As a registered securities broker, I know disclosures, so let me make one off the start. I’ve been selling EB-5 regional center investments since 2013. But now, with the expiry of the Regional Center Program, my new experience with direct investments has led to a realization:Direct investments — especially those made into growth-stage businesses — are, I now firmly believe, a better representation of Congress’ intent when it first created the EB-5 program decades ago.What exactly is that mandate? USCIS tells us, “Congress created the EB-5 Program in 1990 to stimulate the U.S. economy through job creation and capital investment by foreign investors.”Further, USCIS describes the two fundamental criteria of EB-5 as follows:“Make the necessary investment in a commercial enterprise in the United States; andPlan to create or preserve 10 permanent full-time jobs for qualified U.S. workers.”Using my own experience, as well as the insight of two prominent EB-5 securities attorneys, and the perspectives of business principals seeking the capital of EB-5 investors, let’s look at the ways direct investments fulfil the Congressional mandate and offer advantages in ways regional center investments do not.
1. Direct investments only count payroll jobs
An EB-5 investment is required to create at least 10 “full-time” jobs per investor. But direct and regional center investments have vastly different criteria. Direct jobs only qualify if they are actual payroll jobs (construction jobs generally don’t count). That’s it.By contrast, regional center "projects" not only count operational jobs associated with the business receiving the investment capital, but construction jobs, indirect jobs (supplier industry), and induced jobs (created by new spending in the local economy). If you think this sounds a bit hypothetical, you’re not alone.
Greg Zaic is the Chairman of 12-15 Molecular Diagnostics, a company that creates rapid COVID-19 screening diagnostics; he’s looking for EB-5 direct investments and expresses doubt about the job counting associated with regional center investments: “Ascribing induced jobs is, to me, smoke and mirrors. Any kind of induced job calculation is the result of economic theory. I’d like to see any of that audited.”Adityo Prakash is the CEO of BreezLyte, a company that manufacturers what is marketed as the world’s-best N95 respirator masks (for COVID-19 protection and other uses). He is looking for EB-5 capital and he holds a similar opinion: “The Regional Center Program hides behind revenue and expense numbers to claim indirect job creation that often doesn’t materialize in reality.”Prakash sees this as a manifestation of a national issue. “As a country, we use economic indicators as proxies to say everything is going well while regular people are still feeling the pain. This is not good for long-term sustainable prosperity. Regional center job creation is a symptom of this: we’re using economic proxy indicators to say enough money is creating jobs when it isn’t. A direct EB-5 investment is a more direct and honest way to create actual jobs.”
2. Direct is a true equity investment without a loan component
A direct EB-5 investment is truly an equity investment. The investor invests his or her money directly into the business that creates the jobs, and has ownership in the company. There is no loan and the money is truly “at risk,” a requirement of the EB-5 program.Veteran EB-5 securities attorney Robert Cornish comments on how direct investments are more closely aligned to typical investments: “The direct program certainly has more stringent requirements for investments to have more traditional equity characteristics.”Contrast that with the structure of most regional center investments where the investor “invests” into a new commercial enterprise (NCE), but in almost all cases, the NCE is not the business that creates the jobs. Instead, it’s merely an EB-5 fund that loans the investor capital to a job-creating entity, which has historically been a commercial real estate development project.So regional center investors never really invest in the business that creates the jobs. What’s more, the investors can benefit from loan terms the NCE has negotiated with the developer, thereby offering a more clear exit from their investment — at the time the loan is repaid. While the EB-5 program has an impermissible loan policy, this kind of structure is clearly predicated on a loan and is currently viewed as acceptable for regional center investments.In fact, investors in these schemes are typically paid 1% or less per year, a reflection that these investments don’t function like equity investments. Shouldn’t a real equity investment have the potential to pay investors a substantial return?It is undeniable that regional center investments don’t function like traditional investments. “I certainly think the Regional Center Program was meant to attract foreign capital as equity,” observes Cornish. “But it has morphed over time into more of a lending mechanism. ”A true equity investment — with the investment funds at risk — was clearly a goal of Congress when it created the EB-5 program.
