Risk and Reward
While EB-5 capital is commonly used for mezzanine capital by the companies raising funds, the investors essentially face a venture capital-level risk profile. When considered in this way, the return in dollars to an EB-5 investor is considerably below market for this risk profile. This is no secret and it is the model that the industry has settled into, for the most part. This model appears to make sense for all concerned since the investors get the added benefit of a path to US citizenship if the businesses create the requisite jobs, giving them enormous perceived value for their investment, while at the same time the project developer faces additional risk, time and cost in setting up a project to fit the EB-5 program.
With this view in mind, one should remember that venture investment is inherently risky, ask any venture capitalist. Even better, have a look at venture capital funding lists to see the kinds of businesses that get funded every day by seasoned investors, some very odd and seemingly risky businesses indeed. According to a September 2012 Washington Post article, “About three-quarters of venture-backed firms in the U.S. don't return investors' capital, according to recent research by Shikhar Ghosh, a senior lecturer at Harvard Business School”. By comparison projects that I’ve seen available via the EB-5 program today would seem to be far less risky than that, on the whole.
This is not to say that some deals in the EB-5 marketplace do not, in some cases, put forward overly aggressive projections and/or assumptions, but this is true of many businesses seeking funding, whether they are seeking EB-5 capital or not. Like for any business investment, investors must thoroughly investigate the EB-5 project's business plan, claims being made, the team and even the companies who are representing the deals. This can be done in part by feasibility studies or by other consultants who specialize in project reviews, feasibility studies or the like.
Are there people with bad intentions in EB-5? There is no doubt that there are people out there who might come to think that investors will be blinded by the possibility of attaining a green card and will fall for a bad deal without looking at it too closely. While this is not true for the great majority of EB-5 deals that this author has seen, nobody can say that it hasn't happened.
Should an investor be careful in making an EB-5 investment? 100% and unequivocally yes! Investors must investigate any project that they are looking at investing their hard-earned dollars into and this cannot be stressed enough. Every deal has pros and cons and good and bad elements and the investor should weed out all the risks for themselves (or get a knowledgeable consultant who can help them) so that they can make a decision that they are comfortable with. Will there be deals out there that don’t succeed? Likely so; it is a free market after all and the statistics for failures of new businesses in America show relatively high numbers. It would be safest for investors to assume that EB-5 deals would not be different on the whole, although EB-5 deals are often brought to market by experienced teams and the author does not believe that EB-5 business failures are even in the same ballpark as published statistics on the whole.
There are many deals for EB-5 investors to choose from today and investors must choose the project and risk profile that suits them best, and again, they absolutely must investigate any business deal, EB-5 or not. I have seen investors willing to take undue risk in their EB-5 investments in their eagerness to move themselves toward the opportunity to participate in the American dream. Spending more time to check out every detail, however, will help to ensure that the investor can choose an investment leads the desired result with the least amount of risk. So EB-5 investors don't rush, investigate everything and then make the choice that you are most comfortable with.
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).