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EB-5 Risk Management and Insurance Excerpt

By: Bonnie Novella, CAIA

An important fact must be addressed head on: the EB-5 immigration process is actually a complex financial trans­action which imposes numerous risks on participants. The transaction involves a securities instrument, multiple par­ties, multiple legal entities, many bank accounts, and an illiquid, long-term financial vehicle, all of which contribute to
the complexity and confusion around the process. 
Regardless of that confusion, it is up to project sponsors and EB-5 investors to install a risk management frame­work to mitigate the risks in the transaction. Some of the risk mitigation approaches protect the issuer officers and directors, while others directly protect investors. Risk management tools (such as insurance and third-party oversight) are not free but well worth the cost to achieve greater success and peace of mind. 
The EB-5 marketplace has a large variety of projects vying for investor capital, and investors have the power of choice. Investors should first understand all of the risks in the EB-5 transaction, then strategically select projects where the issuer provides strong risk management framework. For an investor seeking an EB-5 project, insurance and risk management are prudent components of the investment (project) selection and the path to success ob­taining the permanent visa. 
Tt1e Pr􀀃nciples of Risk Management "Risk management" is a common description for controlling risks and starts with a solid understanding of what specific risks exist on both sides of a transaction. Each party is responsible for understanding their own risks and
taking action to find protection. Risk management experts study the risks of a financial transaction and categorize them, then employ specific toolsto mitigate the components of the risk stack. Before looking at the granular risks, it may be helpful to underscore
the principle that there are two sides of the EB-5 financial transaction: the issuer of the EB-5 private placement (the financial security) which raises capital, and the EB-5 investor who selects the exact project to commit their capital to. The project sponsor accepts the capital while also accepting the burden of administration of the immigration and ob creation. While risk management approaches are not compulsory for the issuer, the elective decision by some project sponsors to mitigate risk is a sign of best practices around the management of investor capital. 
Investors may benefit by reading the project's offering carefully and search for those vvith a risk management frame­work in place. For example, in EB-5 these risk types are fairly standard: 

Issuer and project-specific risks:

1.    Construction
2.    Property and casualty
3t    Liquidity
4.    Operational
5.    Regulatory
6.    Reputation
7c    Compliance
8t    Liability
9.    Interest rate

There are risk management experts available to EB-5 project sponsors who specialize studying the risks of a proj­ect, company, or person - such as insurance brokerage firms. Insurance is a common tool in the management of risk, so insurance brokers must be licensed and knowledgeable on the specific risks of any business. 
A prudent investment approach would be for the EB-5 investor to understand the risks, then seek projects that adhere to the highest risk management standards by providing the necessary insurance coverages to protect the investor. EB-5 projects can and should have a detailed study of the specific risks of their project, many of which are dis­closed in the offering documents. However, it is rare for the risks disclosures to be followed with a sufficient descrip­tion of the insurance and risk mitigation framework, so incumbent on the investors to ask for this information and proof. 

 

David Kowert