3. Direct investments don’t just create construction projects — they grow vital businesses in almost any sector
Historically, direct investments were franchises, but something interesting happened after June 30, when the Regional Center Program lost its authorization: leading-edge small and medium-sized businesses looked to EB-5 to expand, often by hiring high-end skilled employees.I know this from personal experience. In just the two and a half months since the Regional Center Program expired, I have been selling direct investments in a range of sectors: fin-tech fundraising, ransomware cyber security, addiction-treatment centers, COVID-19 early detection, manufacturing of bathroom fixtures, a 5G telecom company, and what could be the world’s best N95 respirator masks.Greg Edwards, the founder of a ransomware-detection company called CryptoStopper, tells us exactly what kinds of jobs direct EB-5 will create in his company: “We’re offering high-tech jobs: developers, sales, engineers, executive staff.”Zaic’s COVID-19-diagnostics business will similarly use EB-5 direct capital to employ highly skilled staff. “Receiving EB-5 capital will allow us to hire much needed people, primarily engineers to get into the market and scale up production and meet the strong need of the country for COVID-testing equipment.”
4. Direct jobs are permanent by design — not merely project based
Regional center jobs have mostly been construction jobs that are accepted as permanent jobs if they last more than two years. But construction projects have limited life spans and thus the associated employment is not long lasting.Direct EB-5 investment jobs suggest a much different story. Most of these businesses are not project-based and thus don’t have an end date where a worker picks up his lunch pail and goes home for good. Direct jobs in businesses involved in technology or manufacturing, for example, offer tangible goods and services for the long-term, and they hire people for what may be years or even decades.12-15 Diagnostics is a perfect example of this. Zaic explains, “These engineer jobs could be lifetime jobs. We hope to create scores of jobs over the next five to 10 years.” Edwards similarly speaks to the long-term impact of the jobs CryptoStopper will create with the help of EB-5 capital: “EB-5 direct investments are helping to create long-term jobs in long-term sustainable businesses like ours, as opposed to construction jobs that are needed, but completely different — a one-time project that will have an impact, but not a sustained one like small businesses like ours.” The job-creation and economic benefit is something Edwards can see lasting far into the future. “The impact with our jobs will be more substantial because we plan to hire long-term employees, at a minimum, three to 10 years."Prakash offers his endorsement for direct job creation: "This is longer employment as opposed to contractor jobs that come and go as contractors do. The people we hire could be working for us for years or decades. The direct EB-5 program helps grow companies in a region for a long time to come.”
5. Direct EB-5 investments can support innovation, ‘the most powerful factor’ in driving the economy
Direct investments don’t just fund bricks and mortar; they are supporting the growth of intellectual capital by supporting innovative businesses beyond the world of real estate development.This is what America needs to grow, compete and prosper according to economists Kevin A. Hassett and Robert J. Shapiro, who expound on this notion in their study What Ideas Are Worth: The Value of Intellectual Capital And Intangible Assets in the American Economy:“Innovation is widely recognized by economists as the most powerful factor that can drive changes in an economy’s underlying rates of productivity and growth. The quality of the new ideas embodied in those innovations and the pace at which innovations are developed and applied, therefore, significantly affect a nation’s prosperity.”Hassett and Shapiro fully support investment as a means of spurring business innovation. “The successful application of new ideas in innovations does not occur by chance; rather, it requires identifiable conditions. These conditions include large public and private investments in research and development, education and training, and an economic and political environment that promotes the creation of new firms and new investments by existing firms.”This is what direct EB-5 investing can do: expand an established and successful business that needs an influx of capital to propel it — and its ideas and people — forward.Greg Edwards says of his cyber-security business, “With the help of EB-5 direct capital, we’re growing high income, highly educated workers. America needs more of these workers. EB-5 direct fills a real void for an important but underfunded business like ours.”Prakash has seen America lose jobs to foreign competition and he knows how to stop it — with both lower costs and higher thinking. “The big manufacturers like 3M are mostly building in Chinese plants. Long term, we want to win back all of these jobs to America,” he says. “But we can still be competitive. Quality and price that’s globally competitive, that’s what we’re doing. We hope to be an example of how it should be done. We ought to be creating jobs that aren’t just minimum wage, labour-intensive jobs; we should create higher-quality jobs that are higher skilled. The EB-5 direct program helps create a diversity of higher-quality jobs that will grow the economy.”
