Comment: Hybrid EB5 & ReverseHybrid EB5

Table of Contents:

• Introduction 
• Cons of Hybrid & Reverse Hybridmodels
• Pros of  Hybrid & Reverse Hybridmodels
• Implications of Hybrid & ReverseHybrid for the EB5 loan model

Introduction 

• What is Hybrid EB5? In a typical RC offering, the job count includes (1) Direct jobs and (2) Indirect and Induced jobs. A Hybrid EB5 offering is one where a typical RC offering is split up into two offerings: (1) one for the Direct jobs, which must necessarily be for the JCE and (2) one for the Indirect and Induced jobs, which could be either for the NCE or the JCE. 
• What is Reverse Hybrid EB5? A Reverse Hybrid EB5 is the same as a Hybrid EB5, but begins with a typical Direct EB5 as the starting point, and adds a second offering to capture the Indirect and Induced jobs of the Direct EB5 project. 

Cons of Hybrid & Reverse Hybridmodels

• The Hybrid/Reverse Hybridmodel requires control of JCE which many loan based Regional Centers do not have.
• Costs per investor in preparing documents for Hybrid/ReverseHybrid are high as the offerings are complex.
• The Direct jobs component of a project may be too small for it to be worth preparing a Hybrid/Reverse Hybrid offering.

Pros of  Hybrid & Reverse Hybridmodels

• The Direct EB5 component for an EB5 offering suite is a hedge against the lapse of the RC program now, and also a hedge in case of future lapses of the RC program.
• Appeal to more investors by offering securities with different risk-reward profiles: The offerings can be structured so that the RC offering and the Direct offering can each have different risk:reward profiles - one low-risk-low-reward and the other higher-risk-higher-reward. These two securities can be marketed in two different markets, one in Vietnam and one in India, for example.
• Projects with a large number of operational jobs become much more attractive from the EB5 context within a Reverse Hybridoffering suite, as opposed to a plain vanilla Direct EB5 offering, the Reverse Hybrid concept thus expands the asset classes suitable for EB5.

Implications of  Hybrid & ReverseHybrid for the EB5 loan model

• The new Hybrid/Reverse Hybridstructures likely drive a stake through the heart of the EB5 loan model because EB5 loan model practitioners do not usually have access to the JCE.
• However, due to the pros and cons listed above, a decision on Hybrid/Reverse Hybrid is a case by case decision–these new structures will work effectively in some industries and not in others.
• Every dollar of Equity EB5 investment can be leveraged to raise many dollars of debt, thus increasing the total capitalization of the JCE. As there is more capital at work, the JCE’s ability to create jobs is greater under the equity model. Compared to the equity model, addition of EB5 capital as a loan cannot be leveraged to get additional non-EB5 capital, so the total increase in capitalization and jobs created due to addition of EB5 capital is lower than the equity model. 
• The Market (which is the final arbiter of success) has not yet spoken on the novel Hybrid/Reverse Hybrid models. We will all have to see how well these new structures do against pure RCs and pure Direct EB5s if and when the RC program is reauthorized. Stay tuned. 

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