RIA: The End of Pooled Direct. Enter the Duplicative Direct Project

by Mona Shah, Esq.


An Alternative to Direct Pooled Projects

Introduction

The EB-5 Reform and Integrity Act of 2022 (“RIA") passed on March 15, 2022 ensured an abrupt cessation of what had been dubbed: the “Golden Era” of direct pooled projects.

Direct pooled projects have been in existence ever since the implementation of the EB-5 category under the Immigration Act of 1990 (IMMAC1990). However, with the lapse of the Regional Center program in June 2021, direct pooled projects took center stage as a viable alternative for developers looking for EB- 5 funding. Rather than encompass the much-favored construction project as the EB-5 investment vehicle, direct pooled projects allowed developers of operational businesses hitherto overshadowed, to seek EB- 5 capital. Projects in sectors such as health care, pharmaceutical, assisted living homes, dental offices, animal clinics, cloud-kitchens, manufacturing, IT software and transportation emerged.

The Regional Center program and direct pooled projects have long coexisted, but when President Biden signed RIA into law, for the first time since 1990, direct pooled projects were unexpectedly outlawed. What alternatives, if any, now exist for developers of such projects?

What Has Changed with the EB-5 Reform and Integrity Act of 2022

The EB-5 Reform and Integrity Act of 2022 or RIA, did not make any changes to the basic rules governing direct EB-5 investment. Notably, the investment must fall into a new commercial enterprise and must create full-time positions for no fewer than 10 “qualifying employees”. The full-time positions must be created directly by the new commercial enterprise (or its wholly owned subsidiaries) to be counted. The Investor must be engaged in the management of the new commercial enterprise, either through the exercise of day-to-day managerial responsibility or through policy formulation and the provisions that all invested capital must be shown to have been derived by lawful means.

What RIA did change, was to abolish multiple investments into a direct EB-5 project. Direct EB-5 projects can now only consist of a single EB-5 investor. There is of course, no limitations on the amount of non-EB- 5 investments, such as a private equity investment. However, RIA has now forced a developer, with an operational project who is looking for multiple investors, to raise capital only through a regional center.

Why Direct Pooled was Phased Out

To understand why direct pooled projects were made obsolete, it is first important to know how these projects operated before RIA was enacted. These projects did not require sponsorship from a USCIS- designated Regional Center, they did not file annual compliance documentation and many projects failed to adhere to any form of securities laws governance. Meaning groups of immigrants were investing money into projects without much oversight. It would not be correct to say that all direct pooled projects fell into this category. A few pooled direct projects have insisted on complying with best practices, ensuring comprehensive private placement documentation, escrow procedures with reputable banking organizations and repetitive Edgar Filings. The problem was that these projects were few and far between, and with no mandatory oversight or enforcement, devious or lazy developers took full advantage. Towards the end of 2021, the direct pooled industry had taken on a “Wild West” guise! As the primary intent of RIA was to add integrity measures and investor protections, Congress, presumably upon USCIS’ advice, decided to simply axe the direct pooled option in its entirety.

Why some Developers prefer Direct Pooled over Regional Center projects

Arguably, rather than completely abolish the direct pooled category, Congress could have simply legislated for the addition of a subsection to the annual compliance documents. Or else compelled USCIS to develop a separate form for direct pooled projects. Many developers prefer the direct pooled model, for various reasons. These may include: (1) Cost. The new integrity measures, including the addition of fund administrators will substantially increase the administrative and legal costs of a project. (2) Size. Developers have found that investors from some markets prefer smaller rather than larger projects. The raises being more manageable. More importantly, given the nature of the corporate structure and direct job creation, large scale projects can only be successful in very few industries and models. (3) Geography. Direct pooled projects were not limited to a defined geographical scope.

Is there an alternative to pooled direct? What about “Duplicative Direct”?

Direct EB-5 still exists. It has always been seen as an attractive substitute for Regional Center projects, primarily due to its permanent nature. The direct EB-5 program is immigration law, and not subject to expiry dates and reauthorization. Notwithstanding, other than the investor wishing to put up his or her own project, EB-5 practitioners must now be more creative in their approach if developers are to make use of EB-5 as alternative capital. A duplicative direct model can exist in one of two ways: (1) as a franchise arrangement or (2) a former direct pooled model that has been dissected into multiple corporations, and thus, separate direct projects capable of handling a single investor. An investor should be wary of such developers if there is a lack of disclosure documentation. As a direct investor, possibly with an ability to be involved with management, there will be less protections. Careful due diligence is required.

Conclusion

EB-5 practitioners are known to be innovative, finding ways around whatever Congress throws at us. No doubt the duplicative direct model will quickly become refined, with the addition of private equity when required. Unfortunately, cases of EB-5 fraud were all too common in the pre-RIA sphere as bad actors swindled millions of dollars out of investors in a program marred by a lack of investor protections. It is hoped that developers of such projects adhere to best practices.


About The Author

Mona Shah, Esq. U.K. born, Mona Shah is a dual-licensed attorney and former British Crown Prosecutor. Mona is the managing partner of MSA, headquartered in Manhattan, with an office in the UK. MSA has an advanced global corporate Immigration practice. Mona has been instrumental in raising hundreds of millions in investor capital.

The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.