Articles Posted in EB-5 Financing

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This article is the fourth in a series of articles on how EB-5 regional centers and sponsors can evaluate broker-dealer, investment company and investment adviser registration requirements under U.S. securities laws.

You may want to read:
Part 1 – EB-5 offerings do not fit standard SEC registration requirements;
Part 2 – Securities broker-dealer registration requirements and hiring U.S. and Non-U.S. brokers; and
Part 3 – Investment Company Act requirements.

Check back soon for new articles on raising investment capital, or subscribe to the Investment Law Blog, and you will be notified when the next article is published.

Investment Advisers Act or state law registration requirements for investment advisers may apply to managers of EB-5 funds

In a presentation on securities law issues applicable to EB-5 regional centers and sponsors at the May 2014 annual conference of the Association to Invest In the USA (“IIUSA“), the trade association for EB-5 regional centers, a representative of the Securities and Exchange Commission (“SEC“) stated that the registration requirements of the Investment Advisers Act of 1940 (“Advisers Act“) may apply to general partners and managers of EB-5 investment funds. It was recommended that EB-5 regional centers and sponsors consider this issue as part of their efforts to comply with U.S. securities laws. In our view, the Advisers Act should not apply to most EB-5 regional centers or sponsors, for reasons that relate to the characteristics of EB-5 funds in general. However, unless and until the SEC provides further guidance on this issue, it is necessary for every EB-5 regional center and sponsor to analyze the registration requirements of the Advisers Act and determine if they apply. In addition, the regulation of investment advisers is bifurcated between the SEC, for investment advisers with over $100 million in assets under management, and the states, for those with under $100 million in assets under management, and so it is also necessary to determine whether there is a requirement to register as an investment adviser under applicable state law. Continue reading →

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This article is the third in a series of articles on how EB-5 regional centers and sponsors can evaluate broker-dealer, investment company and investment adviser registration requirements under U.S. securities laws.

You may want to read: Part 1 – EB-5 offerings do not fit standard SEC registration requirements and Part 2 – Securities broker-dealer registration requirements and hiring U.S. and Non-U.S. brokers.

Check back soon for the rest of the series, or subscribe to the Investment Law Blog, and you will be notified when the next article is published.

As mentioned in Part 1 of this article, “EB-5 offerings do not fit standard SEC registration requirements,” U.S. securities laws were designed primarily for offerings of securities in the U.S. to protect U.S. investors, and these laws are not well suited to the EB-5 investment market. Nevertheless, it is necessary for EB-5 regional centers and sponsors of EB-5 offerings to understand the requirements of U.S. securities laws, and to structure EB-5 offerings in a way that will allow them to qualify for exemptions from the registration requirements. In Part 1 and Part 2 of this article, we discussed the requirements for exemption from registration of securities under the Securities Act of 1933 and exemption from registration as a securities broker-dealer under the Securities Exchange Act of 1934. In this Part 3, we discuss the registration requirements and exemptions under the Investment Company Act of 1940 (“ICA“).

What is an “investment company” under the Investment Company Act?

The ICA generally applies to every public or private company which invests over 40% of its assets in securities of one or more other companies, except securities of its own wholly owned subsidiaries. This definition includes any EB-5 fund, whether it is a limited partnership or limited liability company, that invests in the securities of a project company. For example, in the EB-5 “equity” model, if an EB-5 investment fund consisting of EB-5 investors (the new commercial enterprise or “NCE”, using USCIS terminology) purchases preferred equity interests in the project company (the job creating enterprise or “JCE”), the fund will be investing in securities of the JCE, and will therefore be deemed to be an investment company under the ICA. Loans are also considered securities under the ICA, meaning that in the EB-5 “debt” model, if an EB-5 investment fund makes a loan to a JCE, the fund will be deemed to be an investment company under the ICA. However, if the EB-5 fund itself owns the project (EB-5 investors are direct equity holders of the JCE), or one of its wholly-owned subsidiaries owns the project (EB-5 investors are equity holders in the fund, and the fund’s wholly-owned subsidiary owns the project), then the fund will not be considered to be investing in securities, and so will not be an investment company under the ICA. If an EB-5 investment fund meets the definition of an investment company under the ICA, the fund will be required to meet all of the requirements of the ICA, unless the fund is able to rely on one of several exemptions from the ICA, which will be discussed further below.

