The future of EB-5 fundraising: seismic changes ahead
It’s easy to see the challenges faced by issuers of EB-5 qualified private placements — an unpredictable Immigration Service, the steep decline of major markets, and an over-supply of offerings in the market. All these forces make a slow-down inevitable. But EB-5 USA market is actually maturing and better protecting both issuers and investors as market forces change the category.
It’s become clear over the past 12 months that China can no longer satisfy the EB-5 investment market. And over the next 12 months it will become clear that neither can a handful of other countries, such as Vietnam, India, Brazil, etc. So what does this mean for the rest of the world? How is this an example of the EB-5 market maturing and better-protecting people?
The reason they won’t is a result of China’s voracious appetite for EB-5 visas over the past ten years, which likely claimed all of China’s EB-5 visa quota for the next 15 years, and probably all unused EB-5 visas from other countries for the next 15 years as well. Therefore, each country’s EB-5 visa limit would be around *268 per year, and any additional EB-5 investments would be applying for future years’ allocations and lengthening the green-card waiting time.
Without the influence of powerful Chinese agents who once controlled the flow of information, it will become impossible to aggregate investors in a bulk manner the way China was able to do.
In fact, Indians are particularly suspicious of agents getting a fee and tend to learn about the category and review multiple offering documents themselves.
Such a lack of agent influence will also mean small offerings (under 100 investors) will have a better chance of raising funds in a market that becomes fragmented and spreads across the globe.
Reg D Offerings
Another major shift will occur as issuers structure their investments as Reg D (506c) offerings. This adjustment is not complicated or expensive and affords issuers the ability to use General Solicitation. Requirements of Reg D (506c) are minimal but do demand that all investors verify that they’re accredited instead of just attesting to this. Add a short definiton here? Accredited Investor defined.
Registering as Reg D (506c) also enables investment professionals to promote offerings without having to first establish a prior relationship with each prospective investor, as was required in the past. Essentially, Reg D (506c) combined with technology will open many new investor-facing opportunities.
During the past ten years while China controlled the market, the Internet wasn’t a great tool for issuers because websites located outside of China were blocked or load times were excruciatingly slow. So these project websites were relatively useless to Chinese investors.
The use of technology is now presenting investors with a breadth and depth of deal terms and analysis on each EB-5 investment. This transparency helps investors more effectively learn about and compare investment options. Count this as another factor that lessens the need for agents.
Eventually, digital deal platforms will be the distribution outlets for a majority of EB-5 investments. The days of investors accepting a 0.5% rate of return while putting their capital at significant risk are coming to an end.
Deal directories are likely to be hosted by broker-dealers who can help structure a marketable offering, ensure that the offering contains appropriate disclosures, and ensure that the investment process follows proper SEC rules and guidelines. And this will better protect both issuers and investors.
The time of immigration attorneys suggesting a handful of offerings is also likely to end. This situation offers no beneficial outcome for a law firm — but raises the potential for liability. And this is even truer for attorneys that suggest a deal that they were paid to help draft. When a deal fails, regardless of why, immigrant investors will be encouraged to file a lawsuit, and litigation attorneys tend to name everyone they can as defendants.
The EB-5 process is going through a seismic change regardless of when the new Integrity Measures define Integriy Measures are adopted or how much the minimum investment amount increases.
Attaching a permanent US visa to an investment will always find a market — whether we’re talking about today’s $500,000 minimum investment amount or a $1.2 million project. And the demand for wealthy people and their children to migrate to the U.S. will only grow.
*268 investments per year is calculated by assuming each country is entitled to receive 700 visas per year, and since the average number of family members in a petition is 3 (*EB-5 derivitive rates), we can assume around 233 investments could be made. If we apply a 15% denial rate (EB-5 denial rates) we increase the number of investments to 268.
CEO – EB5Deals.com
The EB5 Deals platform provides the deal terms and a strengths and risks analysis on over 100 EB-5 offerings. The digital deal platform is only available to investment professionals and their clients, ensuring that each offering is sold in an SEC compliant manner.