America’s Untapped Multi-Billion Dollar EB-5 Investor Market The Oft Forgotten F1-Visa Holder – the International Student!
Whether on the web, television, in the papers, or whether you watch Fox News or MSNBC, there are very few topics that politicians from both sides of the aisle can agree on. Arguably, creating more jobs for Americans and improving our economy is chief among those where all parties seem to agree. One solution for this increasingly fast growing, hot topic - the United States government’s Employment Fifth Based Preference Immigrant Visa Program, otherwise known as the EB-5 Program. The EB-5 Program has become a prominent and important financing mechanism for U.S. businesses and real estate developers. In fact, most would be surprised at how many local business or major real estate developments in one’s neighborhood is being funded throughout the United States utilizing the EB-5 Program.
America’s Untapped US Student EB-5 Potential
There are significant financial benefits to businesses to attract EB-5 capital, usually based on the lower-than-market borrowing rates and the far friendlier terms and covenants when compared to commercial banks or institutional lenders or investors. However, there is also start-up and structuring costs associated with this type of investment and, depending on the amount of capital raise, it can be quite significant and cost prohibitive for the small capital raise. While fees associated with professional advisors (such as lawyers and consultants) can be expected with any capital raise, regardless if it is EB-5 or non-EB-5, there are usually significant expenses associated with the marketing of such securities offerings. In most cases, these costs can be mitigated with the use of foreign migration agents who are “on the ground in their home country.” But, in order for any capital raise to be successful, there is usually a need for the key management team and their U.S. advisors to participate in the capital raise campaign. Enter, the “road show”. Only now, the road show takes place in a foreign country and usually to an audience that may (but more often does not) speak English.
Nonetheless, there is no dearth of EB-5 investors funding projects worth hundreds of millions of dollars in America. Most of these investors domiciled abroad are the ones who have kept the program alive.
A very interesting investor profile that is largely untapped for EB-5 is the enormous student pool that already exists in America. Every year, more than 700,000 foreign students on the average pursue their education in the US, with an all-time high of 819,644 students enrolled in 2012-2013. China comes out on top, with 25.4% of the student inflow in 2012, followed by India at 13.1% and South Korea at 9.5%.
Foreign students are motivated to obtain an American education and in most cases some level of practical work experience in their respective fields prior to returning to their home countries. In most cases where a graduate level degree is being pursued,
especially in the financial, technology and science
sectors, the desire for employment post-graduation
is of high priority to the student. However, the most common obstacle for these foreign students is the requirement for the employer to sponsor them through the requisite work visa. In an ever growing competitive environment, the student’s ability to enhance their own personal “marketability” for employment can be achieved by not needing their employer for visa sponsorship. A solution for this is in most cases, is the EB-5 program. By doing so, they are providing themselves a competitive advantage over their peers who do need visa sponsorship in order to be employed. Coupled with this motivation, is also the motivation of overall life planning for the individual as the EB-5 program will enable the foreign student the flexibility to travel and work within the United States on their own schedule and not be beholden to their employer’s stronghold over them as their work and residency status is dependent on their employment.
Student visa holders are eligible to apply for EB-5 permanent residency under the same conditions discussed for foreign based investors. While not all of them with various demographic backgrounds are eligible or have the required minimum capital, a considerable number of them do qualify. However, in order to quantify to magnitude of the market potential, a conservative estimate can be used by making the assumption of only 1.0% of the average student inflow per-year, or 700,000 as referenced above, leaves a potentially untapped $3.5 Billion pool of EB-5 investment capital that is not being tapped. And this is just the beginning. Every year, a large portion of these students also enters the work force following graduation. As previously discussed, this represents another related pool of potential investors who have remained in the country on work visas, i.e. H1B, L1, etc. who now may have decided to remain in the United States and don’t wish to have their residency or work status at the mercy of their employer.
Do you really need a Broker-Dealer?
Invaluable to the EB-5 investment process itself and to the Businesses, Issuers, and Regional Centers involved in the capital raising process is (1) finding potential foreign investors, (2) finding qualified businesses seeking capital, (3) structuring the financing transaction and the overall securities transaction, (4) marketing the securities (5) closing the transaction and deploying the investment capital and (6) ongoing management and monitoring of the investment.
