EB-5 Due Diligence: What's Entailed?
Due diligence comprises a complete review of relevant documents to verify all claims being made, analyze the investment’s strengths and risks, and provide transparency and analysis to interested parties. Additionally, it includes background checks on key persons and entities, as well as discussions with management, a site visit and more.
For potential investors, a due diligence investigation of an EB-5 investment should be conducted before entering an agreement, as a clear understanding terms of the investment and the risks involved is vital to making an informed decision.
Third-party due diligence provides investors more confident about achieving two main goals:
Fulfilling EB-5 requirements will lead to approval of the initial investor petition, Form I-526E, allowing an investor to be eligible for a conditional Green Card. Approval of Form I-829 will remove conditions on permanent residency.
For most investors, this means the investment will return investor capital in a full and in a timely manner. Some investors may further define success as the return of capital as well as a return on investment.
Due diligence vs. Marketing
Investors who may consider not using third-party due diligence should be aware that marketing materials don't provide transparency about a project's risks — and there are often project issues or concerns that regional centers don't want to share.
What the due diligence process includes
Proper due diligence includes, but may not be limited to, an analysis of the following elements:
EB-5 program requirements
EB-5 is perhaps the most complex U.S. immigration program with myriad regulations — many of which change over time. If the investment fails to comply with USCIS regulations, an investor's petition will be denied.
Likelihood of job creation
A review of the economic impact analysis is required to predict job creation and a reasonable job cushion. This is essential for petition approval.
Investor fund protection
This identifies risk-mitigation strategies and third-party oversight to determine the safety of investor capital transferring between the entities involved, and the potential return of investor funds in the event of project or I-526E denial, or investment default.
Corporate governance entails the conditions for an EB-5 fund manager to act in the interests of the fund and its equity holders. Investor rights are vital and these are detailed in the new commercial enterprise (NCE) operating agreement or the limited partnership agreement. Due diligence should also identify any conflicts of interest between the lender fund manager and the borrower developer.
Security interests and default conditions
As investments can fail, it's vital to know rights and remedies available to the EB-5 fund (NCE), and for investors to have strong security interests.
This details the market for a project's products or services and includes a review of the projection inputs, as well as a sensitivity analysis to determine how much a plan can change before investors will be impacted.
Regional center review
This is necessary as regional centers oversee the investments they sponsor. The review will analyze regional center policy and procedures manual, confirm good standing with USCIS, compare the regional centre geographic jurisdiction with the investment impact area, and the history of I-526 and I-829 approvals (note that regional center history is often overstated in importance).
Review of issuer and project management background
Background checks should be performed on persons and entities involved in the NCE and job-creating entity (JCE). Also, a review should include news and press releases, confirmation of government approval of the project, and a search for pending litigation or project resistance by local authorities or the community.
A site visit and meeting with the project developer and NCE will help evaluate current project progress, management experience and motivation, updates, and will help answer the most recent questions.
Due diligence differs for different applications
Due diligence often relates to different stages of the EB-5 immigration process or financial concerns.
For example, I-526E due diligence will review the business plan, fulfillment of the "at risk" requirement, investor management requirements, job-creation projections, and more..
And I-829 due diligence will review various elements such as financing, project progress and completion, job creation types and total, and more.
Continual updates as due diligence is ever evolving
It must be remembered that due diligence only offers an analysis at a particular moment in time. Constant updates are necessary throughout the capital raise and the Project lifecycle.
EB-5 Documents that require due diligence reviews
The following agreements, if applicable, are reviewed in a due diligence evaluation:
Fund administration agreement
Certificate of formation and good standing for the New Commercial Enterprise and NCE Manager
NCE Manager operating agreement
EB-5 loan or equity agreement
Contact information for securities counsel, immigration counsel, economist
Certificate of formation for Job-Creating Entity (JCE)
Certificate of good standing and operating agreement for JCE
Market feasibility report
Senior financing, bridge financing and any other financing agreements
Developer equity commitment
Land purchase or lease agreement
Franchise and Management agreement
Projects cash flow and construction draw schedule
Balance Sheet of JCE
TEA designation letter
Regional Center approval letter and certificate of formation, certfiicate of good standing, latest I-924A
Draft form D
Bad actor questionnaire completed by NCE management
A list of any material litigation or judgements from the past 10 years where the NCE or Regional Center (and affiliated entities) was involved, directly or indirectly.
*Material litigation includes matter outside the ordinary business operations with at least $100,000 in dispute.
Who should conduct due diligence?
An EB-5 offering is an investment that combines legal, financial, and government considerations; very few investors are qualified to understand all of the complex issues involved without expert guidance.
Therefore, due diligence should be conducted by third-party experts who are experienced with the requirements of the EB-5 program. Third-party "arm's length" status of a due diligence provider ensures that there is no conflict of interest, and that the investor can count on transparency of all necessary information and analysis — positive and negative.
Is an immigration lawyer enough to conduct due diligence on an investment?
An experienced immigration attorney is vital to ensure the success of I-526E and I-829 petitions and to review an investment from an immigration perspective. However, unless they have the financial accreditation, the vast majority of lawyers are not qualified to offer any advice or analysis on the financial concerns of an EB-5 investment. In fact, a lawyer could be in breach of securities law if they give such financial advice.
What if an investor is working directly with a regional center?
An investor choosing an EB-5 investment through a regional center and not using third-party due diligence should be aware that they are likely not receiving complete third-party due diligence from that regional center.
Further, a regional center employee is not being supervised, like a broker-dealer representative, to be in compliance with securities regulations. Most experienced immigration lawyers would advise an investor against incurring the unnecessary risk of not using third-party due diligence in such a situation.