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On August 25, 2014, Catherine DeBono Holmes was featured in the GlobeSt.com article, Financing Projects with EB-5 Funds?, posted by Natalie Dolce, national executive editor of the publication:

“Some of the largest real estate developers in the country, including Related Cos., Silverstein Properties, Forest City Ratner, and many others, have raised hundreds of millions of dollars through the EB-5 program to help finance their largest real estate developments,” [Holmes] says. “Smaller real estate developers have also been successful in raising EB-5 financing to support their development projects.”

“There have also been some EB-5 financed projects that have failed, and some cases of blatant fraud by a few bad actors, she notes. “The recent Fortune Magazine article about the Chicago Convention Center case that occurred in 2012 painted a dark portrait, making it appear as if this one case was representative of the entire EB-5 program. The article failed to present an accurate portrayal of the EB-5 program as a whole, failed to mention the multitude of EB-5 financed projects that have succeeded, and caused confusion among real estate developers about whether or not EB-5 financing is a viable source of capital for their projects.”

Dolce wrote:

“In response to the questions real estate developers are asking today about whether they should consider EB-5 financing as a potential source of capital for their projects, we talked with Catherine DeBono Holmes about some key facts about the requirements, timing, marketing, risks and recommended procedures for EB-5 financing.”

In this article, Catherine DeBono Holmes answers the following questions about financing projects with EB-5 funds:

• What are the most important elements of a successful EB-5 financing?

• How long does it take before a developer receives the proceeds of an EB-5 financing?

• How much does EB-5 financing cost?

• What are the risks of using EB-5 financing and how does a developer protect against those risks?

Click here to read the full article.

Catherine DeBono Holmes is Chair of the Investment Capital Law Group at Jeffer Mangels Butler & Mitchell LLP, and the is the publisher of the Investment Law Blog. She has represented more than 50 real estate developers in obtaining EB-5 financing for their projects.

To review all of her articles on this topic, click on “EB-5 Financing” in the Topics menu to the right, and scroll down through all the articles we have posted.

In addition to forming EB-5 Regional Centers for investment in U.S. business through the EB-5 immigrant investor visa program, JMBM’s Investment Capital Law Group assists clients with forming U.S. and non-U.S. private investment funds for investment in real estate, mortgage loans, securities and other investments; sourcing and raising investment capital for hotel, multi-family and mixed use real estate developments throughout the U.S.; acting as securities counsel in connection with offerings of investment securities in compliance with exemptions from registration under the Securities Act of 1933 in the U.S. under SEC Regulation D and outside the U.S. under SEC Regulation S; and assisting securities issuers with crowdfunding.

Click here to see a full list of the services provided by JMBM’s Investment Capital Law Group.

Cathy HolmesCatherine DeBono Holmes is the chair of JMBM’s Investment Capital Law Group, and has practiced law at JMBM for over 30 years. She specializes in EB-5 immigrant investment offerings and hotel and real estate transactions made by Chinese investors in the U.S. Within the Investment Capital Law Group, Cathy focuses on business formations for entrepreneurs, private securities offerings, structuring and offering of private investment funds, and business and regulatory matters for investment bankers, investment advisers, securities broker-dealers and real estate/mortgage brokers. Contact Cathy at CHolmes@jmbm.com or 310.201.3553.

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This article is the second in a series of articles on how EB-5 regional centers and sponsors can evaluate broker-dealer, investment company and investment adviser registration requirements under U.S. securities laws.

You may want to read: Part 1 – EB-5 offerings do not fit standard SEC registration requirements

Check back soon for the rest of the series, or subscribe to the Investment Law Blog, and you will be notified when the next article is published.

Part 2: Securities Broker-Dealer Registration Requirements and Hiring U.S. and Non-U.S. Brokers

As mentioned in Part 1 of this article, “EB-5 offerings do not fit standard SEC registration requirements” the Securities and Exchange Commission (“SEC“) is studying the EB-5 investment market, but there is no indication whether or when it will issue any guidance regarding the registration requirements applicable to the sale of EB-5 investments.  At the May 2014 annual conference of the Association to Invest In the USA (“IIUSA“), the trade association for the EB-5 regional center program, representatives of both the SEC and the Financial Industry Regulatory Association (“FINRA“) gave presentations regarding the potential application of registration requirements to EB-5 regional centers and others engaged in the marketing and sale of EB-5 investments, but there was no indication that the SEC or FINRA had developed any policies specifically addressing the unique characteristics of the EB-5 market.

