3RD PARTY ESCROW OVERSIGHT WITH REID THOMAS
EB-5 Investment Voice,
(Mona Shah & Associates Podcast Series)
Reported by Hermione Krumm, Esq.
EB-5 Investment Voice is the only Podcast series that focuses on the United States immigrant investor visa, EB-5 and foreign direct investment. Mona Shah welcomes guests from the industry including: Developers, Regional Center Operatives, Attorneys, Legislators and Politicians.
In this podcast, Mona Shah interviews Reid Thomas from NES Financials and discusses everything there is to know about third-party oversight. They talk about the current issues and trends in the EB-5 business. They also talk about what causes challenges or creates opportunities in order to promote solutions that allow people to take advantage of these opportunities. Although the law does not require third-party oversight of escrow for EB-5 projects, the USCIS advocates the use of third-party administrators as a safeguard to issuers and investors alike. Because of the political unrest in Europe, more and more people have perceived that U.S.A. is a great place to live and invest. As an increasing number of investors are coming in, it is essential for them, especially the EB-5 investors, to know more about escrow administration.
The followings are some topics discussed in this episode.
What does NES do?
Mona states, nobody really understood EB-5 in 2005 or 2006 and the situation didn’t change much until 2012. That is why NES wasn’t in the EB-5 business until 2010 as there were certain types of financial transactions where banks were generally afraid of dealing with the money, where there was a lot of compliance and reporting requirement, and a potential or even history of fraud and abuse. There were a lot of financial sectors that suffered from these conditions, so NES built the solution to do escrow administration.
Why do we need a third-party administrator?
Currently, USCIS is advocating the use of a third-party administrator. This is an independent company that provides a level of tracking, oversight or control over the movement and management of the money. If a developer has gone out of his way to get a third-party administrator, it gives integrity towards the developer. Reid suggests that the projects that adopt these third-party best practices fund faster, while Mona believes that faster fundraising is not guaranteed, but those projects do have the most solid funding. The median project size that NES is overseeing is actually 20 million dollars and lots of others less than that, which shows that not only big projects but also much smaller ones choose this kind of administration.
However, we have to be aware that there are very few banks that deal with EB-5 escrow. And whenever you do go through an escrow bank or a third-party administrator, there are issues relating to control and hold back as in some part of the EB-5 money is held back. Many people underestimate the banking complexity. Out of the 6000+ banks in the U.S., less than a dozen take EB-5 deposits on a regular basis. Nonetheless, banks partner with NES because they help mitigate risks.
The small developer who needs the money might not see the need to use third party escrow services considering that EB-5 does not require it. But it has been a best practice where the demand is pushed from the investor’s side as if an investor’s I-526 is denied, the project has the pledge to repay the subscription money. If you already put all your capital into the project, there is no third-party best practice, and the project does not get approved, what happens to the investors? This is the bank complexity issue as at the end of the day, the bank is the one with the deep pockets in this transaction and everyone will end up being sued. This is one of the biggest issues that’s difficult for banks to deal with because you are alluded to the ideas of hold back and complicated escrow structures to help mitigate the risk which actually even further complicate the process. The USCIS is even advocating the best practice.
Mona suggests that EB-5 programs do not have many regulations, or at least, not yet. The regulations are not there to impede the private enterprise. Therefore, there is minimum government involvement. But because of the growth of EB-5, a lot of these practices have evolved. Because of the profile of the recent fraud and abuses, integrity measures have been put legislatively, so at the end of the day, they end up in the same place but equity measures are forced into the EB-5 realm.
Mona believes that the fraud element, although present, is merely a handful compared to the number of current projects. She states as she has several times on the Podcast that there is a difference between a developer who intends fraud and a developer who just has a bad project. This is in relation to funded administration, i.e. third party monitoring the funds.
The EB-5 process is a complex process where money flows through different entities over an extended period of time. As part of the immigration process, it is essential to be able to show if the money is fully invested, if it remained at risk, and if it created jobs. This involves a tremendous amount of tracking in ways that go way beyond what traditional private equity funds need to do.
NES as a third party administrator is not a registered investment adviser. It is a provider of services not just to issuers, but to all stakeholders, including banks as well as investors. Statistically speaking, 100% of the larger projects and 80% of other projects coming to the EB-5 market all adopt the same services. If a smaller project wants to compete against a big project, they have to offer the same levels of security and transparency to investors. Investors can login using the services’ solutions and see exactly where their money is at any point in time. This is even more important for a direct pooled project.
What is a hold back?
Previously, money was put in an escrow until the petition was approved or denied. Since the time processing has gone so long, it is not practical to do that anymore. Money is released earlier, but a portion of the money is held back until the approval. When the I-526 is approved the remaining hold back money is immediately released, so the money was all in the project.
How does a third-party administrator help attorneys?
Immigration workflow is a place where all immigration-related documentation can be tracked. Documents such as I-526, I-829, RFEs, to name a few are consolidated in the tool created by NES. When it comes to filing any petition, it would be much quicker to get access to the information any attorney needs to help investors. This does not replace the attorney’s own case management system, but rather it aims to consolidate information which increases the likelihood of the investor’s success for immigration.
How does a third-party administrator help developers?
If a developer doesn’t hire an independent 3rd party to track the flow of the money into the project for job creation and immigration result, it is assumed that the developer will have to do that themselves. This is a burden outside of the natural comfort zone of what a developer wants to do, which is to build or develop properties. They can think of it as outsourcing the problem to a third-party administrator. NES has built a technology to automate all of this which proves to be more efficient and cost effective on the side of the developers. NES tracks expenditures, creates audit trails and provides supporting evidence for all financial activity within the project.
Escrow accounts are not required in the EB-5 process at all. But one advantage of it is it protects the investor and issuer by putting additional controls in place. However, it is getting complicated because the processing times do not line up with the reality when the capital is needed by developers. That’s why this year NES is going to innovate and introduce a new solution for escrow by combining escrow capabilities with drawdown account control capabilities. Because when you look at how deals are ultimately structured, it is really on a drawdown and control in place during a loan period that is the critical piece.
Mona reminds the investors that once the money goes into the developers’ hands, it’s not so easy to track. When it comes to the I-829 stage, as an immigration attorney, Mona has had situations where there have been multiple transfers into lots of different accounts for one reason or another, and many times, you could have some nefarious activities slipped in at the same time, so Mona believes that’s why USCIS is taking a very long time now to get the I-829 approved, as they are tracking the activities. When Mona talks to developers, she always advocates a third party administrator like NES from the very outside.
Mona concludes that the real purpose we talk about a third-party administrator today is that we actually are explaining to our audience that these services are essential and available. They should be used and they are being used by some better projects. One more remark is that the law doesn’t require these third-party oversight of escrow but it certainly benefits the investors and even provides some protection for the issuers. Although the law doesn’t require third party oversight today, the draft versions of the law are getting tougher and tougher in this regard and the latest version clearly specifies that this is a requirement. Mona, as an attorney, encourages its use at every stage.
About the Author:
Hermione Krumm, Esq. is an associate attorney with Mona Shah & Associates. Hermione works with EB-5, corporate, merger and acquisition (M&A), intellectual property and foreign direct investment (FDI) matters involving China, the UK and the US. Hermione received her LL.B. (Hons) from the University of Manchester School of Law (UK), and obtained her LL.M. from Cornell Law School. Hermione speaks fluent English, Mandarin and Cantonese.