Questions that Every Investor Should Ask a Regional Center

The terms and conditions under which an investor will invest in a Regional Center are governed by the legal documentation. It is critical to understand that these terms and conditions vary depending on the Regional Center. We may assist you in this process or you may retain a 3rd party consultant to assist with due diligence. In any event, the investor should be asking the following questions:

Escrow/Refunds

Is an Escrow Account used? If so, what are the terms of the escrow? Some freeze the funds until there is an approval of the petition; some freeze the funds, but once three investors’ petitions have been approved by USCIS, it releases the funds to the project; some do not use an escrow account. Some may seek to gain your authorization to release funds from escrow because of pressure from the borrowing company, which does not want to wait for the funds.

What are the Terms of Refund in the Event of Petition Denial? Within what timeframe are the funds returned? Some refund the entire sum transferred ($500,000 + administrative expenses) plus interest. Some only return the $500,000. Usually the funds are returned within 30-90 days; some may delay a refund until a new investor is found.

What happens if the Petition is Approved but the Visa is Denied? It is possible that USCIS approves the petition, but at the consulate, the investor receives a denial on an admissibility ground (e.g., criminal, security, medical). Some refund the entire sum; some refund $500,000; some will refund depending on the reason for the denial; some may not refund at all.

Management Company

Who will be managing the investment on a day-to-day basis? Where are they based? What is their financial background? The management company is usually the general partner, who will oversee the investment, report to the investor, and ensure EB-5 compliance. A management company may operate several Regional Centers. Who are the individuals at the company with whom you will be interacting? Do any of them have a criminal record? USCIS does not carry out background checks on the managers of Regional Centers.

What is their EB-5 track record? How many I-526 approvals has the management company overseen? How many denials? How many I-829 condition removals? I-829 denials? USCIS does not publish these statistics yet.

Will the management company allow you to use your own EB-5 attorney, or do you need to retain an attorney appointed by the management company? If the attorney is appointed or authorized the attorney, has that attorney represented the Regional Center in its USCIS filings, presenting a potential conflict of interest?

Is the Management Company willing to meet with the lawyer and/or financial advisor of the investor?

Carrying on of Business

What is the Profit Split? For some, it may be 70% to the limited partners and 30% to the general partner. It may be 80/20. It may be entirely set aside for the limited partners.

How much in dividends can the investor expect to receive? When are dividends distributed?

Could the Investor be subject to a cash call (required to put additional sums, beyond the $500,000)? For example, if the real estate business plan calls for finding and leasing out the commercial space to tenants, what happens if no tenants are found? Who will pay for the cost of maintenance? Taxes?

What is the Investor’s Role in the Business? Is there an annual teleconference? How often does the management company send out reports?
If there is any material change in the business over the two-year conditional period – one not stipulated in the business plan – the investor may have to start all over again and submit a new I-526 petition after the condition removal petition is denied. While “material change” has not been defined by USCIS, a material change may be a new type of business; production of a new product; substitution of a new debtor. Sometimes these material changes may occur due to events outside the control of the RC – a hurricane hit the area where the company was located, for example. But for events within the control of the RC, can the general partner unilaterally make and implement a material change in the business during the two years?

Collateral

What happens if the debtor is unable to return the loan after five years? What security or collateral is being used? In a battle with other potential creditors, is the limited partnership first in line? 2nd? 3rd?

What is the current balance sheet position of the debtor? Has there been an independent audit?

Investor Quota Not Met

What happens if a project does not fill up, i.e., attracts fewer investors than stipulated? Is another source of financing available? If a project does not commence operations, the I-829 condition removal petition will be denied.

Condition Removal Stage

Will the management company prepare the documentation necessary for the condition removal petition? Will the investor have to pay an administrative fee for the documentation? What will the management company do if the condition is not removed? A Regional Center cannot guarantee return of invested funds if the condition is not removed, but it can take steps to ensure that the investor can liquidate his investment.

Exit Strategy

What is the exit strategy? For debt arrangements, the strategy is usually to receive payment of the principal of the loan after a certain period of time (5-6 years). At that point, the proceeds are distributed to the investors (limited partners). For equity projects, at what point may an investor sell his share? What is the market for his share (usually part ownership in a particular real estate project)? How easy/difficult will it be to find a buyer? What assistance will the management company provide in finding a buyer? Will the value of the share appreciate or depreciate?

TEA – Targeted Employment Area

For investors in a Regional Center to be eligible for the reduced investment sum of $500,000, the enterprise must be located in a targeted employment area. A targeted employment area must be rural (population less than 20,000) or have an unemployment rate 150% of the national average at the time of filing the petition. The former is easy to prove; the latter – may not be. The big issue is how to define the area (census tract, city, county, ward, political district) and whether more than one area is aggregated to reach the 150% national average. Does the Regional Center aggregate areas to reach the 150%? Has the state issued a designation letter? How recent are the unemployment statistics used by the Regional Center? It must be noted that during the course of attracting investors to a particular project, the TEA status may change: at the outset – for example, for investors #1-45 – the project is qualified as a TEA; a year later, after the release of new employment statistics, the project may not qualify as a TEA for investors #45-50 ($1 million needs to be invested). This shift in TEA status and subsequent sums required from investors may also implicate other legal issues.

Current Project

Just because a Regional Center has been approved does not mean this particular project within the RC has been. USCIS can pre-approve the project – if the RC sends project documentation, the USCIS can approve the project and, at least theoretically, investor petitions submitted pursuant to a project will only be scrutinized on source of funds issues, not project-related issues. However, the pre-approval process requires substantial time; so as not to lose this time, RCs usually do not go through the pre-approval process, instead submitting the project documentation for initial review as a part of an investor petition. Even a project pre-approval or the approval of an investor petition in the project is not a guarantee that your petition will be approved, but it reduces the risk. Has there been a USCIS pre-approval of this project? Have investor petitions already been approved for this particular project? Denied? How many investors have already signed up for the current project? USCIS will not provide approval/denial statistics for specific projects.

What is the investor’s place in a current project? The place of the investor in the project can be important because newly created jobs are allocated in chronological order: the first investor is allocated the first ten jobs created, the second investor is allocated the second ten jobs created, and so on. Thus, it is of benefit to not be one of the last investors in a project in the event of a job shortfall. While this issue should be obviated by adherence to the business plan and adherence to the job creation methodology utilized, the issue can nevertheless become relevant at the condition removal stage.

Job Creation

What job creation methodology is used by the Regional Center? How many direct and indirect jobs are being projected? What is the projected surplus of jobs beyond the minimum number required for all investors? Does the RC also count jobs created because of leverage (without the investment of the RC other investment would not flow. But because the RC invested, another funding source has also invested, and the RC counts jobs not only from the RC investment but from the other funding source as well.)?