NEW YORK, Oct. 5, 2021 /CNW/ - Direct investments are a better representation of Congress' intent for EB-5: immigrants make an equity investment into a business that creates permanent U.S. jobs.
1. Direct EB-5 investments only count payroll jobs
In the permanent direct EB-5 program, investments only count operational jobs; compare this to the currently expired Regional Center Program where construction workers, supplier jobs, and induced jobs (projected by local spending) are also counted.
Greg Zaic runs 12-15 Diagnostics, a business that has created a low-cost and rapid COVID-19 testing device, and balks at induced job counting: "It's smoke and mirrors. Any kind of induced job calculation is the result of economic theory. I'd like to see any of that audited."
2. Direct EB-5 requires a true equity investment — without a loan component
Direct EB-5 investments are made directly into the job-creating business.
However, regional center investments are made into an entity whose sole purpose is to raise and lend money. Invested capital is restructured as a loan to give more certainty of repayment to investors; the spirt of this opposes the EB-5 equity investment intention.
EB-5 securities attorney Robert Cornish declares, "The Regional Center Program was meant to attract foreign capital as equity, but it has morphed over time into more of a lending mechanism."
3. Direct EB-5 investments grow vital businesses — in almost any sector
In less than three months since the Regional Center Program expired, businesses ranging from COVID-19 testing to bathroom-fixture manufacturing to addiction-treatment centers have created EB-5 offerings.
Compare this to regional center investments which have focused almost exclusively on big real-estate developments in urban areas.
Adityo Prakash of BreezLyte, manufacturer of possibly the world's most breathable N95 respirator masks, is a champion of direct EB-5 investing: "We ought to create jobs that aren't just low-wage, labour-intensive jobs; we should create higher-quality, higher-skilled jobs. The direct program creates a diversity of high-quality jobs that grow the economy."
In the report What Ideas Are Worth: The Value of Intellectual Capital And Intangible Assets in the American Economy economists Kevin A. Hassett and Robert J. Shapiro declare innovation is the driver of the American economy and requires public and private investment. Direct EB-5 investments can support innovative businesses and thought leadership in almost any sector.
4. Direct EB-5 jobs are permanent by design
Direct investments fund sustainable businesses, and direct jobs can be careers.
In the Regional Center Program, jobs are calculated based on expenditures — whether or not the project is successful. Veteran securities attorney Charles Kaufman observes, "Isn't that a perverse way to allocate billions in foreign direct investment? Direct EB-5 investment encourages investors to find projects that have the best prospects to succeed in the marketplace."
5. Direct investing isn't driven by special interests and doesn't push for gerrymandered maps
Smaller businesses using direct capital don't drive political campaigns. Or lobby for less-restrictive Targeted Employment Area (TEA) rules.
Conversely, giant real estate developers lobby for easier application of high-unemployment determinations — the kind that allowed Hudson Yards in Manhattan to qualify as a distressed area and raise $1.2 billion of EB-5 capital.
Greg Edwards of CryptoStopper, a ransomware-detection business seeking EB-5 direct capital, states: "We are proof that you can start a vital U.S. tech company in the cornfields of Iowa."
6. Fraud — you don't hear about it with direct EB-5 investments
A simpler offering structure makes EB-5 direct offerings more transparent.
A search for "EB-5" on the SEC website yields 243 search results. Not a single result appears to be associated with a direct investment.
Regional center investments have layers of entities that allow for potentially hidden and conflicted interests. The SEC warned regional center investors that "layers of companies run by the same individuals" can be a "hallmark of fraud."
After 30 years, where EB-5 is — and where it can go
The Regional Center "Pilot" Program dominated EB-5. But it reduced a job-creation program into an offshore capital-raising vehicle that lowered the cost of borrowing for large real estate projects, while enriching overseas agents. And it has done little to create truly permanent jobs.
Direct equity investments create actual, high-end jobs that can last decades and bolster the economies of smaller communities across the U.S.
Wasn't that the intent of Congress when it created EB-5?
Author Kurt Reuss is a registered securities broker working exclusively in EB-5 since 2013, and founder of eb5Marketplace.com
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