SPORTS AND ENTERTAINMENT IMMIGRATION: Equity Crowdfunding by Immigrant Investors

NYSBA Entertainment, Arts and Sports Law Journal

Summer 2016 | Vol. 27 | No. 2


Introduction

The Employment-Based Fifth Preference: Immigrant Investor category of applications for lawful permanent residence, otherwise known as the “EB-5 program,” or simply, “EB-5,” allows an individual to invest $500,000 or $1,000,000 into an American entity to create 10 full-time jobs, and in return for doing so, obtain a green card for him or herself and his or her spouse and children.¹ Of course, it is far more nuanced and intricate than this, but because the EB-5 program is becoming increasingly popular, it is important to have a basic understanding of what it is.

This article provides a general overview of the EB-5 program and points to its application for the sports or entertainment practitioner, with a few points to keep in mind along the way. To accomplish this, the New York Times article, “Price for a Green Card: $500,000 Stadium Stake,”² will be referenced throughout.

The Beginning

The EB-5 program began more than two decades ago in 1990, as a way to “stimulate the U.S. economy through job creation and capital investment by foreign investors.”³ Those foreign investors would invest into a “new commercial enterprise.”⁴ In 1992, Congress expanded the reach of the EB-5 program, by allowing multiple foreign investors to pool their funds into certain new commercial enterprises that were designated by USCIS to undertake approved, job-creating projects in a particular area.⁵ Those entities would be known as Regional Centers, which would become the primary source of investment through the EB-5 program. Regional Centers had their own unique benefits when compared with other investment vehicles, such as the ability to include indirect job creation to determine whether 10 positions were created.

The EB-5 program was also intended to not only revitalize the American economy as a whole but, more specifically, to revitalize and reinvigorate areas with high unemployment or rural areas.⁶ The idea was that if individuals from outside of the U.S. would invest $500,000 into an entity that would create or save 10 full time jobs in an area experiencing unemployment of at least 150% of the national average rate or a rural area,⁷ this would have a lasting impact throughout a local region and, eventually, the rest of the country. As a sort of “thank you,” the immigrant investor would receive a green card for his or her successful, job-creating investment.⁸

The Middle

There is not much of a middle, but rather a prolonged initial development stage. Therefore, this section is being included only to continue the chronological structure. Though there were precedent-setting opinions from the United States Citizenship and Immigration Services’ (US-CIS) Administrative Appeals Office, and attempts were made to make the program more appealing, those events provide more of an historical understanding than necessary for our purposes. As this article is concerned with how the EB-5 program may impact clients in this present global economy, we jump to 2008, when everything became interesting.

The Current State

Since the 2008 Recession, there has been a significant amount of regulation over lending, especially large-scale lending. If loans were difficult to obtain and rates not ideal, why not turn to other sources? Many did, and that is part of the reason that the number of Regional Centers approved by USCIS between 1994 and 2013 grew from a meager handful to approximately 25 in 2008, only to sky rocket to more than 200 in 2013.⁹ Likewise, the number of EB-5 visas granted was very low until 2007/2008, with the exception of a brief period from 1996 to 1998.¹⁰ Contrast this with today’s figures and we see that the EB-5 program has exploded: As of May 2, 2016, USCIS approved 834 Regional Centers and received 6,277 applications as of the first quarter of FY2016 (October through December 2015).¹¹

Worth noting, as well, is that the general public is becoming more comfortable with the notion of crowdfunding, as demonstrated by the success of Kickstarter, Indiegogo, and many other investor platforms, as well as the passing and enactment of the JOBS Act, which authorizes equity crowdfunding by unaccredited investors. With the significant growth of interest in alternative sources of funding, it is not surprising that many developers and executives are turning to foreign investors to complement, or supplement entirely, their other sources of financing. This brings us to how the foreign investments can intermingle with the worlds of sports and entertainment.

EB-5 Financing and the Sports and EntertainmentIndustries

Building an arena or stadium is incredibly expensive. The New York Times article opens with this fact: “For years, sports teams have tried to defray the multi million-dollar costs of their new stadiums by asking fans to pay thousands for personal seat licenses that entitle them to buy season tickets.”¹² This sounds like a perfect situation in which to introduce EB-5 funding.

For the developers of the stadium in Orlando, marketing to foreign investors is being done “not because lending is tight, but because lawmakers in Florida would not provide subsidies for the stadium […].”¹³ Part of the reason for the lack of support from the local community is that “officials are under pressure from voters opposed to using public money to help wealthy owners.”¹⁴ Therefore in walks EB-5, having been used previously in the development of a stadium: “EB-5 financing helped pay for infrastructure work connected to [the] Barclays Center in Brooklyn, but not for the arena itself.”¹⁵

Why then, do more people not use the program to defray the costs associated with developing a stadium? There is certainly enough interest in the EB-5 program to provide for some investors to use a stadium as an investment vehicle, and because of the size of the construction, it will likely create the requisite number of jobs to allow a foreign investor to obtain a permanent green card. It should also be noted that most foreign investors do not seek steep returns on their investments, making this even more of an attractive option.