6. No special interest groups or gerrymandered maps to qualify for lower investment amounts
It’s simply a truth that the Regional Center Program is driven by big real-estate developers. It makes business sense to build their major projects in thriving urban areas, not rural or struggling communities. Thus, they have lobbied for broader definitions of Targeted Employment Areas (TEAs) to qualify for lower minimum EB-5 investment levels, to thereby attract more investors.The TEA designation was meant to spur EB-5 capital to be invested in either rural or high-unemployment areas — distressed areas. That’s what Congress wanted when it offered lower investment amounts for areas in need. But that isn’t exactly how the story unfolded. Regional center investment capital, and TEA designations, went into New York, Chicago, and other big cities.Senator Chuck Grassley (R-Iowa) has long been an opponent of regional center abuses. When the program expired this June, he did not mince words: “A narrow subset of big moneyed and corrupt interests has now shown that they would rather kill the program altogether than have to accept integrity reforms designed to clamp down on their bad behavior. A small minority,” Grassley asserted, “blindly opposes much-needed accountability and transparency in the program.”The problem extends beyond big developers. Grassley points the finger at politicians who have been funded by such interests: “Bipartisan reforms have been repeatedly blocked by big-money interests that benefited from the status quo and their supporters in Congress.”Smaller direct businesses don’t pump countless millions into political campaigns. And thus don’t have the political support that big developers have in the Regional Center Program.These small and medium-sized direct businesses, many already operating for years, exist where they are needed and don’t have their sights set on swanky area codes (think of the luxury Manhattan development Hudson Yards raising $1.2 billion from EB-5 as a TEA project — “a distressed area”).Direct businesses don’t lobby for TEA rules that allow for gerrymandering districts to make it easier to qualify for the lower level of EB-5 investment. Greg Zaic tells us that locating in a successful urban area simply isn’t a consideration for his COVID-19 diagnostics business. “The direct EB-5 program should be encouraged because it more directly has a positive economic impact where businesses are located. Companies like ours do not need — or want — to be in major metro areas. We’re located in suburban and small-city Connecticut. That’s where our economic benefit happens.”The idea of successful and innovative direct businesses happening anywhere may be evidenced by Greg Edwards, who lives closer to grain silos than skyscrapers. “I live on a 60-acre farm in the middle of Iowa. CryptoStopper is proof that you can start a vital U.S. tech company in the cornfields of Iowa.” Like Grassley, Prakash is far more caustic in his assessment of regional center stories like Hudson Yards. “When we saw this we were shocked that they were stringing together census tracts in the middle of Manhattan. This goes against the spirt of the program. With EB-5 direct you are providing a specific project in a TEA and showing the benefits for the job creation and local creation. There’s no way to get around it. It’s a lot cleaner.”A lot cleaner. I like that description of direct EB-5 investments. I know many in the industry won’t agree. But I know the politics of the Regional Center Program. And I know people who run direct businesses. They’re too busy trying to run and grow their business; they don’t have the influence, or the time to curry favor with politicians. They are focused on building their business, hiring professionals, and stimulating the economies of their American towns and suburban areas.
