Featuring special guest veteran securities lawyer Clem G. Turner – Hosted by Kurt Reuss and Rupy Cheema
Special guest is Clem Turner, a corporate and securities lawyer who heads the law firm Chiesa Shahinian & Giantomasi’s Alternative Capital Practice. His EB-5 experience is vast — from small direct offerings to complex $400 million raises. Clem has been named one of EB5 Investor Magazine’s Top-15 Corporate Attorneys.
This conversation examines how tech companies can benefit from the EB-5 program and how their influence may be expanding because of recent program changes.
Discover why EB-5 investment has historically focused on real estate — and why that will be shifting to other sectors, including tech. Learn what tech has to offer that real estate doesn’t, and how tech offerings often have a very different structure. What kind of tech companies should investors seek out? How is job creation in tech different from real estate? How do the new TEA rules favor tech projects? Find out how the size of a tech project makes a difference. And why the future of raising capital in tech looks nothing like what EB-5 stakeholders have seen in the past.
Keep reading to see why tech and EB-5 make a very attractive pairing as the program moves forward into a new era.
Kurt: So Clem, why haven’t tech companies gotten EB-5 investments substantially?
Clem: Traditionally investors who funded an EB-5 project weren’t particularly enamored with tech and instead were more focused on real estate. Real estate was seen as a safe environment.
You had a situation where even a potentially very good tech investment would have a very difficult time convincing mostly Asian investors, who were making the bulk of EB-5 investments.
If companies aren’t convinced that they’re going to be able to get investors, there really isn’t a reason for them to pursue EB-5. And very early on the EB-5 program was dominated by investors from Asia, with at one point 85% of all EB-5 investments going into the program.
Kurt: And when you say Asia, you are referring specifically to China, right?
Clem: Yes. China was 85% of the EB-5 program’s investment dollars. The Chinese investors definitely did communicate that they were interested primarily in real estate deals, which they perceived as being safer than deals in other areas, specifically startup deals.
And given that the consequences of investing in a failed project could lead to deportation, this wasn’t an investment that investors were willing to take a risk with.
Kurt: The first consideration of any EB5 investment is to ensure that you’re going to get your EB 5 immigration benefits.
Clem: Right, exactly. Investors in Asia were predominantly unwilling to take a risk on something that they perceived as less solid than real estate.
Rupy: And I would say another appeal is simply the reliance on construction jobs which is appealing in EB-5, as opposed to a start-up business, which may be heavily relying on projected operational revenue.
Clem: I would agree. The construction jobs that you speak of are deemed to have been created upon the spending of the money allocated in the budget for construction, as opposed to operational jobs which have to exist and have to be proven.
And I also think, frankly, that the technology industry in Asia (China) works very differently than it in some other countries where entrepreneurial behavior is fostered and understood. I think tech, as an industry, wasn’t as familiar to Asian (Chinese) investors as in some other countries.
Kurt: Do you think people assumed that EB-5 Green Card by investment required a real estate investment until recently?
Clem: I think a lot of people made that assumption. And I think a lot of people made that assumption throughout the world. And I think in the United States people made that assumption because that’s who was raising capital.
ORIGINAL EB5 STATUTE
Although, interestingly, the original EB-5 statute back in 1990 envisioned supporting small businesses. It required 10 jobs to be created. Actual operational jobs. It required the capital to be invested directly into the job creating enterprise. I think it envisioned an investment in a small developing, emerging business that was located in an area that needed economic revitalization, in an area that needed job creation.
However, two years after the original legislation was passed in 1990, the regional center pilot program was created, which set up regional centers as private entities and allowed the counting of indirect and induced job creation, which was a boon to many people looking at real estate projects.
Those projects tend to have very, very large budgets and they tend towards very large indirect and induced job creation. The regional center pilot program created the foundation upon which tens of millions and even hundreds of millions could be raised.
Kurt: And the counting of jobs was done by an economic study where the inputs were the amount of money spent. So you didn’t even have to have head-counts. You just had to spend tens of millions of dollars and an economist could project that a specific number of jobs would be created from an expenditure of this size. So as long as you spent the money, you were deemed to have created the jobs and you really eliminated a lot of risk to job creation.
Clem: Yes, you did. And it should be said that the Chinese preference for real estate because it was safe, wasn’t erroneous. That job creation was primarily based on expenditures meant there wasn’t going to be an issue when it was time to prove the jobs were created.