Part of the reason that more developers do not use the EB-5 program is the lack of knowledge about it, as well as having to wait before the application is approved to use the funds. Therefore, developers may also need to spend significant sums of their own money while waiting for USCIS to approve those pending applications.¹⁶ What is worse, however, is the negative stigma attached to the EB-5 program by lawmakers, who criticize it as “riddled with corruption and national security vulnerabilities.”¹⁷ Further, some programs have not developed as expected, “producing little or no economic benefit,”¹⁸ some “foreign investors have accused developers of misspending their money and not paying promised returns,”¹⁹and a number of Regional Centers were terminated.²⁰ Add to these an ongoing Securities Exchange Commission (SEC) investigation that has touched upon a range of professionals,²¹ and therein lies a program that has been under significant scrutiny over the last few years.

Conclusion

Despite all of its issues, developers should not be deterred from seeking foreign investor funds, because the EB-5 program is still viable and one of the areas that USCIS has undertaken to ensure that it continues in an optimal manner. The program is being cleaned up quite a bit, and although that means there will be an increased number of eyes on the transactions, it also means there will be more guidance about how to navigate the valuable, yet sometimes murky, area of EB-5 financing.

Endnotes

  1. EB-5 Immigrant Investor Program, U.S. Citizenship & Immigration Service, available at https://www.uscis.gov/eb-5 (2016).
  2. Ken Belson, “Price for a Green Card: $500,000 Stadium Stake,” The New York Times (May 16, 2016), available at http://mobile.nytimes.com/2016/05/17/sports/soccer/orlando-soccer-stadium-foreign-investors-visas.html?referer=.
  3. EB-5 Immigrant Investor Program, supra at 1.
  4. Immigrant Investor Regional Centers, U.S. Citizenship & Immigration Service, available at https://www.uscis.gov/working-united-states/permanent-workers/employment-based-immigration-fifth-preference-eb-5/about-eb-5-visa (2016). “All EB-5 investors must invest in a new commercial enterprise, which is a commercial enterprise:

    • Established after Nov. 29, 1990, or
    • Established on or before Nov. 29, 1990, that is:

    1. Purchased and the existing business is restructured or reorganized in such a way that a new commercial enterprise results, or
    2. Expanded through the investment so that a 40-percent increase in the net worth or number of employees occurs

    Commercial enterprise means any for-profit activity formed for the ongoing conduct of lawful business including, but not limited to:

    • A sole proprietorship
    • Partnership (whether limited or general)
    • Holding company
    • Joint venture
    • Corporation
    • Business trust or other entity, which may be publicly or privately owned

    This definition includes a commercial enterprise consisting of a holding company and its wholly owned subsidiaries, provided that each such subsidiary is engaged in a for-profit activity formed for the ongoing conduct of a lawful business.

    Note: This definition does not include noncommercial activity such as owning and operating a personal residence.”

  5. EB-5 Frequently Asked Questions, Invest In the USA, available at https://iiusa.org/us/eb5-faq/. Worth noting here is that the size of the targeted employment area could be a few blocks, to an entire county, or more.
  6. EB-5 Immigrant Investor Program, supra at 1.
  7. Immigrant Investor Regional Centers, supra at 4.
  8. The initial status afforded to an immigrant investor is that of “conditional permanent residence,” meaning that he or she will have obtained a green card, but needs to demonstrate the actual creation of those 10 jobs.
  9. Audrey Singer and Camille Galdes, “Improving the EB-5 Investor Visa Program: International Financing for U.S. Regional Economic Development,” Brookings Institution and Rockefeller Foundation, at Figure 1, available at  http://www.brookings.edu/~/media/research/files/reports/2014/02/05%20eb5/eb5_report.pdf.
  10. Id. at Figure 2, available at http://www.brookings.edu/~/media/research/files/reports/2014/02/05%20eb5/eb5_report.pdf. Due to the sudden and sharp rise of applications in and around 1997, there were suspicions of fraud and the EB-5 program was suspended, leaving several hundred applications in limbo. When the EB-5 program reopened, the damage was done and the lasting effect was a drop in interest that would not show signs of recovering for years to follow.
  11. EB-5 Blog, Lucid Professional Writing, available at https://blog.lucidtext.com/category/eb-5-statistics/ (2016). What is curious about this is that the second quarter of FY2016 (January–March 2016), saw the number of applications received fall to 849. This could have been caused by SEC investigations of attorneys, increased USCIS scrutiny of initial applications, concern over the future of the program due to the negative statements by Congress and consistent delay in renewing it, or a need to diversify the pool
    of countries from which investors hail (right now, mainland China makes up the bulk of the applicants).
  12. Belson, supra at 2.
  13. Id.
  14. Id.
  15. Belson, supra at 3.
  16. Id.
  17. Id.
  18. Belson, supra at 6.
  19. Id.
  20. Regional Center Terminations, U.S. Citizenship & Immigration Service, available at https://www.uscis.gov/working-united-states/permanent-workers/employment-based-immigration-fifth-preference-eb-5/eb-5-immigrant-investor-process/regional-center-terminations (2016).
  21. SEC: Lawyers Offered EB-5 Investments as Unregistered Brokers, U.S. Securities and Exchange Commission, available at https://www.sec.gov/news/pressrelease/2015-274.html (2016).

Article originally written in Entertainment, Arts and Sports Law Journal and is republished here with permission from NYSBA.

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