As a registered securities broker who has been working exclusively in EB-5 since 2013, I know the industry well, and I know a lot of the people who work in it — securities attorneys, immigration lawyers, economists, regional center owners, fund managers and others.
So when I published an article in January 2022 titled “The EB-5 Regional Center Program should stay expired as a better alternative already exists” it got a fair amount of attention. And it didn’t make me many friends.
I was critical of a program that I worked in because I saw a better solution emerging, the permanent and direct EB-5 program.
I stated my fundamental objection to the Regional Center Program thusly:
“The Regional Center Program has helped stimulate commercial real estate development in the U.S. and had some economic benefits, but it never lived up to its mandate of creating permanent jobs and stimulating areas in need.”
Since publishing that article the EB-5 Reform and Integrity Act of 2022 (RIA) was enacted. And I’ll take this opportunity to revisit my previous objections to the Regional Center program and discuss how the RIA has impacted the program.
Issue #1: EB-5 investments were mostly gobbled up by wealthy developers
A big target of my criticism was that the Regional Center Program was essentially a form of cheap capital for wealthy urban developers who didn’t really need EB-5 money.
In fact, I asked — and answered — this pointed question: “Wouldn’t most of that commercial real estate development still have happened without cheap EB-5 capital? I believe it would have.”
I wasn’t the only one who felt that way. Senator Grassley, an architect of the Reform and Integrity Act, made this statement about EB-5 in 2021:
“The EB-5 program was designed to encourage job creation and investment in rural and economically distressed areas of the United States…. [However, the program has] been exploited by some wealthy urban developers who syphon investment money away from rural and economically distressed areas to fund ritzy projects in some of the nation’s most well-to-do neighborhoods.”
The Reform and Integrity Act makes meaningful changes by adjusting incentives that now promote “fly-over”states, by offering advantages to applicants who invest in rural and high-unemployment areas.
Congress addressed this issue with three major changes: the use of visa set-asides for petitioners who invest in rural or high unemployment areas; the elimination of gerrymandering of high-unemployment areas; prioritizing processing of EB-5 applications whose investment is made into a rural area.
1. Visa set-asides
Congress created three new visa set-aside categories to encourage petitioners to invest in rural and high unemployment areas and infrastructure, giving rural projects the biggest set-aside — 20% of all EB-5 visas. And potentially just as importantly, the 10% set-aside for high-unemployment area investments will make a significant difference in where people invest.
These new visa set-aside lineups are a tremendous opportunity for applicants from retrogressed countries who were looking at potentially eight to 20-year delays.
And it doesn’t end there.
2. Prioritized processing for rural investors
Investors are also flocking to rural projects because these investments offer I-526E processing in a fraction of the time it takes to adjudicate an I-526E with a standard investment.
While "priority processing" isn't yet defined, this change is significant and is already drawing a huge amount of interest in rural-based projects.
Rural projects now have a true incentive they didn’t have before with immediately available visas and faster processing. Reserved visa will be hugely attractive to investors from India, China, and Vietnam, and I would be shocked if the 20% set-asides are not fully used up every year going forward.
Do these adjusted incentives level the playing field? It’s fair to say that the field is now tilted in favour of rural areas, but over time we’ll see how things balance out.
3. Elimination of gerrymandering
I previously wrote, “The idea of reducing the minimum investment requirement from $1 million to $500,000 was another good idea the Senate had, in theory. The discount was intended to incentivize investment in Targeted Employment Areas (TEAs), which are defined as rural areas or areas with high unemployment. However, the execution of this was a different story.”
While I’m not personally a fan of everything said or proposed by Senator Grassley, he explained how the RIA will impact urban construction:
“[The new TEA rules] will significantly limit the number of census tracts that may be used to seek a designation as a ‘high unemployment’ TEA. This TEA model, combined with the exclusive authority of DHS to make high unemployment TEA designations, should crack down on TEA gerrymandering that has long deprived rural and economically distressed areas of the investment Congress intended they receive.”
