If your company is preparing for significant job creation over the next three years, EB-5 capital can offer you relatively inexpensive, non-dilutive, equity capital. Additionally, it’s raised in $500,000 increments, and negotiations are rare. Most companies like the sound of that.
So what do you do to attract EB-5 investors?
First, you need to understand that these investors’ main motivation is gaining permanent U.S. residence, aka Green Cards, for themselves and some family members. This makes job creation paramount. The investment must be made into a U.S. business, that creates 10 full-time jobs for each investor, over the following 3 years. Your business should also be located in a Targeted Employment Area (TEA), which can be either a rural or high-unemployment location; this allow investors to invest the discounted amount of $500,000 rather than standard $1,000,000 amount required by the program. The market is very slim for the latter. Companies with a proven concept, with capital already in place to create the jobs being planned for, are obviously strong EB-5 investment candidates. Quality start-ups with high employment needs are also good candidates for EB-5 funding. Investors also like an investment structure that encourages the company to repurchase their shares in order to receive the return of their capital. This is because while investors are willing to accept less advantageous investment terms while their immigration petition is going through its processes, which is taking about 4 years now, once they’ve satisfied their EB-5 requirements they are then allowed to sell their equity. But program requirements restrict EB-5 investors from having a right of redemption in their investment contract, so exit strategies generally involve giving the company incentives to repurchase their own equity. This is achieved with escalating preferred dividend rates to investors, countered with an open-ended call-option right for the company to repurchase EB-5 investor’s shares, usually at par. This structure conforms with the regulations and USCIS guidelines but offers the potential for a more timely investment exit.
Determine offering terms that match with investor goals
The underwriter works with companies seeking EB-5 funding to structure a marketable investment, with terms that are desired by EB-5 investors, and avoiding problematic ones. EB-5 investors are generally accepting of rates of return below market rates for the opportunity to invest in a stable job creating entity. So EB-5 investment terms generally favor the business for the first five years, and then may evolve so the investor either earns higher rates of return or the company repurchases their equity. In short, job creation and a “motivated” exit strategy can replace a high ROI. It’s a win-win for both the company and the investor.
Assembling the EB-5 offering package
An offering starts with a business plan drafted by an expert in writing EB-5 compliant business plans; a securities lawyer who drafts the Reg D and Reg S offering documents with proper immigration disclosures; a due diligence firm to verify the claims made; and an immigration lawyer to review all the documents and develop a ‘Form I-526 template’ to be used by each investor’s counsel when filing their petition.
The business plan
The business-plan writer’s job is to write an EB-5 program-compliant business plan which must adhere to the complex program regulations, and many “guidance memos” issued by the Immigration Service. The plan will need to be ‘Matter of Ho’ and ‘Matter of Izummi’ complaint (two precedent-setting cases in EB-5), among other things. You don’t have to know what that means right away but your business plan writer sure does. And the business plan will need to include market research and a feasibility study that proves to USCIS that the company’s plan is legitimate, and job creation is necessary. If you already have this research, great; if not, the business plan writer can help you develop it.
The securities attorney drafts the offering documents
A good securities attorney is required, which can be a corporate securities firm you have an existing relationship with, but unless they are experienced with EB-5, we’d recommend they at least co-counsel with a securities firm who is active in the program. The securities attorney or team will draft the Private Placement Memorandum (PPM), the subscription agreement, and create or update an operating agreement, shareholder agreement or limited partnership agreement. The question of whether you need a Private Placement Memorandum (PPM), or whether a long-form subscription agreement will suffice, depends on the number of investors you plan to attract. If you’re only bringing in one or two investors, they’ll be more active partners and a PPM is not generally necessary. But more than a couple investors suggests they will have a more passive role, and in order to comply with securities regulations, you will be best protected by having a PPM. Still, it’s not a hard-and-fast rule. For example, in a small deal with two accredited investors who are not fluent in English — are you the issuer responsible for assuming the investors can look after their own interests? Obligations are often not entirely clear in such cases and your securities attorney should advise.
Due diligence verifies claims
Once the business plan and offering documents are completed, a due diligence analysis begins. What does that mean, exactly? Due diligence, conducted by an independent expert, verifies that the claims of the PPM are true and backed up with documentation. The due diligence review often identifies items that should be identified in the offering with an additional disclosure in the PPM, and often identifies errors that weren’t picked up previously. The due diligence review is used to satisfy the broker-dealer’s compliance requirements and to satisfy supervision of the marketing and sales of the offering. Check out https://www.eb5diligence.com/
The immigration lawyer’s aim is immigration success
The immigration lawyer reviews all the documents, which now includes the business plan, the PPM, the subscription agreement, the operating agreement, and the due diligence report, to ensure that the investment is highly likely to be accepted by USCIS. The lawyer will then develop an I-526 filing template, for use by each investor’s immigration counsel filing on their behalf. Every investor needs the same narrative and the I-526 template helps to ensure USCIS requirements are all met and that all investors tell a consistent narrative. The due diligence report will often be included in I-526 template package to provide a summary of the deal and to provide USCIS adjudicators with a list of reviewed documents. This helps them identify where they can find information to verify claims in the offering.
Marketing and selling the offering
Your EB-5 underwriter should be a registered securities broker who is expert in EB-5 and has experience with marketing to attract investors. From the very beginning, when you are structuring the offering, through the due diligencing analysis of the offering, to the marketing of international investors and their immigration lawyers, to processing the sale of your offering and assisting the investor’s counsel in filing their EB-5 petition, the broker dealer supervises the entire process.
Summary: EB-5 capital can be well worth the effort
This isn’t your typical capital raise. And that’s probably a good thing. If your business expects to create enough jobs to support a number of EB-5 investors, low-cost, non-dilutive capital may very well be worth the effort it takes to attract EB-5 investors. For most successful EB-5 capital raises, it is a bit of serendipity: a happy coincidence that the job creation you are planning for anyway, helps fund your business continued growth, at a much better terms, from a lower cost, to less negotiation, to less burdensome oversight. To learn if you qualify as a TEA designation, or to discuss terms you could offer to attract EB-5 capital into your company — I’d be happy to have a conversation. Kurt Reuss, registered securities broker, founder of eb5Marketplace 1 (646) 708-0922 email@example.com Schedule a meeting here Securities offered through Dalmore Group LLC, registered broker dealer, member of FINRA (www.finra.org) and of SIPC (www.sipc.org).