The EB-5 program requires that every investor make an at-risk investment, which simply means there must be a risk of loss and a possibility for gain. The phrase “at risk” has a different meaning in the EB-5 context thanin common usage. Of course, EB-5 investors are not expected to invest in “risky” projects.This requirement is meant to ensure that EB-5 capital is not “buying a green card” but invested in a new commercial enterprise (NCE) that creates jobs and benefits the economy. Conducting thorough due diligence is highly encouraged to reduce financial and immigration risk.
When filing their I-526 petition, EB-5 investors must show evidence that their investment is at risk according to the program rules. Since intent to invest or arrangements for proposed investments are not sufficient to demonstrate the investment is at risk, investors must make their investment before submitting their application.
Further information regarding the EB-5 “at risk” requirement can be found in the United States Citizenship and Immigration Services (USCIS) Policy Manual 6(G)(2)(A) as well as Matter of Izummi, a decision issued by the Administrative Appeals Office (AAO) of USCIS, which states, “If the immigrant investor is guaranteed the return of a portion of his or her investment or is guaranteed a rate of return on a portion of his or her investment, then the portion of the capital is not at risk. For the capital to be considered ‘at risk’ there must be a risk of loss and a chance for gain.”
The three main components of this requirement that EB-5 investors need to be aware of are contractual obligations, the ownership and use of assets, and the transfer of investment amounts, which are explained in further detail below.
Projects developers are not allowed to make any assurances of financial gain because there must also be a chance of financial loss. Any determination of the financial outcome cannot be decided prior to the investment. There can be no contract that requires the NCE to pay back the investor at a fixed price or a fixed maturity date. Distributions of profits are allowed, provided they are not guaranteed and not a portion of the investor’s minimum investment amount.
Second, as stated in the USCIS Policy Manual, if the investor is guaranteed the right to eventual ownership or use of a particular asset in consideration of the investor’s contribution of capital into the NCE, the expected present value of the guaranteed ownership or use of the asset will count against the total amount of the investor’s capital contribution in determining how much money was placed at risk.
Lastly, investors are required to transfer the entire investment amount to the NCE. Partial investments or installments are not allowed.
An additional rule for the “at risk” requirement can be found in Matter of Ho, another decision issued by the USCIS AAO.It requires that, to have an I-526 petition approved, the business plan must be clear about what the business activity is, where it will be located, how the capital will be spent, and how and when employment will be created. Without this detailed information, USCIS will not be able to verify that the EB-5 project is legitimate or that it will help improve the U.S. economy.
Examples of the “At-Risk” Requirement
Below are actual examples of how USCIS applies the “at-risk” requirement.
Lack of Reasonable Need and Obligation
An EB-5 investor had her I-526 application denied after she put her investment capital in escrow with plans for the NCE to make a loan to the job-creating entity (JCE) because the NCE’s program description memorandum and the loan agreement did not obligate the NCE to make a loan to the JCE. Since the investor’s funds were still in escrow, pending I-526 approval when the construction of the JCE was finished, USCIS denied her petition due to a lack of reasonable need for the capital and the lack of obligation for the NCE to loan the capital to the JCE.
Insufficient Evidence of Business Activities
USCIS initially denied an application for exemplar status because it found insufficient evidence of business activity during a visit to the construction site. USCIS didn’t believe that investor funds were at risk due to inadequate proof that the entity was an active JCE. However, upon appeal, the applicant was able to provide evidence of business activity, including construction contracts, building permits, inspection records, and fee receipts. The AAO then ruled that the applicant had demonstrated that substantial business activity had begun and placed the EB-5 capital at risk, which led to the project being approved for exemplar status by USCIS.
A Risk for Profits
By EB-5 rules, the investor must show that they incur the possibility not only of losses but also of gains. In one example, the EB-5 investor signed a Limited Partnership Agreement that did not give her rights to the NCE’s profits. The agreement did grant the investor an interest payment upon maturity of the loan, but only at the option and sole discretion of the general partner, and it would come from unspecified sources. USCIS denied the petition because it did not satisfy the regulatory requirement for capital at risk.
There is no EB-5 requirement for how profitable an investment must be. An EB-5 petition was once denied by USCIS because the investment terms appeared to prevent any chance for the EB-5 investor to break even on the investment in the foreseeable future. But the AAO disagreed, since they felt that the investment did show an opportunity for profit along with the risk of loss, although it was still considered a bad investment due to the amount of financial risk.
How to Conduct Due Diligence for the “At-Risk” Requirement
EB-5 investors should conduct due diligence not only when evaluating the financial and immigration risks of an EB-5 project but also when looking for any provisions or circumstances that fail to comply with the “at-risk” requirements of the EB-5 program. Here are several questions to ask when reviewing documents and business plans:
- Does the NCE offering agreement or limited partnership agreement provide the EB-5 investor with terms consistent with an equity interest?
- Does the business plan and offering show that the EB-5 investor has a chance both to profit and lose from the investment?
- Is the investor guaranteed a rate of return or ownership of an asset that could be counted against the qualifying EB-5 investment amount in the NCE offering?
- Do the documents specify that the NCE is obligated to make the full amount of EB-5 investment available to the JCE? Would any fees reduce the amount of capital that the JCE collects?
- Does the business plan show how and when the JCE will use the full amount of EB-5 capital?
- Does the business plan show that the JCE project is moving forward?
These questions apply only to the I-526 petition stage. The current USCIS Policy Manual extends the at-risk requirement up through the I-829 petition stage, asking the investor to demonstrate that the required funds remained at risk throughout the entire period of the petitioner’s conditional permanent residence in the United States.