How escrow arrangements have evolved in EB-5 — and why they still make sense

  • Posted on December 16, 2019 | Updated on December 18, 2019 | 5 min read

An IIUSA article details the history of escrow arrangements in EB-5, and how they have been impacted by changing I-526 processing times. The article also advises that while escrow arrangements are not required by securities or immigration regulations, a well-structured one can offer investors assurance their capital will only be released to appropriate entities, and a refund may be issued in the event of an I-526 denial.

Three veteran EB-5 lawyers — Jill Jones, Monah Shaw, and Osvaldo Torres — have detailed a history of escrow accounts in the EB5 green card world. They note the benefit an escrow arrangement can offer not only investors, but also issuers — a competitive advantage in a market teeming with options.

They also have witnessed the evolution of escrow arrangements, and the relationship such structures have had with ever-growing I-526 adjudication times.

2008 – 2012: conservative EB5 escrow arrangements

After the financial crisis in the U.S., EB-5 popularity surged, especially in China. USCIS was adjudicating I-526 petitions in four to six months. The short processing times allowed investors to have some confidence that their investment capital was safely held in an escrow account until their petitions were (hopefully) approved. If there was a problem with either their petition or their investment project, they could easily get their EB-5 visa cost back to reinvest or leave the program.

2013 – 2018: creative Eb5 escrow arrangements

More EB5 investors resulted in longer processing times. Adjudications were now taking from over one year to over two years. The authors of the article observed that “the ripple effect wreaked havoc.” The result was that projects were not able to wait for years to have access to EB-5 capital. Developers, contractors, and other parties needed EB-5 funds to avoid defaults and bankruptcies, and foreclosures.

While investors still wanted assurances of security and a refund in the event of a denial, they had to allow for arrangements to be accessible to projects in a timely manner. This resulted in the advent of more aggressive “early release” escrow arrangement. Such a structure could help with the risks of project failure and investor denials.

This new escrow design featured release mechanisms that potentially allowed for both refunds for denied investors and fund access for developers. Typically, a project would not release funds until one of two benchmarks: there was exemplar approval or at least one approved I-526 petition; the full capital stack was arranged so that development was not contingent on EB-5 funding. After project approval, a portion of EB-5 capital was released to the New Commercial Enterprise (NCE) at the time of I-526 filing, and a portion was held in escrow until I-526 adjudication, thus allowing for potential refunds in the event of any future I-526 denials.

2018 to now: longer processing times means even more escrow changes

With EB5 Green Card processing times now officially listed at 29 to 45.4 months, further challenges have impacted escrow arrangements. Developers need access to portions of EB-5 capital that are locked in funds to either finish the project or to refinance or sell. However, the EB-5 program requires proof that investor capital is fully invested in the NCE and that it has led to sufficient job creation. A portion of EB-5 funds held in escrow awaiting adjudication may not satisfy the requirements for job creation, and thus lead to USCIS denying an I-526 petition.

Popular opinion wrongly believes that a simple solution to this challenge is to have the NCE or EB5 regional center make an amendment and have the bank remove the holdback. A change in release will impact the offering documents, and also may need consent from some or possibly all of the EB-5 investors, who were counting on the assurance of funds being available for petition denials. Such a request could lead to some inventors withdrawing from the EB5 project.

The legal experts behind this IIUSA article advise the following: prepare an amendment to the offerings documents; notify investors that the NCE wishes to access their capital before I-526 adjudication; disclose the risks associated with this proposed change.

An amendment or supplement should disclose all material information including:

  • conditions needed to release funds
  • the name of the financial institution where EB-5 funds are held and the identify of the entity that controls the funds prior to release
  • how the NCE would return investor capital in the event of an I-526 denial

The NCE should ensure that all EB-5 investors acknowledge and consent to such changes. In the event that an investor dos not consent, the NCE may offer investors the right to rescind their EB5 investments.

If such a change is made to allow the full EB-5 capital to be released before I-526 adjudication, investors lose the protection of having funds available if there is a petition denial. The authors admit there is no standard practice in such a case, but suggest that the best practice is to “provide a clear mechanism to return funds… or clearly articulate that there is no commitment to refund a denied EB-5 investor at all.” They also recommend that there be a mechanism in the supplement that allows the NCE to obtain a substitute EB-5 investor whose funds could provide the liquidity necessary to return funds to an investor whose I-526 has been denied. This, of course, is contingent on the offering period still being valid for the EB5 project.

Another option is that Job Creating Entity (JCE) be required to repay a portion of the EB-5 loan when proceeds are available. This option may not provide an immediate return of investor funds.

EB5 escrow arrangements going forward

The authors admit that escrow arrangements are no longer likely to be a protection for the release of investor funds in the event of an I-526 denial. While some escrow arrangements may provide for such a denial refund guarantee, the lawyers behind this article state that most escrow arrangements will no longer offer such a guarantee, making EB-5 investments more like traditional private equity offerings.

Read the IIUSA article

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