Crowdfunding Your Startup: A Guide to EB-5 Financing for Startups

By Jinjian “Jin” Huang and Sterling Chan, attorneys at Nixon Peabody LLP in San Francisco. Wendy Chan, an EB5 immigration lawyer in San Francisco, contributed to this article.

The objective is relatively straight forward: maximize funds, minimize time and cost needed to get those funds, all the while retaining control in your company. Simple, right?

Like most things in the startup world though, many entrepreneurs get bogged down in the execution. For many entrepreneurs, raising startup capital can be a costly and time-consuming nightmare that distracts from developing the ideas and products that ultimately matter.

From shark-like VCs demanding their pound of flesh to anonymous angel investors, finding investors with the right resources and motivation to invest in your idea can be daunting to say the least.

This is where the EB-5 Program comes in. Comprised of wealthy and eager investors whose money typically doesn’t come with many of the strings attached to money from traditional startup investors, the EB-5 Immigrant Investor Program could be an attractive alternative or supplement to traditional sources of startup financing.

A Primer on the Immigrant Investor Program

So what is the EB-5 Program? Generally speaking, it’s a program created by Congress in the early 90s to encourage foreign investment in the U.S. economy. The proverbial “carrot” at the end of this particular stick is a Green Card that confers an investor with conditional status as a legal permanent resident, with all the rights and privileges accompanying. The core requirements to do this are relatively straightforward. Broadly speaking, each investor must:

  1. Invest the legally-mandated minimum amount of capital, which — as of the time of this article — can either be (1) $1,000,000, or (2) $500,000 for projects in Targeted Employment Areas (TEA); and
  2. Create 10 Qualifying Jobs.

Assuming the investor fulfills these requirements, the conditional Green Card becomes a permanent Green Card after two years. For many, the EB-5 visa program is currently one of the fastest paths to obtaining a U.S. Green Card, and by extension U.S. Citizenship.

EB-5 Investors: Not Your Typical Startup Investors
For foreign investors, the incentive to invest is powerful: invest in a U.S. enterprise, and get on the fast track to obtaining a Green Card. For startups, the incentive to seek out this type of financing is likewise compelling. The primary advantages of EB-5 financing are four-fold:

  1. The ability to crowdfund your startup with a large and diverse pool of wealthy, willing investors: according to reports published by the Department of State, between 2014 and 2016, there were over 30,000 EB-5 visas issued for investors from an average of 80 countries from all regions of the world. (See the 2014 Report here, the 2015 Report here and the 2016 Report here).
  2. The ability to obtain a large amount of funds per investor: the current minimum investment threshold is $500,000 for investments in qualifying TEA (which is likely to increase, as discussed below).
  3. The ability to obtain capital cheaply: most EB-5 investors only expect a nominal rate of return (around 1–2%).
  4. Retain control over your startup: EB-5 Investors generally do not seek or expect control over the enterprise.
All this is to say that EB-5 investors are not typically motivated by traditional investment metrics like ROI, equity stake percentages or number of board seats. The incentive is fundamentally different. These investors are motivated by the opportunity to obtain a Green Card, and because of this they can be in many ways more accommodating than traditional profit-driven investors.
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What’s the Catch?
At this point, it’s fair to wonder — given all the key advantages of EB-5 financing, why isn’t it more widely utilized as a source of startup financing? There are two key reasons for this:

  1. EB-5 investors (like most other investors) are inherently risk averse. A core requirement to qualify for an EB-5 visa is that the investment must truly be “at risk of loss.” In other words, the receiving entity cannot provide any guarantees that investors will be able to withdraw their investments after they’ve obtained their permanent green card (as discussed below). Additionally, because many EB-5 investors do not or cannot personally perform due-diligence on the projects they are investing in, they typically have a low appetite for risk. In most cases, this drives them to select larger projects affiliated with Regional Centers, which allow investors to pool capital and count the indirect jobs created through these large investments. Given that most startups are smaller operations that often don’t yet generate any income, they may present more risk than many EB-5 investors are willing to stomach.
  2. EB-5 investors are not typically in the market for long-term investments, and because of this they are generally looking for the earliest exit opportunity. Investors are required to make their investment prior to applying for the visa, and must maintain that investment until the moment their conditional status is removed. However, once an investor’s conditional Green Card becomes a permanent Green Card, they are not legally obligated to maintain their investments. The one caveat here is that most EB-5 investments are governed by contract between investors and the receiving entity, and the terms of these agreements typically will not allow investor to withdraw their investment for 5–6 years. For startups that are looking for longer term financing, or have a longer development curve, it may be more difficult to convince EB-5 investors to commit to a longer investment period. Additionally, for startups that are looking to combine EB-5 funds with other sources of capital investment, some additional legal help will be needed to structure the right agreements to govern the relationship between the different types of shareholders.

The Road Ahead: The Future of EB-5.
The EB-5 Program has come under public scrutiny in recent years, thanks in part to lawmakers’ attempts at either reforming the program, or (to a lesser extent) to abolish it altogether. Although the EB-5 visa was originally created by Congress in 1990, the Regional Center Pilot Program that the vast majority of investors utilize today was created in 1993, and has since been reauthorized several times. As of the time of this writing, Congress has passed, and the president has signed into law, a Bill to extend the program unchanged through September 30, 2017.

Even with the program being extended to fall 2017, the EB-5 program is poised for major reforms in the near future, including a drastic increase of the requisite investment amount. Despite the extension, there is certainly nothing preventing Congress from passing reforms to the program at any time. There is certainly support for reform on both sides of the political spectrum, which stems largely from concerns related to fraud and gerrymandering. The White House recently signaled that it planned to evaluate reforms to the program. Additionally, there has been legislation proposed in both the House and Senate to eliminate the EB-5 Program altogether. While these proposals are unlikely to become law (they are currently estimate to have a 5% and 1% chance of being enacted, respectively), it is a sign of the mounting pressure to enact reforms. Earlier this year, USCIS proposed rule changes to raise the minimum investment threshold from $500,000 to $1.35 million. Additionally, a comparison of all the proposed legislation to reform the EB-5 Programs in the past two years (courtesy of Suzanne Lazicki at LUCID Professional Writing) show that the idea of enacting reforms is gaining steam, particularly in terms of raising the minimum investment amount and limiting gerrymandering to drive more EB-5 investment toward rural areas with high unemployment.

Is EB-5 Right for Your Startup?
It should be clear by this point that EB-5 financing is not for everyone. As outlined above, there are many key advantages for startups to seek EB-5 financing over traditional avenues of raising capital — the biggest selling point being that it is relatively inexpensive capital that can be raised without sacrificing much control and equity in your company. The flip side of this equation is that startups must convince investors that they are a “safe” investment that is likely to be able to provide them with an exit in 5–6 years. Despite these challenges however, given the influx of foreign investors interested in the EB-5 program, startups looking for alternative avenues for raising capital should take the time to evaluate whether EB-5 financing could be the right fit. That being said, given the intricacies of the application process and possibility of fraud, it is a good idea to work together with trusted business and legal advisors to explore the possibility of obtaining EB-5 financing.

As for the future of the program, despite all the recent murmurings from Washington, many immigration experts would seem to agree that there isn’t any widespread appetite in Congress to quash the job-creating EB-5 Program. However, all indications are that there are some major reforms on the horizon. We look forward to following these developments in the coming months.