Thought not a requirement, the use of escrow in EB-5 has become a best practice when it comes to raising EB-5 funds. NES Financial, the leading provider of EB-5 escrow and fund administration solutions, has compiled some of the most frequently asked questions in regards to escrows.
1) What is an EB-5 escrow?
An EB-5 escrow is a contractual arrangement formed and controlled by an escrow agreement made between an EB-5 issuer, an EB-5 investor or their representative, and an escrow agent. The EB-5 investor remits his/her funds to an independent third party (the escrow agent) who receives, holds, and then disburses the money upon satisfaction of mutually agreed upon release conditions.
2) Why use escrows in EB-5?
Practically all EB-5 offerings pledge to refund an investor’s subscription funds in the event that his/her I-526 petition is denied or withdrawn. An EB-5 escrow is a great way to assure that funds will be available for return should a refund be warranted. This additional layer of security provides a higher level of investor confidence.
3) Where can I use escrows in the EB-5 process, and when should I set up the escrow account?
An EB-5 escrow is most commonly used to hold subscription funds during the subscription and application phase. However, escrows can also be valuable at other stages of the EB-5 life cycle. For example, a reservation escrow can be used to receive and hold an interested investor’s funds while the private placement memorandum and other documents for the offering are completed.
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Escrow documents are an important part of the project offering package and are frequently included as part of the Regional Center (I-924) application or project exemplar filed with the USCIS. As such, an EB-5 escrow account should be set up in advance of the marketing of the offering so that the account is open and ready to receive funds when the offering is ready to be sold.
4) What are Hold-Until-Approval and Early-Release escrows?
When an escrow is used in the subscription phase, there are two basic models – Hold-Until-Approval and Early-Release. As the name implies, with a Hold-Until-Approval escrow the subscription funds remain in escrow until the I-526 petition is finally adjudicated. Under the Early-Release escrow model, funds are released during the I-526 application process but prior to a final adjudication.
The Hold-Until-Approval model provides the highest level of funds security for investors and is considered a best practice for investor protection. However, given the often lengthy USCIS processing times for I-526 petitions, this model may not always be practical for the needs of the project. The Early-Release model attempts to balance the security needs of the investor with the demands for capital for the EB-5 project. These structures are sophisticated and require working with a company that has the requisite expertise.
5) Does the type of EB-5 escrow used in EB-5 impact how capital is raised?
In 2013, NES Financial conducted a study of more than 175 of its EB-5 projects. The results showed a correlation between escrow structure and project success. Projects that use more conservative escrow terms (like Hold-Until-Approval) tend to fund better and faster than those with more aggressive terms (like Early-Release).
EB-5 escrows are highly specialized. Regional Centers and developers should be sure to work with experienced escrow professionals. NES Financial partners with leading banks to deliver the most comprehensive suite of EB-5 escrow administration solutions. These solutions, designed specifically for the EB-5 industry, have been used by more Regional Centers on more projects than any other solutions in the market. Find out more about the suite of NES Financial EB-5 solutions and how they help Regional Centers streamline their business processes by downloading our EB-5 Solution Kit.
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