The above activities may not seem to contradict the State and Federal Securities laws related to Broker Dealer registration, when undertaken individually. However, one would have difficulty arguing that when performed as a whole, Broker Dealer licensure is not only required, but by not using a licensed Broker Dealer you could be risking exposure of the entire transaction and parties involved to detrimental repercussions from regulators.
Broker-Dealers are qualified participants in the market and are generally registered with the Securities Exchange Commission (SEC) and regulated by the Financial Industry Regulatory Authority (FINRA). Since EB-5 deals involve sale of securities, it is prudent that the capital raise is assisted and overseen by SEC and FINRA registered broker-dealers. It is to be noted that though these securities are privately raised and held, may not trade on any exchange, and can be exempt from SEC registration, they still are regulated by the securities laws. The Broker-Dealers and Securities Lawyers are in the best position to advise on regulations that govern various aspects of the entire EB-5 process, even beginning with advertising the sale of these securities or soliciting an investor, whether foreign or domestic.
For the proponents of EB-5 industry that continue to play in the gray area of not adhering to State and Federal securities regulations, or relying on the often misused and misunderstood Issuer’s or EG S exemptions as the foundation of why a Broker Dealer is not necessary in an EB-5 securities offering, one area that is indisputable is when the EB-5 securities offering is being made within the United States to foreign persons, the EB-5 securities offering must now rely on the REG D exemption; marketing to accredited investors. This would include individuals who are currently residing in the United States on varying Visas, including but not limited to work and student visas.
Any party engaging in the above referenced activities, or even engaging in activities that include business development of providing services that raise capital investment, offering advice in regard to the structure, timing and form of the EB-5 securities offering on behalf of a third party requires either engaging a broker-dealer to conduct and oversee the securities offering, affiliate with a broker-dealer or register as a broker-dealer. This applies to Regional Centers, Marketing Firms, Consultants, Lawyers, etc.
Advantages of US Based Foreign Investors
The untapped student investor base poses multiple unique advantages to business owners seeking capital:
1. Cost and Convenience: US Business owners are marketing to US based foreigners, which reduces language barriers. The travel involved to structure and market the deals are domestic, reducing overhead in time and cost. This gives the investors sourced the opportunity to have a close relationship with and deeper understanding of the business and/or investment transaction.
2. Aligned Motivations: While businesses seek overseas’ capital, the student pool looks to enhance their chance of deploying their money to use, build a career through long term residency, and recoup the significant investment in their education. They are also in a better position to make informed decisions for deploying their family capital, since it’s almost always their families who provide financial support to students from their home countries.
EB-5 Investment Trends
The majority of the EB-5 investments today are funding real estate projects. Typical projects include hotels, resorts, commercial office locations, shopping plazas and nursing homes. Many foreign investors are raised in a cultural belief that an investment in real estate mitigates and improves the risk profile of the investment. Commercial real estate projects tend to easily meet the EB-5 job requirements, with jobs being created during the construction phase, as well.
This trend actually indicates where to look for opportunity. Real estate investments tend to be larger size deals with internationally recognized corporations/intermediaries. However, huge areas of America in mid-tier cities are facing a “crunch” in attracting EB-5 investors, as their deal sizes are smaller. Smaller cities and communities can structure innovative deals/products that appeal to the investors and promote them through intermediaries or foundations. In addition, businesses with a proven track record and management that can demonstrate both job creation and business growth are also very appealing to the EB-5 investor, especially when the investor offers potential upside beyond the minimal annual return that is the standard in real estate financed structures.
In conclusion, the untapped student market presents a huge potential that compliments the direct overseas sourcing of EB-5 investments, and represents a perfect partnership with foreign agents managing and sourcing foreign investors and U.S. based investment banks (Broker-Dealers), in addition to working with the foreign agents abroad, managing the overall securities transaction and sourcing U.S. based foreign investors. These untapped investors can fill the gap for the under-served, under-funded EB-5 markets, ultimately benefiting the US student population and American businesses.
Reprinted with permission.
Trevor M. Saliba, is Chairman/ CEO of NMS Capital, a leading investment banking and asset management firm with a dedicated EB-5 Practice Group. He can be reached at firstname.lastname@example.org.