The new EB-5 regulations went into effect on November 21. In a series of blogs, JTC Americas, Formerly NES Financial, (along with its Medallion partners) is looking at the impact of the regulations and what EB-5 stakeholders can do to prepare for and operate in this new era, which we’re calling EB-5 3.0.

Despite the fact that USCIS doesn’t require the use of an escrow account in the EB-5 process, it has always been considered a best practice by industry, and is the norm in the EB-5 market.

When we look at escrow in EB-5 and how it’s changing, it’s valuable to understand the original purpose behind it. In the modern history of the program, up until quite recently, the purpose of an escrow account in EB-5 was to offer security to the investors. Virtually all EB-5 issuers pledge to return the subscription amount to the investor in the event that his or her I-526 petition is denied. Having the funds held in a properly structured escrow account provides certainty that those funds will be available if needed.

At JTC Americas, we have led the way in structuring escrows that do not interfere with the program compliance requirements, while balancing the need to protect investors (who are looking for return of their money in the event of an I-526 denial) with the needs of the project (which wants to put that capital to work). During the early days of EB-5 (EB-5 1.0), I-526s were adjudicated within 4 to 6 months and escrow accounts were structured to hold the entire subscription amount until the adjudication was complete.

However, as USCIS processing times started to get longer during the EB-5 2.0 era, things became more complicated. Because of EB-5 regulations it was no longer possible to keep the full subscription amount in escrow until the I-526s were adjudicated. Holdback structures with release triggers linked to project approval, TEA approval, and other risk-reducing milestones became the norm.

With I-526 adjudication times approaching four years, even those creative escrow approaches from EB-5 2.0 are ceasing to work. In fact, adjudication times are now so long that projects are nearing completion before all of the investors’ holdback funds can be released from escrow into the job-creating entity. This situation runs the risk of creating immigration compliance issues for investors. For this reason, subscription escrows with a holdback no longer make sense for a growing number of projects.

What role should an escrow account play in the EB-5 3.0 era?

Gone are the days when subscription funds could be held in escrow until I-526s are adjudicated — and, seemingly, so are the days when most EB-5 issuers can truly promise to have funds available to facilitate a refund by the time the I-526s get denied, at least though the mechanics of the escrow account. But that does not mean it is time to abandon escrows altogether.

Escrow accounts under EB-5 3.0 are probably more important than ever as a tool to import and aggregate the subscription funds: Many countries that are home to potential EB-5 investors have currency export restrictions that force those investors to send EB-5 funds in multiple smaller transactions, possibly from a number of different (friends’, family members’ or administrators’) bank accounts. In these cases, the escrow account is a vital tool to organize and consolidate the money so that it can be easily reported to the immigration attorney, who must provide a detailed analysis of the source of funds on each investor’s I-526.

Not to mention, the escrow account has always provided an additional layer of investor protection: making sure the money can only be disbursed to the NCE. During the early EB-5 days, there was often a time lag between the release of subscription funds from escrow and deployment of those funds into the job-creating activity. Unscrupulous issuers (who were not subject to the independent control of an escrow agent over the funds during this gap period) have used investor money to day trade, to purchase homes and boats, and even to pay off debts in other real estate investments. A properly structured escrow account — especially one featuring JTC Americas’ third-party administration services — can still help prevent such mismanagement of funds.

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Does your project have an JTC Americas’ Platinum Medallion?

Established to help develop and promote best practices in the EB-5 industry, the JTC Americas Medallion Program includes a select group of projects that adhere to the highest standards of safety, transparency, and compliance. The JTC Americas Medallion Program focuses on guiding new projects, investors, and regional centers comply with EB-5 regulations. This distinctive program, with its honorary awards, is recognized throughout the industry as a sign of operational excellence — which translates directly into project success.

If your EB-5 project already has a Platinum Medallion, be sure to tell your prospective investors! In our customers’ experience, this can be a powerful marketing tool. And if you’re interested in earning a Platinum Medallion for your project, please don’t hesitate to contact us.