7. Fraud — why you don’t hear about it with direct investments
I believe that when you solicit a single investor at a time (as opposed to regional center deals soliciting dozens of investors at a time), it attracts a more informed, educated, and committed investor who understands what they are investing in and who has a greater commitment to the investment. This goes a long way to following securities regulations and avoiding abuse.It’s much harder for a foreign migration agent to round up dozens of investors for a single direct investment. But that’s what was happening with regional center investments. And often times these investors solicited en masses couldn’t even read or understand the English contracts they were told to sign. This was a recipe for fraud and abuse — one that was served up too many times.“I personally want to vet any investors to ensure they understand what an investment in our company is, and ensure they’re a good fit for our company,” Greg Edwards explains. “CryptoStopper only wants investors who understand our business.”The Securities and Exchange Commission (SEC) put out an Investor Alert warning EB-5 investors of potential scams. In one alert, the SEC pointed out that the structure of regional center investments should give pause before investing: “Examine structural risk,” the SEC Alert warns. “Understand that you may be investing in a new commercial enterprise that has no assets and has been established to loan funds to a company that will use the funds to develop projects."Further, the SEC warns that a regional center investment structure with “layers of companies run by the same individuals” can be a “hallmark of fraud” because of possible conflicts of interest.Cornish agrees that a more complicated investment structure offers a bad actor more latitude for harm: “Where there are multiple entities and those controlling them earning fees in a complicated deal structure, there are certainly more opportunities to engage in bad conduct.”Now regional center advocates might point out that we don’t hear about fraud in direct EB-5 investments as much because regional centers have historically comprised about 95% of EB-5 investing. So out of 20 EB-5 fraud cases, one case should be tied to a direct investment.But I suspect the lack of direct fraud news is not just a numbers game. My team did a check of the SEC’s official website and, at the time of this publishing, searching for “EB-5” yielded 243 results. We could not find a single result associated with a direct EB-5 investment.While fraud can happen in any investment, the simpler structure of direct investments with fewer layers of business entities presents fewer opportunities for fraud and conflict of interest.
After 30 years, here’s where EB-5 is — and where it can go
For the past three decades, regional center investing has dominated EB-5. We’ve seen the results. We’ve seen what kinds of investments get funded, what kind of jobs are created, and how long those jobs last. We’ve seen the special interest groups behind the projects sometimes worth hundreds of millions. And we’ve seen fraudulent schemes perpetrated on investors regularly.With some meaningful reform, the Regional Center Program can be viable. But it surely needs fixing. And even then, it shouldn’t be commanding the vast majority of EB-5 investment capital for the sole purpose of helping mega-developers build real estate projects in big cities at cheaper rates than what the banks can offer. Veteran securities attorney Charles Kaufman sees the appeal of regional center investments but doesn't think it's ultimately what's best for stimulating businesses that really work: "Regional center projects can attract investors because job creation is more certain: if the money is simply spent as planned, the jobs will be deemed to have been created, whether the project is ultimately successful or not. But isn’t that a perverse way to allocate billions in foreign direct investment?" Kaufman pointedly asks. "Direct EB-5 investment encourages investors to find projects that have the best prospects to succeed in the marketplace.”The direct EB-5 program — especially as it manifests in growth-stage U.S. businesses — is real equity investing, without loan terms. It creates real operational jobs that you can count by walking through the doors of a business — and not by scanning an economic forecast. And many of these jobs will last far beyond a construction-site timetable. Direct investments can help grow the economies of smaller and challenged communities across the country.When Congress wanted the EB-5 program to create jobs, was it thinking about two-year construction contracts? Or was it thinking about an economic impact that is longer lasting, more diverse, and more impactful?Don’t get me wrong. America needs real estate developments and construction workers. And the Regional Center Program can help drive that need. But EB-5 needs so much more than that. It needs careers in growing U.S. businesses that may be around for decades. Jobs that are helping grow the intellectual capital — and thus the long-term economy of this nation.