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A Visa Program for the Franchise Industry

A major catalyst for growth has been the ability to use the EB-5 Program to counteract the scarcity of capital coming from traditional sources.

Foreign investors searching for an open door to the United States may finally have their entryway with the EB-5 Visa Program for lawful permanent residence. The program has so far resulted in the creation or maintenance of 65,000 jobs and $3.1 billion invested in the U.S. economy through FY 2012.

The program, currently administered by U.S. Citizenship and Immigration Services, has concurrent goals of emigration to the United States through qualified investment into a commercial enterprise, and job creation for U.S. citizens or lawful residents. Investors receive conditional residency after taking the risk in a qualified investment of their own creation or as part of a separate entity in a regional center. After two years of receiving such status, the investor may apply for a removal of conditional status at which time it must be shown that 10 qualifying, full-time job positions per investor have been created – some direct and some indirect or induced.

The required investment level is $1 million unless the investment is made into a business located in a “targeted employment area” (unemployment rate that is 150 percent or more of national coverage), a rural region (population less than 20,000) or a “troubled business enterprise” (at least 20 percent decline in value over the past 12 to 24 months), at which time a reduced investment of $500,000 is required.

A major catalyst for the growth has been the ability to use the EB-5 Program as a way to counteract the scarcity of capital coming from traditional sources, such as banks. Foreign investors present a relatively cheap source of funding and have a strong incentive to give, not to mention the credibility they receive from the EB-5 Program’s official USCIS “stamp of approval.”

A substantial majority of the investors come from Asia, with China leading the way, accounting for approximately 80 percent of the investors during the last fiscal year. South Korea is second at about 9 percent. There is now a strong push to acquire investors from India, Latin America and the Middle East.
To meet the competitive demand for investor capital, four main factors in the evaluation process include:

  • The amount of money being invested by the developer/sponsor in the project or the applicable business, with typically a minimum equity investment of 25 percent of the total project cost;
  • The quality of the sponsor group and its prior track record in similar types of operations;
  • The quality of the business itself and whether it includes identifiable brand names or special situations, such as nationally branded hotel chains or restaurant or retail operators; and
  • The safety of the job creation of the 10 jobs per investor.

Regional Center and Direct Program

Investing in a regional center additionally provides flexibility through the acceptance of indirect job creation as part of the job requirements. As of Feb. 1, 2013, there are 251 approved regional centers, operating in 45 states, including the District of Columbia and Guam. Approximately 92 percent of the individual Form I-526 petitions filed each year are filed by foreign investors who are investing in regional center-affiliated commercial enterprises.

With respect to the franchise industry, franchisors and franchisees alike can pursue the direct investment program whereby EB-5 investors invest directly in the franchise enterprise rather than having to go through a regional center. If a regional center is not being utilized, only direct employment jobs will be included in determining whether the 10-job per investor test has been satisfied. As referenced in the chart below, the structure for a chain retail establishment would include the following:

  • Formation of holding company that would have subsidiary entities that would own the retail facilities.
  • The EB-5 investors would invest preferred equity in the holding company and receive a fixed-dividend return. The franchisor or franchisee would also invest in the holding company and own the common-equity interests.
  • Since the holding company will own a 100 percent interest in all of the subsidiary entities, under USCIS Guidelines, all jobs created by the subsidiary entities would otherwise count toward the 10-job requirement for each investor. The subsidiary entities could also not only include the operating entities, but separate entities that may own real estate interests as well.
  • When the investors finally receive their I-829 approval after the minimum time period for investment of two years has been satisfied and proof of job creation has been provided, then the holding company could redeem the investors’ interest for the fair-market value which should be the capital account plus any accrued preferred returns. The EB-5 investors would, therefore, have an exit strategy to receive a return of their capital investment.

The significant advantages to the direct program include the following:

  • Ease of execution since there is no need to go through a regional center.
  • No need for an economic study since the reliance is totally on direct job creation and, therefore, the holding company/employment company would just need to provide W-2 employee information.

Raising capital for a direct program would include the following:

  1. A private-placement securities offering that would comply with either Regulation S or Regulation D of the Securities Act of 1933.
  2. Necessary corporate documents, which would include an operating agreement or limited partnership agreement.
  3. Subscription documents.
  4. Escrow documents for the escrowing of funds until I-526 petitions have been approved, at which time funds would be released from escrow to the holding company for investment purposes.
  5. A business plan would be required to be included in the I-526 template that is filed with USCIS to enable investing members to obtain their temporary green cards that allow them and their family members to be included in the application. When the necessary two-year investment condition has been met and the proof of employment has been provided, an I-829 petition is filed that will enable the lifting of the temporary green card restrictions and cause the green card to become permanent in nature. It is noteworthy that the time period for which the temporary green card is in place counts toward the ultimate citizenship requirement of five years status as a green card holder, which would accrue from the time that the temporary green card was issued.

The Relevance of U.S. Securities Laws

A regional center or the issuer holding company must comply with federal and state securities laws in conducting the offering.

The SEC adopted Regulation S to provide a “safe harbor” exemption from registration under the 1933 act for offerings and sales of securities occurring outside the United States. The safe harbor provides that the offer or sale must occur in an “offshore transaction” outside the United States at the time of the sale and no “directed selling efforts” are made in the United States by the issuer, a distributor, any of their respective affiliates or any person acting on behalf of any of the foregoing. Regulation S is not the exclusive means that must be employed to fall within an exemption for the offering.

Franchise System Opportunity

The regional center or direct investment program offers a unique opportunity to enable the franchise system to raise debt or equity capital at very reasonable rates to enable the development of additional corporate or franchise units.

Ronald R. Fieldstone is a partner at Arnstein & Lehr LLP. He can be reached at 305-428-4521 or rrfieldstone@arnstein.com.

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