page 14

Continued from page 11 It is important to disclose exactly what roles the regional center is playing in an EB-5 project and any affiliations the regional center has with other parties involved with the EB-5 project. In certain situations, the developer may be affiliated with the regional center and the NCE and serve as the manager/general partner of the NCE. In such a case, there is an inherent conflict of interest concerning how a lender entity having the borrower-affiliate as its manager/general partner can properly administer a loan to itself. We have suggested in such cases that, at the Treatment of escrow arrangements and holdback requirements It is now very common for EB-5 projects not to require that each investor receive I-526 petition approval before any funds may be released from escrow. In fact, there is no legal requirement from either a securities or immigration standpoint that there be an escrow at all. There are many forms of escrow arrangements and escrow holdbacks through the combination of the following: a. No escrow. Having no escrow at all and funding the money directly to the NCE, which disburses the proceeds to the developer/project company. In this situation, the offering documents provide for refunds to denied investors and it is important to disclose the risk factors related to such refunds being made and assurances that the refund will be forthcoming. For example, it is important to disclose to what extent the project company/developer guarantees the refund and from what other resources and other parties that refund obligation will be satisfied or what additional collateral/security is being provided to ensure that there will be sufficient funds to cover the refund. least, an independent co-manager be appointed to assume the responsibilities of administering the loan program. As a fallback position, the affiliated manager/general partner could appoint an independent/third party to at least administer the loan, even if such party is not a co-manager/general partner of the NCE. Appropriate disclosures need to be undertaken to reflect all of these affiliated relationships between the various parties in order to articulate more clearly how investors are being protected in all oversight matters related to the program. b. Release upon filing. Another alternative is having the funds initially escrowed and released upon the filing of the investor’s I-526 petition. At least in this manner the investor is assured that an immigration attorney has been able to obtain necessary information to legitimately file the I-526 petition on their behalf, unlike the above-referenced structure where there is no assurance that the I-526 petition will be properly filed. Furthermore, in dealing with these issues, there are several variations of how and when funds are released from escrow. Some programs require at least one or more I-526 petition approvals or an exemplar approval of the project before funds may be released upon I-526 petition filing; thus, ensuring that the project itself has been approved by USCIS, which substantially reduces the risk of an I-526 petition denial. Generally, the only reason for an I-526 petition to be denied after an exemplar project approval would be due to the personal information provided by the EB-5 investor and not due to failures in the economic model or other information related to the project itself. c. Holdback of funds. As a further modification, we have employed a holdback concept where a portion of the investor’s EB-5 capital is escrowed as a holdback amount in order to ensure that there is at least a certain amount of funds available to refund a denied investor or otherwise provide that the next investor who subscribes becomes substituted for the denied investor so that there is a process to provide a further level of protection for the investor whose I-526 petition is denied. There are many variations to this structure that further reduce the risk that there will be insufficient funds to cover project denial, including minimum escrow amounts, additional contributions from the developer entity, developer guarantees and the like. Additionally, it is a best practice to have a mechanism to collateralize the loan disbursements so that, in the event there is a project denial and a certain portion of EB-5 funds have already been advanced, there is at least collateral available to protect refunds to the investors. 12 EB5 INVESTORS MAGAZINE