There are exemptions from broker-dealer registration that are available to EB-5 regional centers and entities which act as general partners or managers of EB-5 investment funds.  In addition, there are exemptions that apply to non-U.S. broker-dealers in connection with the sale of U.S. securities that could be applied to the sale of EB-5 investments.  However, there is a lack of clear guidance specifically applicable to the broker-dealer registration requirements that apply to persons engaged in the marketing and sale of EB-5 investments outside of the U.S.  Until such time as the SEC provides specific policies, the EB-5 community is in need of practical advice on how to conduct their business in compliance with U.S. securities laws, and in a way that fits the realities of the EB-5 market. Continue reading →

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This article is the first in a series of articles on how EB-5 regional centers and sponsors can evaluate broker-dealer, investment company and investment adviser registration requirements under U.S. securities laws. Check back soon for the rest of the series, or subscribe to the Investment Law Blog, and you will be notified when the next article is published.

Part 1:  EB-5 Offerings Do Not Fit Standard SEC Registration Requirements

  • The SEC has not provided clear guidance on how to comply with U.S. securities laws requiring registration as a securities broker-dealer, investment company or investment adviser when conducting EB-5 offerings

The U.S. Securities and Exchange Commission (“SEC“) has stated in open meetings with the United States Citizenship and Immigration Services (“USCIS“) and the Association to Invest In the USA (“IIUSA“), the trade association for the EB-5 regional center program, over the past two years that EB-5 investment offerings are subject to U.S. securities laws, even though EB-5 investments are offered primarily outside the United States to persons who by definition are not currently U.S. residents but are seeking to become U.S. residents as a result of making their investment in an EB-5 offering.  However, the SEC has not provided any specific guidance to the EB-5 investment community on the ways in which they can comply with the registration requirements that apply to the registration requirements for securities broker-dealers, investment companies or investment advisers under U.S. securities laws, other than to suggest that they speak to an experienced securities lawyer.  This advice leads to conflicting opinions among lawyers, and makes it difficult for everyone involved in the EB-5 investment market to know exactly what they are required to do in order to comply with these registration requirements under U.S. securities laws. Continue reading →

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Competition for EB-5 Financing is Strong.

Demand for EB-5 financing among U.S. real estate developers is at record high levels, and demand for high quality EB-5 investments in China remains strong. Marketing agents in China and elsewhere are looking for the “best” EB-5 projects, meaning those that will be viewed by potential investors as the ones with the best chance for approval by USCIS and the best chance for the investors to receive a return of their investment after the investors receive their permanent green cards, in about five years from the date of their investment. At the same time, U.S. real estate developers are looking for the “best” marketing agents in China, meaning those who have a good track record of selling other EB-5 Projects, are direct and honest in communicating with the developer, and charge competitive fees for their services.

Most U.S. real estate developers have heard a great deal about EB-5 financing over the past five years. Those who are new to the market have a number of questions on how the EB-5 financing market works, how to structure a successful EB-5 offering, and how to find the right marketing agents to sell their EB-5 offering. Those developers who have some experience with EB-5 financing want to know what is selling in the EB-5 market now in China and how they can find good marketing agents in China to sell their EB-5 investment offerings. Here are some of the answers we provide to these questions:

What are the basic requirements for projects to obtain EB-5 Financing?

For those new to the EB-5 financing market, here is a thumbnail description: The EB-5 investor visa program allows non-U.S. persons to invest at least $500,000 or $1,000,000 in a business that is expected to create at least 10 new permanent jobs per investor, and to obtain a conditional visa upon review and approval by the United States Citizenship and Immigration Service (“USCIS”). EB-5 investments can be pooled to raise any amount of funds necessary to finance a project, provided that enough new jobs can be created to support the amount of financing being raised. Because the requirement is that new jobs be created, it is almost always the case that EB-5 financing is used for the development of new businesses, such as building new hotels or multi-family projects or major renovations of old buildings. EB-5 financing cannot generally be used to buy existing businesses, because the existing jobs cannot be counted toward the new job requirement. Due to USCIS policies, jobs of employees of tenants that lease space in a building cannot usually be counted toward the job creation requirement, which means that development of office and retail projects are generally not a good fit for EB-5 financing, other than in large projects seeking to raise a small percentage of EB-5 financing. Continue reading →

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Are regional centers really required to register as broker-dealers under U.S. securities laws?

Recent articles have suggested that every United States Citizenship and Immigration Services (“USCIS”)-approved regional center which pools foreign investor funds for EB-5 investment offerings sold to foreign investors may be required to register as securities broker-dealers under U.S. securities laws. In addition, it has been suggested that the principals or employees of regional centers must be registered as licensed “associated persons” of a securities broker-dealer under U.S. securities laws. We agree that it is extremely important to conduct EB-5 investment offerings in compliance with all applicable securities laws, but we believe there are better ways of complying without registration as a broker-dealer. In this article, we will answer some of the most frequently asked questions we receive from our clients using EB-5 financing for their projects, and offer some practical guidelines for regional centers and project developers to conduct EB-5 investment offerings in compliance with the regulations and policies of the Securities and Exchange Commission (“SEC”).

