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EB5 Projects Due Diligence: Project Financing and Use of Funds

Posted by Kurt Reuss on November 27, 2015

EB5 Project Financing 

Rupy Cheema: A primary question of due diligence is how the project is going to be funded and whether the capital stack is complete. If the project will be funded in part by developer equity, we look into how much equity is being committed to the deal. Most agents we speak to, are looking for a minimum of 30% developer equity.

That begs the question “where is that equity coming from?" and “Is it a cash contribution or is it an asset contribution?”   If the developer is contributing land, how are they arriving at the value of the land. Was there an appraisal done? Is the value assigned reasonable and thus is the developer really contributing 30% of the project cost? If the developer plans to contribute cash, at what stage will it be funded?  Is the developer providing an additional equity commitment in case the project needs more money or if the EB5 projects funding does not come in as anticipated.

Part of the project costs may be funded through a secured loan from a bank.  Having a senior lender in the deal brings both advantages and disadvantages to the NCE’s investment. The biggest disadvantage is that the NCE’s investment will likely have only junior or subordinate rights or perhaps no rights at all to the collateral and the biggest advantage is that the EB5 investors have an experienced party involved in the deal, one who is going to conduct its own due diligence. The senior lender will want to make sure that the construction budgets are reasonable and the environmental assessment is complete. They will also ensure that any conditions imposed have been satisfied prior to the disbursement of their loan.

SEC Rule 10b-5 and the scienter requirement

Posted by Kurt Reuss on October 31, 2015

John Tishler: SEC Rule 10b-5 is what I’d call the primary rule of liability we’re concerned about in EB5 offerings or EB5 Investment projects. It applies to any offering of securities that has any jurisdictional nexus to the United States. Jurisdictional nexus simply means that some mode of interstate commerce was used: the telephone, an email, postal delivery. I think it is impossible to imagine an EB5 transaction taking place that did not somehow avail itself of the means of interstate commerce in the United States.

In any event, 10b-5 is going to apply and what it says is that it’s unlawful for any person in connection with the offer or sale of securities to omit or misstate a material fact or to state a fact that, in the context in which it is stated, is misleading and that’s considered to be a fraud. When people talk about securities fraud, Rule 10b-5 is what they’re referring to. 

In terms of the commonly used word “fraud” and the common sense understanding of it, lets discuss what it means to commit fraud. The standard for securities fraud is quite a bit lower than the common sense understanding of fraud. 

Fraud also includes an intent to omit a fact or to state a fact that wasn’t complete in its context. Rule 10b-5 has what’s called a “scienter requirement” in relation to the omission of facts from which means there has to have been intent. 

I-526 Petition Requirements

Posted by Kurt Reuss on January 01, 2015

For an immigrant investor hoping to obtain his or her green card though the EB5 capital investment program, they must first choose an EB5 project and then make the required capital investment. That path to a green card and potentially to US citizenship, begins with the filing of Form I-526, the Immigration Petition for Alien Entrepreneur. The I-526 petition must be submitted with accompanying evidence in support of the USCIS EB5 program’s requirements. Upon receipt, the USCIS will evaluate and adjudicate the I-526 petition based upon the following: