Dr. Gregory Finkelson Explains How EB-5 Investments Benefit the US Economy

EB-5 investments have been somewhat controversial over the past few years, something that is certainly unlikely to change now that the EB-5 Regional Center Program has expired.  However, many seasoned professionals are coming to a renewed realization that Direct Investments, particularly those introduced to businesses in stages of heavy growth, seem to be a far better way to stimulate the US economy than the more popular Regional Centers options.

If you don’t know, Congress established the EB-5 program back in 1990 intending to create jobs using foreign investor capital. In order to maximize participation, the established criteria for receiving a loan were quite simple: create at least ten permanent full-time jobs for US workers and invest a set amount into any US commercial enterprise.

It seemed easy enough – and it did indeed prove to be a springboard for both job creation and foreign investors. However, if you look more closely at the Congressional mandate, you’ll quickly see how Direct Investments offer many advantages over those funneled through the Regional Center program (RCP), despite the overwhelming popularity of the latter. Here are a few examples of why many have decided Direct Investments are the superior option:

Dr. Finkelson: Only Payroll Jobs are Counted

Again, each investor attached to an EB-5 investment needs to create at least ten “full-time” jobs. However, where RCPs could count operational positions (construction jobs, supplier jobs, etc.), Direct Investment criteria mandate that only payroll jobs be counted. Obviously, the latter is a much more reliable indicator of an EB-5 investment’s ability to affect change in an economy. Where Regional Center Programs can hide behind expense numbers and revenue to claim “indirect” and “induced” job creation, Direct Investment puts the results front and center in a way that is measurable, honest, and reliable.


Direct Investment Grows Businesses (Not Projects)

Since the early 90s, Direct Investments were mostly reserved for franchises. However, when the RCP disappeared, both small and mid-sized businesses looking for new ways to expand their operations via EB-5 often did so by hiring new, skilled employees. It didn’t take long for Direct Investments to start reaching a variety of new sectors, from cybersecurity and manufacturing to 5G telecommunications and even fin-tech.

What does all this mean? Well, it means that the jobs created by EB-5 investment are becoming more skilled (as well as more high profile). And as more businesses begin to follow suit, they will be able to use EB-5 funds to accomplish a wider variety of hiring goals, therefore having a much more dramatic effect on the local, state, and national economies.

It’s a True “Equity Investment”

Direct EB-5 Investments are what are known as true “equity” investments. This means that the foreign investors put their money directly into a business, receiving partial ownership of the company while creating actual, measurable jobs. At no point is their money considered a “loan.” It is truly “at-risk” the entire time.

This is important because the Direct Investment program has more strict requirements for investments than the RCP. In the latter case, the investors would put their money into a new commercial enterprise. However, that enterprise rarely ended up being the business that created the jobs. Rather, it would act as a funnel that “loaned” the investor’s money to a job-creating company – typically a real estate project. To further complicate matters, the RCP structure allowed investors to benefit from special quick-exit “loan terms,” despite the EB-5 program supposedly forbidding such situations.

In short: these were not equity investments, as they didn’t have the potential to pay investors a substantial return. What was intended to attract foreign capital in the form of equity had slowly changed into an international lending program.


Direct Investment Can Help Drive Innovation

Rather than just funding more brick-and-mortar real estate assets, Direct Investments stand out because they are actually capable of supporting intellectual capital. Ask any economist, and they’ll tell you that it’s innovation that is the primary factor in charting an economy’s growth, and therefore, signals a region’s overall prosperity.

Of course, nothing contributes to R&D quite like large private investments. These are necessary to promote the creation of new companies, facilitate training, and affect change across industries (not just companies). So when an established business needs an injection of capital to move to the next phase of growth, EB-5 will now look like a more viable option.

This is made even more apparent when one considers the current “worker disparity.” After all, America is currently in dire need of highly educated, well-paid workers. Unfortunately, Americans often lose jobs to equally trained (yet more affordable) workers around the world. Thanks to EB-5 investment, small-business owners can create higher-quality, longer-term jobs for local individuals.