Rupy: And I would say that another appeal to real estate was that you actually have a tangible asset, that’s being built. As opposed to a tech company where their balance sheet is mostly going to have some intangible asset.
Clem: That’s true. Much of the value in technology is in its intellectual property, which is intangible, although I would argue that it definitely does have a real value as evidenced by the fact that Facebook, Google, Amazon, Twitter, these are the companies that are leading the NASDAQ.
NOTE: over 80% of the enterprise value of the S&P 500 today is in intangible assets such as patents and trademarks, as well as software, brands and IT acquisitions.
Kurt: So, Clem, what makes you think tech companies are going to compare well to real estate investments going forward?
Clem: I think, you have to have a shift in investor taste, but just comparing real estate to tech from a market perspective, you see a very different structure. I think we should maybe rewind a little bit and define what we mean by “tech.”
There are a lot of tech startups out there. And I would say the majority of them are probably not appropriate for an EB-5 investment. They may be too early in their corporate development to rationally seek an EB-5 investor primarily for all the reasons that we talked about. The company needs to be established and needs to be secure.
Kurt: Because job creation is paramount.
Clem: Yes, exactly. The job creation is paramount and an early-stage tech company that has yet to make any revenue, that has yet to really prove out its business model, may not be around in three years.
However, the tech companies that I seen have success in EB-5 are those companies that come to the program already making revenue, already cashflow positive. They already have a considerable amount of employees and are looking for EB-5 capital, not to prove out their business model, but to take their business model to the next level.
There is a synergistic market that they want to go after, so they want to launch a new product line, or create a new division and leverage the success that they’ve had initially.
It takes a tech company that is on solid flooding, but once that type of company has been found, the structure of their deal is going to be very different in some key ways than the structure of a real estate deal.
The tech company that is established and is looking to grow is going to have the ability to provide investors with a much more significant, preferred return, typically, than what your typical real estate investment is gonna provide.
Kurt: What has the typical EB-5 real estate investment rate of return been in the past?
Clem: Historically your typical preferred return was about half a percent.
Kurt: And these are typically mezzanine investments which are ahead of the equity from the developer, but often the developer’s equity consisted of real estate they had purchased, which may have appreciated. The skin in the game might have been this piece of land that they bought.
Clem: Right. That is very true in terms of what the typical real estate investment looked like. In recent years you did tend to see the return to the investor go from half a percent to 1% or 2%. It’s still not, in the grand scheme of things, a very generous return. Comparing to that, the tech industry came into the market in that 1/2% – 3% range.
One difference that I did see among almost all the tech companies that have raised money via EB-5 is a willingness to share in the significant amount of proceeds that can be generated upon a favorable exit from that tech company, such as a big player purchasing the company at a significant premium or that tech company conducting an initial public offering (IPO).
Kurt: So there’s an opportunity, potentially, for EB-5 investors to participate in the big upside should one happen.
Clem: Correct. And that opportunity is not typically presented in the real estate context. Furthermore, real estate exits are a lot more predictable then the exit you’ll be offered from a technology company.
Rupy: And I think with real estate, with the loan model, there was a defined term, so the timing of exit was predictable.
Clem: Correct. The real estate exit relied on either a sale or refinance, neither of which is going to create a return that’s going to be north of what was expected. Frankly, such an exit doesn’t necessarily have the ability to generate a large financial windfall.
There are big winners every year with technology companies, so curating the right tech investment does require some knowledge of the industry, but certainly betting on a tech company that’s established, that’s making money, that’s already proven its model to some degree.
Kurt: A couple of thoughts I have — when it comes to the duration of a job, I was under the wrong assumption that jobs were required to last for two years or more. But my understanding now is that that’s not the case. A job that’s created with the intention of it being a permanent job, qualifies for EB-5, even if the company runs into trouble a year down the road. So as long as the jobs were created with the intent of being permanent, then you would get credit for those jobs.
Clem: Ah, well, that’s great. That’s great to hear. I don’t know if that knowledge has permeated throughout the market, but assuming that’s the case , then that would take a lot of the risk out of investing in a technology company.
Kurt: We had a podcast with Robert Devine just recently, and he talked about the fact that there is no actual duration requirement to the jobs. It’s the intent, and adjudicators need to look at that intent, not necessarily the timeline.
Clem: I agree with that and I would also say to the extent that Robert Divine has deemed something to be the case with respect to job creation, then…
Kurt: The pope has blessed it.
Clem: Yeah, exactly. To the extent Robert Divine has said this, then I completely embrace it and look forward to having that knowledge permeate through the market.
