The Importance of EB-5 Due Diligence

Article was written by Noreen Hogan, President, CMB Regional Centers

Investors need to do their homework and vet the regional centre they plan to work with, writes Noreen Hogan, President of CMB Regional Centers. She recommends non-vertically integrated EB-5 projects and debt-based investments as opposed to equity structures to minimise the financial risk.

Thousands of families every year from around the world make the decision to immigrate to the United States through the EB-5 visa programme. Through a minimum investment of $900,000, an immigrant investor and their qualified family members are able to participate in an expeditious path to permanent residency in the United States. The qualified investment must create 10 fulltime American jobs, and unlike other US immigrant and non-immigrant programmes or immigration by investment programmes from around the world, the EB-5 regional centre programme does not require the investor to run the business/project they invested into or live in a defined location. Those participating in the EB-5 programme choose to immigrate to America for many reasons. These reasons range from a better education for their children, to better business opportunities or access to the US market, or just simply for retirement. Regardless of the specific reason behind pursuing EB-5, all investors must carefully evaluate the risks associated with achieving their immigration goals. The biggest risk is not the financial risk (though that is incredibly important), rather, it is the immigration risk of not being able to permanently immigrate to the United States. This is why due diligence is key when choosing the right regional centre.

Three Goals

There are three goals for any EB-5 investor: first, obtaining permanent residency in the United States; second, ensuring the investment is secure and the ability to receive their money back at the end of the process; and third, receiving some modest return on the investment. If these goals are not prioritised in the appropriate order, an investor and their family will likely increase the risk of not achieving the most important goal: their immigration pursuit, even if they succeed elsewhere. Not only are these three goals of utmost importance, they also must be maintained in correct
order to ensure the highest likelihood of success for the EB-5 investor.

The Right Structure

As an investor considers an EB-5 opportunity, they must make certain that the goals of each party in the investment are clearly understood. It is especially important to ensure that the goals of the regional centre/general partner align with the goals of the investor. The responsibility of the regional centre/general partner is to be a fiduciary for the investors. That responsibility includes standing on the side of the investor and their family to ensure that the project moves forward, creates jobs and eventually returns their capital. This is why choosing nonvertically integrated EB-5 investment opportunities (when a regional centre and developer/borrower do not share common ownership or interests in the project) and debt-based (Loan Model) investments (as opposed to an equity structure) should be the preferred path for any investor looking to make an EB-5 investment. In a loan model, the EB-5 investor participates in a partnership that loans the raised EB-5 capital to a borrower who provides certain collaterals to the partnership to help mitigate the risk in the investment. The general partner of the partnership acts as the responsible party to hold the developer and borrower accountable for the use of the funds and the performance of the project, which allows the investor and their family to have peace of mind, knowing that someone is monitoring the investment at all times. In doing so, the regional centre more closely aligns their goals with the goals of the investor. This also demonstrates the importance of avoiding investments that are vertically integrated; not only are the developer/borrower’s and regional centre/ general partner’s interests aligned, should something go wrong there is a major conflict of interest for the regional centre/ general partner, which typically results in the investors having to stand in opposition to both parties with little or no rights.

Ask Questions

Ensuring that the regional centre’s goals align with the investors is a significant part of the investor’s due diligence, but it cannot end there. Investors must also evaluate the project, the developer, the immigration attorney (especially if assigned or required by the regional centre), any agency or third-party promoter of the project, broker dealer, and any other parties assisting in the decision-making process. The number one thing to remember while conducting EB-5 due diligence is to ask hard questions of everyone involved in the EB-5 process and make them prove their answers.

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