CHICAGO, Feb. 4, 2022 /PRNewswire/ – EB-5 was created by Congress in 1990 as an immigration-by-investment program to create permanent jobs in growing U.S. businesses. The EB-5 Regional Center Program was later introduced as a pilot program and ultimately funnelled more than 95% of investor capital into commercial real estate projects, mostly in urban areas.
But in July 2021, the Regional Center Program expired. The American economy will be better served if it stays that way. Why? Because a far more capable and — less problematic — immigration-by-investment program already exists: the original “direct investment” EB-5 program.
Below are five big problems with the Regional Center Program, and reasons why direct investments into growing businesses are a better solution.
Problem 1: Commercial real estate developers didn’t need EB-5 money; it was just a cheaper alternative
Between 2008 and 2019, EB-5 regional centers raised about $36 billion in foreign investment. Almost all of it went to commercial real estate developers who benefited from this cheaper source of capital.
Now imagine if those billions of dollars were invested into growing U.S. businesses in industries such as manufacturing, health care services, call centers, technology, and others. This is what direct EB-5 investments can do throughout the country.
Problem 2: EB-5 investments were meant to create permanent jobs, but construction jobs are only project based
Congress created EB-5 to help stimulate the economy and mandated the creation of new permanent U.S. jobs. But regional center jobs aren’t career jobs. They are generally made up of project-based construction jobs. When the development is done, so is the employment.
Regional centers were also able to count supplier (indirect) jobs. And on top of that, they also were able to count new hires in the community (induced jobs) based on projected spending of construction employees because all of those construction workers need new sandwich makers and barbers while working at a job site. So the story goes.
But these indirect and induced jobs were never literally counted. They were just modeled by economists. And when the development is done, where are all of those “permanent” jobs?
By contrast, the original EB-5 program is only allowed to count W-2 jobs, those jobs directly created by the business receiving the investment. No project-based jobs counted as permanent. No economic modeling. Just full-time jobs you can actually count.
Problem 3: ‘Equity’ investing didn’t happen with regional centers
When Congress created EB-5 in 1990, it required that investments in U.S. businesses be in the form of equity.
But in 2012 a clever regional center convinced a Texas court that EB-5 investors should be allowed to make an equity investment into a shell company, which could then loan the EB-5 investor capital to a commercial real estate developer, who in turn would hire the workers.
So investors never really made equity investments into job-creating businesses. This structure benefited foreign investors who got a repayment date — despite EB-5 regulations requiring that investments can’t be debt.
Conversely, when a direct EB-5 investment is made into a growing business as equity, the business benefits from a healthier balance sheet. No loan. No shell company. No manipulating regulations.
Problem 4: Helping struggling areas with a 50% investment discount never really happened
Congress provided a significant EB-5 discount to incentivize investment into rural or high-unemployment areas, which seems like a good way of directing capital to areas in need.
But regional center investments were mostly made into commercial real estate developments. Location, location, location required gerrymandering of maps to enable projects in Times Square, Manhattan and Beverly Hills to qualify for the Targeted Employment Area investment discount. Yes, in Beverly Hills, the economic struggle is real.
Direct EB-5 investments aren’t made into commercial real estate; they’re made into smaller, growth-stage U.S. businesses in sectors like manufacturing and healthcare that exist in communities all over the U.S.
Problem 5: the Regional Center Program was rife with fraud and abuse
Complicated deal structures involving holding companies, often with hidden conflicts of interest, and a lack of broker-dealer securities supervision, were a recipe for fraud and abuse. A search on the SEC website for “EB-5” produced 243 search results. They were all regional center cases. On October 1, 2013, the SEC and USCIS issued a joint Investor Alert to educate and warn investors about fraud in the program.
On the other hand, when an equity investment is made directly into the job-creating entity, it’s harder to hide conflicts of interest or misappropriate funds to pay for houses, vehicles, and luxury travel.
Solution: Leave EB-5 as it is
Direct EB-5 investing couldn’t compete with the Regional Center Program. It didn’t have the marketing muscle of commercial developers.
But since the lapse of the Regional Center Program in July 2021, a new direct investment model has emerged: investing in growing U.S. businesses truly in need of investment capital.
We support the permanent direct investment EB-5 program because it’s good for growing businesses and it’s good for communities in need of economic stimulation. It creates real jobs that don’t pack up after construction is completed.
The Regional Center Program is dead. Welcome to the new era of EB-5 — immigrant investors helping grow the U.S. economy across industries and across the country.
See the original article “The EB-5 Regional Center Program should stay expired as a better alternative already exists”
Author: Kurt Reuss, registered securities broker and founder, eb5Marketplace.com