Immigrant Investor Visas and Diversification: an Application of Modern Portfolio Theory to Eb-5 Regional Centers

• Publication year: 2014
• Author: By William Tolin Gay

Immigrant Investor Visas and Diversification: An Application of Modern Portfolio Theory to EB-5 Regional Centers

By William Tolin Gay¹

I. INTRODUCTION

The EB-5 or immigrant investor visa process is a method of obtaining green cards for wealthy foreign immigrants who invest money in the United States. The basic requirement for the EB-5 visa is to invest a certain sum of money in a business enterprise that creates at least ten permanent jobs over a two-year period. For the past several years, most immigrant investors have elected to invest in "regional centers," rather than creating their own businesses.² A broad range of investment options are available to foreign immigrants, with varying levels of risk and return. This paper assumes that the principal reason for investing in a regional center is obtaining permanent residence.

Modern portfolio theory ("MPT") is a financial analysis methodology that assumes an investor can reduce overall risk, without necessarily reducing expected return, by means of intelligent diversification over a carefully selected portfolio of investments. MPT is at the core of most modern investment models.

Under current law, an immigrant investor who invests in a regional center must limit his or her investment to a single regional center. As discussed below, however, applying MPT to regional center investments and permitting immigrant investors to divide their investment among two or more regional centers could produce superior job creation results for investors, regional center owners, and the overall economy.

II. BACKGROUND AND BASIC SUMMARY OF THE EB-5 PROCESS

Congress created the EB-5 immigrant visa classification in 1990 as a way to encourage wealthy foreigners to invest in the U.S. and create jobs.³ Under the Immigration Act of 1990 (the "1990 Act"), Congress set aside 10,000 visas per year for foreigners who invested between $500,000 and $3,000,000 in new commercial enterprises that created at least ten full-time employment positions for U.S. citizens or lawful permanent residents of the U.S.⁴ One year after the 1990 Act was enacted, the final implementing rule took effect.⁵ This rule provided, among other things, that a qualifying investment must be at least $1,000,000, with the exception of "high unemployment areas," or "targeted employment areas," which were defined as rural areas, or areas where unemployment was at least 150% of the national average. In these targeted employment areas, an investment of only $500,000 is required. Initially, at least 3,000 of the annual total visas were reserved for these targeted employment areas ("TEAs"). Under this model, sometimes referred to as the "direct investment" model, nothing prohibits an investor from dividing investment dollars among two or more new business enterprises, as long as the requisite dollar amount is invested and at least ten jobs are created in total.

In a typical EB-5 application, the immigrant investor begins the process by filing Form I-526, a petition for "Conditional Permanent Residence." At the Form I-526 stage, the applicant commits to creating ten jobs within the requisite period of two years.⁶ If the petition is granted, the investor receives conditional permanent residence. At the end of this two-year conditional permanent residence period, the applicant files Form I-829 for removal of conditional status. If this later petition is granted, the immigrant investor obtains unconditional permanent residence.

Recognizing the difficulties that foreigners faced in starting new businesses in the U.S., Congress adopted in 1993 the "Immigrant Investor Pilot Program," which liberalized the original requirements of the 1990 Act in two important respects. First, an immigrant investor could either create ten jobs in a new business enterprise or "save" ten jobs by restructuring an existing, troubled business enterprise.⁷ Second, he or she could invest in "regional centers," funds that were defined by geography and scope of activity and approved by the Immigration and Naturalization Service (the "INS," later reorganized under the Department of Homeland Security as the U.S. Citizenship and Immigration Services, or "USCIS").⁸

Ultimately, the second of these revisions had the greatest impact. Significantly, regional centers were not limited to showing direct job creation. Instead, regional centers could show, for each investor,

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that they had created ten jobs either directly or "indirectly."⁹ Indirect job creation typically means that an investment of a given amount in a certain type of investment in a specific locale has a multiplier effect, as the investment dollars are spent, reinvested, and taxed.¹⁰ Indirect job creation may be demonstrated by "reasonable methodologies,"¹¹ such as "economically oor statistically valid forecasting tools, including, but or limited to, feasibility studies, analyses of foreign and domestic markets for the goods or services to be exported, and/or multiplier tables."¹² The current practice is for a regional center to engage an economist to write a report showing the multiplier effect for the subject investment. In this report, the economist will usually rely upon either the RIMS-II (Regional Input-Output Modeling System) or IMPLAN (IMpact Analysis for PLANning) model for measuring economic impact.¹³The economist's report is one part of the application that must be submitted to the USCIS for approval.¹⁴

Although the Pilot Program still required immigrant investors to actively engage in the management of the business enterprise, they could satisfy this requirement by serving as limited partners in limited partnerships.¹⁵ Today, regional centers are often structured as limited partnerships, with the regional center owner (i.e., the organizer of the regional center) serving as general partner and the immigrant investors as limited partners.

As of November 1, 2013, the USCIS had approved approximately 400 regional centers.¹⁶ Currently, most EB-5 applications are for investments in regional centers.¹⁷ A full breakdown, showing the national origin of investors, is published each year by the U.S. Department of State.¹⁸ There figures indicate that the over whelming majority of regional centers are located in TEAs.¹⁹

III. MODERN PORTFOLIO THEORY

Harry Markowitz first articulated the MPT analytical method in a 1952 Journal of Finance article, calling his method "portfolio selection," which he insisted was nothing new.²⁰ The basic conclusion of the paper was that diversification—as opposed to concentration in a single investment-results in an optimal combination of high return and low variance.

The overall expected return of a portfolio is expressed as the sum of the weighted expected returns of each asset in the portfolio. Mathematically,thebasic formula is as follows:

E (Rp) = ?i Wi E (Ri)

where E (Rp) is the expected return on the portfolio, E (Ri) is the expected return on asset i, and is...