In the Reform and Integrity Act, Congress eliminated state gerrymandering of targeted employment designations which previously enabled low-unemployment areas to get a high-unemployment-area designation.
And we are already seeing that real high-unemployment areas are benefiting from the change.
Issue # 2: Construction jobs aren’t permanent
In my earlier article I pointed out that construction jobs weren’t permanent but were counted as permanent job creation, as were indirect jobs (supplier jobs) and induced jobs (jobs in the local economy) created through the “magic of economic modeling.”
I contrasted this with the new model of pooled direct investments (no longer allowed by the RIA) which created long-term jobs in diverse industries and sectors.
The RIA certainly allows for big-city construction projects — and short-term construction jobs to be counted — but the other program adjustments will limit the dominance of urban construction projects in the program.
Will short-term construction in urban New York and California still happen in EB-5? I expect it will. And now with more attention on proper disclosures, high-quality projects in urban areas should attract affluent investors who are drawn to big-name cities.
But they will no longer be the all-consuming force they used to be and EB-5 capital will spread to areas in need and to other sectors to create long-lasting employment and career jobs.
Issue #3: Equity investment wasn’t really equity investing
The direct program required investors to make an equity investment into the business. This was perceived by most investors as more risky than a loan and many potential EB-5 applicants waited on the sideline for the Regional Center Program to return.
The RIA didn’t address this issue, and EB-5 funds can still raise “equity” capital from petitioners and then loan the funds to the job-creating entity (JCE).
Congress could have reiterated the expectation that immigrant investors should be taking on risk associated with an equity investment, but they instead decided to leave things alone and allow loans to be used, which benefits petitioners. But it also means that earlier-stage business investments are not likely to find much traction in EB-5.
Issue #4. Abuse was rampant in the old program; now, the Reform and Integrity Act is guaranteed to live up to its name.
In my earlier article I wrote, “The program has been in the news over the years for all the wrong reasons including fraud, failed projects, improper supervision, abusing Target Employment Area regulations, and improper transaction-based compensation payments.”
Well, “improper supervision” has been addressed in spades by the RIA which now requires regional centers to conduct due diligence and certify that the new commercial enterprise (NCE), job-creation entity (JCE), and promoters and agents are operating with transparency and under appropriate federal and state securities laws.
Stringent financial requirements such as fund administration now mean money trails are carefully documented and approved by a third-party before disbursal. Promoter compensation must be fully disclosed and acknowledged by investors.
Regional Centers have a lot of work to do to certify compliance with the RIA and while some may grumble, or even bow out of the program, this is necessary work.
My thoughts today: I didn’t see it coming, but the RIA is a very good thing for EB-5
In the beginning of 2022, I asked this question: “If the original EB-5 program offers a better solution, why bother with reauthorization?”
I didn’t expect Congress to enact new legislation that would address the problems in the industry because the beneficiaries of the tilted EB-5 playing field were big money interests. Call me cynical, but I was pretty sure campaign contributions would determine the outcome.
I was wrong.
And I wasn’t the only one. Grassley was exasperated with “big-money interests” in his press releases, and critics had an endless supply of negative stories to use as ammunition against the program.
So why bother with reauthorization of the Regional Center Program?
Because the program is now better than the original direct EB-5 program. There are efficiencies in pooling investors. Due diligence and annual certifications are likely to significantly reduce fraud and proper disclosure of previously undisclosed (or improperly disclosed) risks, including conflicts of interest are better for investors and better for good projects.
And rural America and high-unemployment areas are the big winners.
What’s more, EB-5 is now reauthorized for five years starting September 30, 2022.
All in all, this was a very useful piece of legislation (though it could have been more carefully drafted, but that’s fodder for another article).
The powers that be went above and beyond my expectations and codified reforms that will ensure rural America has an opportunity, even an advantage in attracting EB-5 capital.
I didn’t see the RIA coming but I am now glad it came.