Do broker-dealer registration requirements apply to EB-5 offerings that are exempt from U.S. securities laws?

Yes. Many people do not realize that even if the offering of EB-5 investment securities is exempt from registration under U.S. securities laws, every person who sells EB-5 investments is still subject to the requirements for broker-dealer registration or exemption. In this article, we are focused on the SEC registration requirements and exemptions that apply to people engaged in the sale of EB-5 investments, whether they are selling here in the U.S. or outside the U.S. There are also state laws that apply to registration of broker-dealers, but for securities offerings that take place in more than one state, federal laws and regulations are primary, and we therefore focus on federal requirements in this article. Continue reading →

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Four years after the collapse of the traditional financing markets for new hotel developments, most hotel developers are still struggling to find the necessary financing to fill the capital stack required to build new hotels. Even for developers with access to construction loans, loan to cost ratios are hovering at 50%, and equity providers expect returns in the mid-teens to the mid-twenties. As a result, the “feasibility gap” between a typical project’s cost and its value is still too high, and hotel developments around the country are stalled.

Meanwhile, most cities and states are no longer providing public dollars to support private development. In California, for example, all community redevelopment agencies were abolished by the California legislature in 2011, and $1.7 billion that had been earmarked for redevelopment projects by approximately 400 redevelopment agencies state was instead required to be returned to state and local governments to fill operating budget deficits.

In other states as well, many governmental entities have no public dollars available, or are unwilling to use public dollars to support hotel development. Even in those areas where government financing is available, the time required to obtain approval is usually much longer than anticipated – often taking two to five years or more. There is also the risk that during that time mayors and city council members will change, and they may not support the projects approved by the prior administrations. In this economic climate, some hotel developers around the country are assembling multiple alternative financing sources for their hotel projects, such as EB-5 immigrant investor financing, new markets tax credits, historic tax credits (for renovation of historic buildings), and other forms of public incentives. Continue reading →

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USCIS has challenged EB-5 financing for hotel projects that rely on stabilized revenues as the basis for determining job creation. Since 2012, the U.S. Citizenship and Immigration Services (USCIS) has issued multiple Requests for Evidence (RFE) challenging the validity and reasonableness of economic job creation models for hotel projects that rely on the revenues anticipated to be generated after the second or third year of hotel operation, instead of the revenues generated in the first or second years of hotel operation. In the hotel industry, a new hotel’s future value is based on its anticipated “stabilized revenues”, meaning revenues anticipated after the first two or three years of hotel operation. The USCIS has instead used revenues from the first one to three years of a new hotel’s operation, which are referred to as the “ramp-up phase” of a hotel’s operation. However, using revenue predictions from the ramp-up phase of hotel operations does not reflect the full economic value or job creation potential of a hotel development. In this article, we explain why we believe the USCIS should use stabilized revenues in evaluating the job creation from hotel projects, for the reasons we discuss below. Readers should note that the USCIS has not accepted the use of stabilized revenues as of the date of this article, and this article is intended to suggest that it should do so in the future. Continue reading →

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USCIS has challenged EB-5 financing for hotel projects that rely on guest expenditures. Since 2012, the U.S. Citizenship and Immigration Services (USCIS) has issued multiple Requests for Evidence (RFE) challenging the validity and reasonableness of economic job creation models for hotel projects that include jobs created from increased visitor arrivals or guest expenditures (also referred to as visitor spending), meaning expenditures of hotel guests for goods and services outside the hotel, such as restaurants, retail and entertainment. This has resulted in high levels of uncertainty for regional centers and developers seeking to build hotel projects that include jobs from increased guest expenditures.

The current stated position of the USCIS is to accept job credit based on guest expenditures so long as the applicant demonstrates by a preponderance of the evidence with a data-based analysis that the new hotel project will result in an increase in new visitor arrivals and new guest expenditures. In this article, we explain what standards we believe the USCIS should use to determine that a new hotel will create new jobs as a result of filling demand for additional hotel rooms in a local market. Readers should note that the USCIS has been hostile to the use of guest expenditure jobs since approximately 2012, and this article is intended to suggest that it should more readily credit jobs from guest expenditures in the future where appropriate based on market data. Continue reading →