As the EB-5 space continues to grow and mature, so do many aspects of putting a regional center together continue to change.
Escrow and EB-5
For a time, most all regional center deals involved an element of escrow for the investors. In this case, escrow meant that the EB-5 investor commits to the investment in writing (subject to certain conditions, including approval of their I-526 petition) and while their I-526 was being reviewed, their investment sat in trust with an escrow company, who would release the funds to the project upon the investor's I-526 approval (or otherwise back to the investor, subject to certain conditions, if the approval was not attained).
Today, this is starting to change. Some regional center deals forego escrow altogether, while others still might use escrow more creatively. On the whole, we recommend to new regional centers to make use of escrow in the traditional sense as outlined above, at least while they establish their reputation and trustworthiness in the market. The exception to this rule occurs where a regional center or project team can offer investors other reasons to develop a feeling of trust, such as a proven track record of the company and team that is behind the project. On the other hand, it is understood that waiting for I-526 approvals can take so long that it can threaten the viability of a project.
EB-5 investors are often nervous, particularly around untested EB-5 entities, but if trust is established then some of the other options in escrow can be explored. Among these options are the use of holdbacks, or the use of reasonable trigger mechanisms.
The holdback approach to escrow means that a certain amount of the funds among a pool of investors can be released to the project at a certain point. For example, every time the regional center gets commitments from 10 investors it might release half of the funds it takes in to the project, holding back the other half to allow for failed I-526s or other allowable refunds.
The trigger mechanism approach could occur where a regional center, for example, releases escrow funds to a project upon the approval of one (or any reasonable number) of I-526 petitions for a given project, which would indicate that the project portion of the I-526 is being approved by USCIS and that denials, if any, would be due to a deficient investor application. Others still, might offer to release escrowed funds the moment the I-526 is filed providing there is a legally-binding developer's guarantee in place.
Building trust should always be the first priority of a regional center in terms of how it positions itself to investors, largely conveyed via the EB-5 business plan. With a good reputation a regional center's long term prospects can be very bright indeed. As trust is built and earned among the investor community a regional center can start to look to other options in relation to its escrow structure and its deal structure generally, whereby investors might feel comfortable taking on certain risks which will ultimately enable a higher degree of both project and regional center stability. Like any investor, EB-5 or not, the bottom line is that the more risk an investor has to take the more secure the investor needs to feel about the rest of your project or the companies behind it.
Phil Cohen is the founder and President of Strategic Element, a company that focuses on developing regional centers, EB-5 business plans, economic impact reports, feasibility studies and custom 'direct' EB-5 projects for its clients (www.strategicelementconsulting.com).