Chinese EB-5 Visa Retrogression: Good for Program Diversity

If you are familiar with the EB-5 immigrant investor visa program, you may have heard recently that the sky is falling. Yes, that is correct; the two words that strike fear into many in the EB-5 community - Chinese retrogression - became a reality on August 23.

For those who are not as familiar with the EB-5 program, it enables foreign investors to get a conditional green card in exchange for a capital investment of $500,000 or $1 million in a U.S. business. If the immigrant's investment creates at least 10 permanent full-time jobs, the investor may earn a permanent green card approximately two years after earning his or her conditional green card. However, there are only 10,000 total visas allotted to the EB-5 program each year, and per country visa limits have been set in addition to the overall maximum amount. Chinese EB-5 visa retrogression simply means the demand for EB-5 visas for Chinese investor immigrants has exceeded the fixed number of visas available to them.

Up to this point in the program's history, neither the overall visa quota, nor a per country quota has been met. The latter changed on August 23, 2014, when the U.S. Department of State announced that EB-5 visas for Chinese nationals will not be available for the remainder of the fiscal year.

It should be noted that the fiscal year starts again on October 1, so this disruption should be fairly minimal to those participating in the program, along with the projects relying on EB-5 capital from Chinese investors. However, the Department of State also announced that based upon the current volume of Form I-526 filings from Chinese investors (the first form in the EB-5 application process), in May of 2015 the EB-5 category will likely retrogress to a priority date of June 2013.

Unlike the recent retrogression, next year's episode could last a full five months before the end of the fiscal year. This would result in a significant log jam, and disruption for investors and project developers alike. This certainly seems like it has the potential only for doom and gloom, but such an event actually presents the industry with a great opportunity: the invaluable chance to expand the scope of EB-5 around the globe.

While it is great to have a vibrant investment market such as China provides, EB-5 project developers, regional centers and other stakeholders may prove foolish to overly rely on just one source for EB-5 funds.

China has been the perfect storm for EB-5. The country's rise in individual wealth has coincided perfectly with U.S. developers' increased demands for EB-5 funds. In 2000, China had just 310,000 millionaires. Now, China has 2,378,000 millionaires, ranking it second in the world behind the United States.

In 2006, China produced only 63 EB-5 investors, accounting for just 12 percent of the total number of investors. Even as recently as 2008, it trailed South Korea in the number of EB-5 applications submitted that year. The Chinese now account for more than 80 percent of EB-5 investors. This trend simply cannot continue indefinitely. If we observe the history of U.S. immigration, don't we find that we did not all come from the same place?

Many historians believe that there have been four distinct waves of immigration in the history of the United States. The first wave, which occurred in the years leading up to the American Revolution, arrived from Western Europe with England as the driving force. The second wave occurred in the middle of the 19th century and drew mostly from Northwestern Europe, including Russia. Interestingly enough, this is also the first period that saw the first sizable Chinese population arrive in the United States.

Eastern and Southern Europe generated the third wave which occurred in the last part of the 19th century and beginning of the 20th century. Finally, the fourth wave has brought, and continues to bring, Latin Americans and Asian immigrants to the United States. If history demonstrates that immigration trends fluctuate, can we really expect EB-5, albeit a microcosm of the broader immigration picture, to continue on a one-track path?

Potential EB-5 immigrant investors begin as foreign entrepreneurs. But once they become U.S. permanent residents, they become American entrepreneurs, continuing to do business, paying taxes and enrolling their children in the U.S. education system. Diversity within the academic and business talent pools is crucial to a progressive economy. For example, a study by economists at Brown University and Williams College found that cultural diversity has a positive impact on economic development in industrial societies. The EB-5 industry's tendency to focus marketing efforts in China, and the resulting high-number of Chinese entrepreneurs applying for EB-5 visas, prevents the EB-5 program from accessing its full diversity potential and the benefits it could provide.

While legislative solutions have been introduced by members of Congress to address, among other EB-5 program issues, category retrogression, the opportunity to develop new markets should be seized by EB-5 stakeholders. Whether legislative solutions prevail or not, the run of Chinese investors will not be indefinite. Nor was the program designed with only one country in mind. As with immigration as a whole, a diverse group of EB-5 investors can only be seen as a benefit.

So what country could replace China as the next big source of EB-5 investors? The short answer is that it is highly unlikely that any one country can fill China's proverbial shoes. However, there are certainly a number of countries that are showing an increased interest in EB-5 and are also experiencing an increase in individual wealth. Educating prospective immigrant investors in developing markets will pose challenges, but it's important to note that China was not set up with a ready-made system for EB-5. Networks and systems will have to be implemented and expanded.

Brazil, for example, contributed just one EB-5 investor in 2006, but expanded to 28 visas issued in 2013. The country had less than 100,000 millionaire households in 2000, but is projected to have more than 1,000,000 such households by 2020. Along the same lines, Russia has gone from zero EB-5 participants in 2006, to 216 EB-5 visas issued between 2007 - 2013. It is also gaining in individual wealth and is projected to surpass one million millionaire households by 2020.

From 2006 to 2012, India, Mexico, South Africa and Vietnam have all produced more than 100 EB-5 investor visas as well. India is projected to have more than 700,000 millionaire households by 2020, and Mexico is projected to have 600,000 millionaire households by that date.

China does not have a monopoly on individuals who would like their children to attend one of the many premiere universities in the United States, or who desire to remove themselves from an unstable or oppressive political environment. Will the same marketing approaches work in these potential new EB-5 markets? Perhaps not, but the community will simply have to adapt to the changing foreign landscape.

The EB-5 community had a bit of luck on its side with China, which turned out to be a perfect storm. It may not be able to count on another ideal scenario moving forward. Instead, if EB-5 is to flourish over the long haul, it will need to build and expand multiple international markets.

This first encounter with retrogression should be an impetus for pumping new life into EB-5. A healthy EB-5 program creates thousands upon thousands of new jobs for Americans, and can play a role in reviving and redefining cities and rural areas across the country.