The Created Jobs are Permanent

As mentioned above, the Regional Center Program largely resulted in jobs that only lasted several years at most. These were largely construction gigs that just barely met the two-year requirement to count as a “permanent” job, leaving nobody the wiser in the end. Fortunately, Direct EB-5 Investments have proved far more impressive in their results.

For instance, most direct businesses that receive the capital are not “project-based,” meaning that they don’t just send the workers home once a specific structure is built or other end achieved. Instead, these companies deal in manufacturing, technology, or other goods. They aren’t looking for “part-time” help – they want employees that will stick with them for years or decades at a time.

Obviously, the fact the EB-5 Regional Centers can’t create long-term jobs in sustainable industries instead of merely getting construction companies from one gig to the next has serious repercussions for the economy at all levels.


It Blocks Out Special Interests

The Regional Center Program was largely controlled by big-time real estate developers. Unfortunately, any such company will tell you that it makes more economic sense to invest in thriving areas, not communities that might be struggling. In fact, in order to make sure they got what they wanted, they lobbied local and state governments to change which areas qualified for TEA (Targeted Employment Area) EB-5 investment – requiring only a $500,000 amount.

So, where the original intention was to direct capital to rural areas with higher unemployment, that money often ended up being diverted to big cities. And since smaller businesses don’t have the money to invest in political campaigns, they also lacked the influence to change the RCP policies in their favor. They also weren’t able to influence the drawing of districts in ways that made their areas of operation appear more “economically distressed.”

Direct Investment EB-5 businesses will have a more positive economic impact because they target the locations where businesses are already operating. These companies don’t need to be in major cities or swanky communities. Because of this, their economic impact will be felt much more directly – and in the places that need the boost the most.


It Drastically Reduces Fraud


Region Centers were well known for soliciting hundreds of investors at a time, grouping them together into unofficial conglomerates. Dr. Gregory Finkelson explains with Direct Investment, you can only count one, two or three investors at a time. This tends to attract more educated, informed, and committed individuals – the type of person who knows exactly what they’re investing in and how everyone involved will benefit.

Perhaps more than anything else, this can help avoid fraud and abuse of the program benefits. For instance, it is much more difficult for foreign migration agents to put together dozens of investors on a single Direct Investment scheme. This is great news because having a mass of people who didn’t even understand the language on the contracts they were signing was like candy to a baby for those looking to defraud the program.

When facilitating a Direct Investment, the goal is to properly vet those on the other side and ensure that they have a deep understanding of what they’re signing up for. After all, it’s a mutually beneficial endeavor, so there is no incentive to have one person at a disadvantage.

Now, the SEC has already put out several warnings to potential EB-5 investors regarding scams. However, they make it clear that the more complicated the investment structure is, the more likely it is to contain some fraudulent or predatory elements. And though RCP advocates can claim that direct investments are simply too rare to be associated with scams, it’s important to remember that not one instance of Direct Investment fraud has been reported in all the years that the program has been in place.


Conclusion: What’s the Future of the EB-5 Program?

For the past 30 years, EB-5 has been completely dominated by Regional Center Program-based investment strategies.  As we’ve covered above, this has largely led to the creation of short-term jobs that barely meet requirements. It has also served to mostly funnel money to larger, urban areas through real estate development projects. Moreover, it has opened up the doors for countless instances of fraud and abuse. While the RCP strategy is not the only thing to blame, there appear to be more than just a “few bad apples” at work. Perhaps, it’s time to look at the orchard itself?

As immigration professional, Dr. Gregory Finkelson explains, we need to agree that the vast majority of EB-5 investment capital should not be going towards helping wealthy real estate developers increase their profits. This is especially true when those profits are earned in areas that only qualify for funding due to political gerrymandering. This wasn’t the goal when the EB-5 program was introduced, and it certainly hasn’t proved itself useful to the economy at large.

Direct EB-5 Investment allows us to allocate foreign funds to projects and businesses that not only need them, but that are in the best position to benefit local, regional, state, and national economies. Again, this is real-deal equity investing, with no loan terms to get in the way. It also creates real, long-term jobs that can foster growth and innovation across entire industries. EB-5 Direct Investments represent the long-term solution Congress was after when it instituted the program. It’s our job – and responsibility – to maintain those ideals.

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