TEAs favor tech companies
Kurt: The other thing that I wanted to mention is because we’ve gone from an urban-centric investment model where you could invest in a major metropolitan area at $500,000, and now that investment in an urban area is $1.8 million, versus a $900,000 investment in a TEA [Targeted Employment Area] or a rural area, that differential really starts to bode well for opportunities — in tech, in non-real estate investments.
Clem: In terms of the adjustments that have happened to the targeted employment area rules, they definitely bode well for technology companies looking for EB-5 investment.
The large marquee real estate deals, which the industry has been putting forth into the EB-5 market for years, are no longer going to qualify at the TEA level. There are still opportunities available in major urban areas, but they’re going to be tangential or adjacent to the prime areas. They’re not going to be in their prime areas themselves. So, no more Times Square investments, no more Wall Street investments…
Kurt: At least not at $900,000.
Kurt: I read an article this morning in the NY Times where it’s estimated that half of the residential projects built in Manhattan since 2015 are still unsold five years later. So it’s one thing to get excited about investing in a marquee project that agents were selling as if they were bulletproof. But it’s not enough to just trust that someone’s looking out for your interests. You’ve got to understand what you’re investing in, what the risks are, what the opportunity is.
Clem: I couldn’t agree more. The perception of safety in real estate is one that permeates through not only the EB-5 industry, but other markets as well. And every bubble bursts including the real estate bubble.
Kurt: Can you summarize for us some of the advantages that you see in investing in a tech company for an EB5 Green Card?
Clem: Well, we were talking about return earlier and I think the opportunity for a return for an investor is, while it may not be the primary reason for their investment, it’s definitely something that investors should keep in mind. The technology deals that I’ve structured over the past year or so, all contained components that would allow EB-5 investors to participate in the upside if one came during the duration of their investment.
The other great advantage to a technology business under the new EB-5 regulations is that businesses can be located anywhere. So a real estate project has a distinct address at a distinct location and it is where it is. A technology company…
Kurt: They’re not tied to where the building is being built.
Clem: Right, if they’re looking for a relatively modest amount of money by EB-5 standards, you approach them with the proposition that if they move three miles north or two miles south, they would be eligible to utilize the EB-5 program. I have seen several companies that were willing to relocate in order to raise EB-5 capital.
Kurt: I would imagine the VCs [venture capitalists] who invest in these tech firms would also encourage investments from EB-5 investors because of the non-dilution aspect of them.
Clem: If there is a liquidity event during the time an EB-5 investment is active, in the technology deals that I’ve done, the EB-5 investors shared in that upside.
Rupy: Clem, would this investment be directly into the tech company, or do you see this as structured similarly into a new commercial enterprise that would further invest into the operating company?
Clem: I’ve structured it in both ways and it really depends on how much money they’re looking to raise; it’s really going to be the primary deciding factor with respect to how the deal is structured. Your typical tech company is looking to raise between $900,000 and $2.7 million, so you’re not needing a lot of investors and, purportedly, they are going to be creating organically the number of jobs needed to meet the job requirements of those investors that they’re looking for.
So in those deals investors are becoming a shareholder in the company, albeit as preferred investors, not common stock investors, so they will have limited voting rights, they would have special economic rights that we would work out, and whatever they were willing to give investors. And we would work in whatever liquidity bonus they were going to get, but all of that would go into that company’s charter, and they would be ultimately shareholders in the job creating enterprise, as part of the statute.
There were a few tech companies that were looking to raise $10 million, or thereabouts, and in that scenario you want to take advantage of the indirect and induced job creation that regional center participation allows. And once you have a regional center participating, you are able to create a special purpose entity that can aggregate all the EB-5 capital and then make either a loan or an investment into the job creating enterprise. And you’ve got a structure that looks very similar to how an EB-5 real estate investment structure works.
Kurt: It seems to me that a project that’s raising a substantial amount of money from venture capital, and whose goal is to ramp up their hiring, really suits the EB-5 regional center model.
Clem: Yes, it really does. There is a reason that this model was created in 1992 and there’s a reason that it became so popular with real estate developers. Those reasons still apply to tech companies.
And while we’ve said the tech company is fundamentally in a position to pay more, the structure is still one that tech companies like, for the same reason real estate folks like it. You are able to get a significant infusion of equity capital without corresponding dilution. There may be some but it’s not going to be pro-rata; it’s not going to be proportionate.
