EB5 Investors Magazine - Page 31

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