Post Regulation Changes Reflected in EB5 Project Documents with Ronald R. Fieldstone – Episode 99
The increase in minimum investment from $500K to $900K has fundamentally changed the EB-5 program, and our project documents must be modified to reflect those changes. On this episode, Mona and Mark are joined by Ronald R. Fieldstone to discuss the ins and outs of updating project documents in light of the new rules. Listen in for insight into the rising administrative fees, the pressure for projects to provide a higher rate of return, and the availability of TEA projects on the market right now.
A number of EB-5 projects raised capital from foreign investors at the $500K minimum prior to the regulations taking effect last November. Now, they are looking for additional investors at the $900K level. How should the project documents be updated to reflect the regulatory changes? What disclosures should be included in any modified or new offerings?
Ronald R. Fieldstone is a Partner at Saul Ewing Arnstein & Lehr and serves as the Chair of their Global Immigration and Foreign Investment Practice. He represents both developers and Regional Centers in EB-5 matters, currently handling more than 350 EB-5 projects with a combined capital raise of more than $8B. On this episode of EB-5 Investment Voice, Ronnie joins Mona and Mark to discuss the necessary changes to project documents in light of the new regulations.
Ronnie explains the rules around administrative or management fees, offering insight into how much those fees have increased since November 2019 and why agents may be charging more. He also addresses the pressure for projects to offer $900K-level investors a higher rate of return and weighs in on the small number of TEA projects on the market right now. Listen in for Ronnie’s advice on updating the project summary, economic report and business plan with the appropriate disclosures—and learn whether it’s best to add an addendum to an existing PPM or simply draft a new one.
Administrative or Management Fees
- Administrative or management fees are upfront fees paid to the Regional Center or sponsor and marketing agent. If there is no marketing agent, the balance is retained by the Regional Center or sponsor.
- Administrative fees are to be used strictly for project-related expenses per USCIS regulations. Specifically, any payment of commission made onshore can only be paid to a licensed broker-dealer, making it crucial that any fee paid to an offshore, third-party marketing agent has no US presence.
Rising Administrative Fees
- Since the increase in minimum investment for EB-5, administrative fees have risen as well. Ronnie has seen fees in the $60K to $80K range, though he questions the increase as agents are selling the same investors and performing the same amount of work.
- Agents may be charging more because they are connecting investors with projects that earn a higher rate of return. Agents may also ask for a frontend load payment (on top of the admin fee) from developers for providing inexpensive backend capital for an extended period of time.
A Higher Rate of Return
- There is pressure from investors for an increased rate of return now that the minimum investment has risen to $900K. In the past, nearly all projects were structured as a loan model with a set interest rate. But now, we’re seeing more and more preferred or common equity models, with developers paying 6% to 7% interest—which is still cheap compared to traditional equity funding.
- Ronnie contends that there is almost no market for non-TEA projects requiring the $1.8M minimum investment. The only exception are projects that can offer a straight private equity investment with a preferred return and participation in profits.
Availability of Projects Since November
- Since the regulations went into effect last November, the majority of old ($500K minimum) TEA projects went away. But there is a market for $900K projects, and a small number of TEA projects are being undertaken.
- The industry has become more selective, and only the most viable projects—those with a strong developer, strong economics and good geography—will attract investors at the $900K level.
Uncertainty Around the TEA Determination
- Under the new regulations, the TEA determination is not approved up front and multiple models can be used to determine TEA eligibility. Because USCIS does not identify a particular data set, economists are using both the ACS and Census Share methods.
- Though it would be inappropriate for USCIS to take a position against a normal economic analysis, projects that only qualify as TEA under one model (not both) could be challenged. Ronnie recommends securing a letter from an economist confirming TEA eligibility and verifying the methodology used.
Updating Documents Post Regulations
- The first step in updating your documents is disclosing whether or not you’re a TEA and submitting proof in the form of an economic analysis. You must also disclose that said economic analysis is not binding on USCIS.
- Next, review your documents. Many projects anticipated changes to the minimum investment amount, including the caveats that the “investment amount of $500K is subject to increase based on legislation or regulation” and that the sponsor reserves the right to continue to sell units at the higher dollar amount.
- Ronnie also recommends 1) demanding that the developer update the status of an existing project, and 2) updating the documents for new investors coming in at the $900K level. This includes an update of the project summary and economic report as well as a modified business plan.
- Finally, Ronnie suggests updating your documents to address the regulations, providing investors with a full disclosure of what the new rules mean. It’s also a good idea to disclose the possibility that pending legislation could change the minimum investment yet again.
- With regard to the PPM, you can either create an addendum OR simply start over and draft a new one. Mona believes that both options are acceptable (and do not qualify as a material change) as long as the disclosures are clear.