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