What is Investment for the Purposes of the EB-5 category?

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How to Determine Investment Amount

The investment must be made after November 29, 2009 for the applicant to be eligible for an EB-5.  The standard requirement is USD $1,000,000 and the applicant must have invested the amount, or be actively in the process of investing, that amount.  The investment money is valued in U.S. dollars at fair market value.

If the investment is made in a rural area with less than 20,000 people or in an area that has experienced high unemployment of at least 50% of the national average, then the applicant need only invest USD $500,000 to meet the EB-5 standard.

The total amount invested must be put towards only one commercial enterprise; an applicant cannot count investments made to multiple businesses.

The following count as investment: cash, inventory, property, equipment, cash equivalents, and indebtedness secured by assets owned by the applicant, as long as the applicant is personally and primarily liable and the assets of the new commercial enterprise are not themselves used to secure the loan.

Note that the following do not count as investment: a loan to the commercial enterprise from the applicant; payment of partnership expenses; retained earnings.

The investment money can come from funds in a joint bank account owned by spouses, but not from any other kind of joint account (i.e. owned in common with other family members).

The Investment Must be “At Risk”

To be considered investment, the applicant must risk losing the funds or assets in question.  Specifically:

• Promissory notes.  The promissory note must be secured by the applicant’s property because an unsecured note is not considered an investment.  The fair market value of the secured note and not the face value will determine the official investment amount.  Fair market value is determined at the time of filing the EB-5 petition and is based on the fair market value of the assets securing the note, whether the assets can be seized, the terms of the note, and the discounted value of the note among other factors.  Note that the applicant must substantially complete payments on a signed promissory note by the end of the two year conditional residency period which begins after the application is approved.

• Trusts.  To use money from a trust, the funds must be fully available.

• Loans secured by the investment.  Loans which use the investment as a security cannot be counted towards the investment total.

• Reserves.  Money that is set aside and cannot be used by the new commercial enterprise cannot be considered investment.

• Redemption agreements.  An investor cannot create an agreement granting him/her the right to sell his/her interest back to the partnership before all of the cash payments are made on the relevant promissory note.

• Guaranteed interest payments/guaranteed returns.  Promissory notes that guarantee payment or returns do not count as qualifying investment, again because the money is not at risk.  Other examples that do not count as investment include buy/sell options that set the price at something other than fair market value, and any instrument that limits the amount of money actually available to the new commercial enterprise.

• Sole owner cannot meet the “at risk” standard simply by placing money in the company account, because he/she can easily remove it.

• Any investor plans that minimize risk, such as guaranteed interest payments, buy/sell options at fixed prices, etc., may be challenged by the government as failing the “at risk” criterion.

Funds Source(s)

• An applicant must show the source of the investment money and that such money is legitimate.