COMPARING DIRECT EB5 WITH THE REGIONAL CENTER ROUTE
Foreign nationals seeking a U.S. Green Card are relying on the investment route more frequently than ever before. Various reasons might be surmised for the increase in popularity of the investment option, including the reduced availability of other options under U.S. immigration laws and the comparatively low investment amount — $500,000 or $1,000,000 — compared to most countries.
The foreign national who wishes to use the investment option for permanent residence has two basic choices. One choice is to find his or her own individual investment vehicle in which he or she will invest and play a role in management or policy making. The second option is investment in a Regional Center investment. Let’s discuss both of these options and compare and contrast advantages and disadvantages of each.
As an overview, an advantage of the direct investment option is that the foreign national accomplishes not only an immigration purpose but also a purpose of investing in a business that may provide significant returns and may provide a source of income and a livelihood on an ongoing basis.
The Regional Center investment often provides the quickest and most secure exit strategy. Most importantly, it is not reliant upon proof of direct employment of 10 qualified U.S. workers per EB5 investor, since projected indirect and induced employment qualifies. However, the investor is not running his or her own business, and the rate of return may be lower than in a successful individual investment.
With either option, the amount of the investment is $1,000,000, unless the investor can prove that the investment is in a “rural area” or in an area which has experienced unemployment of at least 150% of the national average rate. If so, the amount of the required investment is $500,000. Most Regional Center projects are located in such $500,000 “targeted employment areas.”
Both options require the investor to prove that his or her investment has resulted in the creation of “full-time employment” of 10 U.S. workers. The big difference is that individual investors must prove direct employment of the 10 full-time U.S. citizen or permanent resident employees. With Regional Centers, employment creation can be met by a combination of direct employment and indirect and induced employment using various accepted economic methodologies.
Both investment options prohibit purely passive investment. In other words, the investor must be engaged in the “management” of the enterprise. In this regard, it should be noted that most of the Regional Center projects are limited liability corporations or limited partnerships. Pursuant to regulation, if the petitioning investor is a limited partner and the limited partnership agreement provides the petitioner with the rights, powers and duties normally granted to limited partners under the Uniform Limited Partnership Act, the investor will be considered sufficiently engaged in the management of the enterprise. The same standard has been applied to members in LLCs. As a practical and legal matter, this requirement can be met by a limited partner or member without the necessity of the investor committing to any specific amount of time or engaging in any day-to-day management, since such activities are performed by the general partner or managing member.
The individual investor must prove that the investment has been made in a “new commercial enterprise”. A “new commercial enterprise” can be created by an individual investor in any one of the following ways:
- Establishing a brand-new business;
- Purchasing or investing in a business established after November 29, 1990;
- Acquiring an existing business and engaging in significant “restructuring or reorganization”. This alternative is rarely used and has not been defined.
- Expanding an existing business. This option requires the investor to prove not only the creation of 10 new jobs but also the expansion of either net worth or number of employees of the business by at least 40%.
If the investor invests in a “troubled business” (a business with losses totaling 20% of net worth in the last one- or two-year period), there may be an opportunity to qualify based on preserving all existing employees (at least 10) as opposed to adding new ones.
Another issue that is significant for both the individual and the Regional Center investor is proving the “lawful source of funds.” Substantial documentation is required to prove that the investor did not acquire the funds through unlawful means. If the funds are the result of a gift, this requirement must be met for the giftor. If the funds are the result of a loan from an individual, this requirement is applicable to the creditor. Documentation utilized to meet this requirement may include tax returns, real estate transactions, securities transactions, inheritance documentation, stock dividends, employment records, bank records, etc.
Related to—but separate from—the lawful source of funds requirement is the requirement to trace the path of the funds from the individual investor to the new commercial enterprise. In some cases, this is as simple as a wire transfer document from an individual’s bank account to the investment enterprise. In other cases, involving countries with restrictions on outbound currency transfers, this can be extremely complex, often involving transfers to multiple parties. It is important to note that the investment must come from the individual investor. An investment from a corporate entity, including a wholly-owned corporate entity, may not qualify.
With both the individual and the Regional Center investor, upon approval of the permanent resident application, the foreign national receives “conditional permanent resident status”. This means that the Green Card that the investor receives is valid for two years. During the 21 to 24-month window after approval, the investor must file an application to remove conditions on residence. As part of this process, the investor must prove that the investment funds have not been withdrawn and that the requisite jobs have been created or will be created within a “reasonable time”.
For individual investors, this can be problematic if the vicissitudes of business are such that a downturn in the economy has resulted in a reduction in the workforce. For the Regional Center investor, although indirect employment creation is allowed and although USCIS may in some cases pre-approve the employment creation element, the Regional Center has the burden to prove two years later that the actual projected employment has occurred or at least that the foundational inputs of the economic projection have occurred. The choice of both Regional Center and the particular project within the Regional Center is a critical one.