© 2021 Matt Gordon
Paraphrasing Mark Twain, the reports of the demise of the EB-5 program have been greatly exaggerated. It is true that on as of July 1, 2021, the Regional Center (pilot) program, enacted in the Immigration Act of 1993, lapsed; however, the EB-5 program itself, which was created by the Immigration Act of 1990 (and not subject to a sunset) is alive and well. What this means is that only direct EB-5 projects, those that create ten or more full time job positions per investors (and do not use indirect or induced labor creation afforded to Regional Centers) are available.
Unlike past lapses in authorization of the Regional Center program, which have ranged from hours to a couple of weeks, this one is going to last for months or longer. After the increase in the minimum investment amount from $500,000 to $900,000 in November 2019, the EB-5 industry became a smaller version of its former self. Many large developers exited the sector, as did immigration agents. There just isn’t the same pressure on members of Congress to get the reauthorization done expeditiously. EB-5 always received a disproportionate and arguably unjustifiable amount of legislative attention relative to its size. It may very well be the case where Congress simply doesn’t have the time or desire to deal with the Regional Center reauthorization as a priority or even at all. We are now in a scenario where the only EB-5 structures available to investors and project developers are those based on direct structures and this will likely persist until late in the year if not well into 2022.
For project developers, all hope is not lost. Pooled direct can provide a partial, if not total capitalization solution. Grouping investors, whether in regional center-based structure or direct has always been legal. I have been advising on exactly how to do this for more than a decade. So long as there is sufficient direct labor creation, there is no limit on the number of investors that invest in a single new commercial enterprise (NCE). The key is in the labor creation to capital expenditure ratio. Business models such as assisted living facilities, hotels, health care clinics and restaurants could find themselves with sufficient labor to make a direct offering worth while for them. It is an opportune time as sponsors who adopt the pooled-direct model will face significantly less competition without regional centers being in the market.
For investors, the time is now. The minimum investment amount is back to the pre-November 2019 $500,000 level. On June 22, 2021, the US district court invalidated the 2019 rule in the Behring case. For a background on that see, https://discuss.ilw.com/articles/articles/403783-article-what-s-old-is-new-again-500k-eb-5-is-back-or-is-it-by-matt-gordon. USCIS has not appealed the case, so until DHS issues a new rule, the more lenient TEA rules apply, affectively allowing virtually all projects to accept investors at the $500,000 level. DHS’s hands are tied with respect to issuing a new rule (based on the November 2019 rule) as they cannot move that forward until the Regional Center program is reauthorized. Their alternative is to start all over with a new rule for only direct EB-5, but that would take more time and isn’t worth the time or effort given the size of the direct market.
For both sponsors and investors alike, now is the time to embrace pooled direct EB-5 projects. For investors, they can invest at the $500,000 investment level. For sponsors, more investor demand and no regional center competition is a very attractive formula. Pooled Direct EB-5 is finally having its day in the sun.