As a quick tangent, in one of the regional center deals that I did with a technology company, rather than your traditional loan mode (where we had a traditional loan agreement with a promissory note and a term, it looked like every other loan agreement out there) the tech company chose to have the NCE invested in a convertible note, and the convertible note looked very, very similar to the convertible note that this company had already. And it was easier for the technology company to incorporate the convertible note into its capital stack.
The convertible note is one of the more common ways that technology companies are financed, primarily because the note itself is debt on the books of the company and can be redeemed by the company if circumstances allow; however, if the company is unable to redeem the note, the note can turn into equity, which companies like. It doesn’t force them into taking unwieldy debt that might lead to the downfall of the company. And investors are comfortable with that.
However in the event of future financing, that convertible note can turn into a big windfall for liquidity purposes and would convert into equity of the company upon anything that drives significant value to that company.
Kurt: What about negotiation? Do EB-5 investors have any opportunity to negotiate the terms of a deal?
Clem: When a tech company is only seeking one to three investors, those investors have a lot more leverage to negotiate with that tech company. Negotiations aren’t going to get unwieldy like they would in a real estate context where the issuer is seeking upwards of 20, 30, 50, 100… however many investors.
Kurt: Speaking of raising money, what do you think the future of raising capital is? In the past, regional centers or members of the issuer would travel around the world hosting seminars or participating in conferences. It seems to me that’s less likely when we talk about tech companies.
Clem: I think, fundamentally, the tech company you want to invest in is the tech company that is very judicious with its dollars. And tech companies are less likely to want to budget thousands of dollars for airfare, for hotels, for conference fees, and are also maybe less able to spare top corporate executives in order for them to attend such things. They want their executives at the company making decisions and, frankly, driving value.
So, I think that is another reason why technology companies weren’t taking advantage of EB-5 earlier, because that kind of travel commitment was necessary. However, with the JOBS Act, which was passed in 2012 and implemented in 2013, in subsequent years companies have been able to raise capital online.
And with the advent of that ability coming to EB-5 (EB5Marketplace.com), you make a much more compelling argument for tech companies to consider enticing EB-5 funds by utilizing this new technology. The other thing I would say is that the kind of investor who would be willing to go to a website that hosts a variety of investments online is going to be the kind of investor that is going to be inherently more comfortable with technology and maybe more prone to making that kind of investment.
Kurt: So let’s conclude this with — what kind of results have you seen? Has it been working thus far? Or is it too early to tell?
Clem: Well technology companies have definitely been successful at this point in raising capital in EB-5. It strikes me that we’re really at the very beginning of this new development.
Kurt: It feels to me like this EB 5 immigration program is really getting back to its roots, where it was initially designed as a job-creating program in areas that needed job creation. And it was typically designed for small businesses, to raise money that they would struggle to raise otherwise.
Over the years it became a large real estate program where hundreds of investors might invest. I still think there are real estate projects that are sound and will do well in the EB-5 investment Green Card program, even at the $900,000 level. But it seems to me like tech and other small business opportunities with big growth potential are suddenly going to find this to be a much more attractive proposition
Clem: Yes, couldn’t agree more.
EB-5 investments into tech: a Summary
Historically, investors (especially from China) didn’t feel comfortable with tech projects. But new TEA rules, largely unknown USCIS policy interpretation, and the JOBS Act will all help tech projects make EB-5 news going forward.
Here are some key takeaways from this podcast:
- While tech doesn’t have as much tangible value as real estate, it definitely has real value — as evidenced by the fact that 80% of the enterprise value of S&P 500 companies today are intangible.
- A tech project should be established, be cashflow positive, have a proven business model and be properly funded to pursue EB-5 capital.
- Tech companies can offer investors a much more significant return than what real estate typically provides.
- When it comes to permanent job creation, USCIS adjudicators look at intent, which takes some of the risk out of tech company investments.
- New TEA rules favor tech projects as they can be located vitally anywhere
- Tech companies looking to raise more than $2-3 million can take advantage of indirect and induced job creation that the Regional Center Program allows.
- Smaller tech projects give investors more leverage to negotiate deal terms.
- Tech companies aren’t as likely to raise EB-5 money the traditional way, via overseas conferences; the JOBS act allows them to raise capital online.
This EB5 ProTalk article features hosts Rupy Cheema and Kurt Reuss. Rupy is CEO & founder of EB5 Diligence; Kurt is a broker-dealer representative and CEO of EB5 Marketplace.