EB-5 Risk Exposure and Risk Management

Investing in EB-5 projects has inherent risks, but many immigrant investors may not realize that they have significant power with project sponsors to demand protections from these risks. Due to the recent scandals and fraud issues related to the EB-5 program, investors should be very diligent in assessing the several program’s risks.

In the United States, numerous projects are vying for investor capital hence offering investors the power of choice. Investors want to invest in funds that are in line with their personal risk and investment return goals, but may overlook the risks in projects that don’t offer the proper insurance to protect investors.

This article outlines the risks EB-5 investors’ face and details the available insurance solutions to mitigate those risks.

A World of ‘Risk Management’

The term “risk management” is commonly used in the business community to talk about controlling risk. Many times, EB-5 investors may not be cognizant of the risks they are exposed to during a project, along with ways to protect themselves from these risks. EB-5 investors should put their focus on projects with the highest risk management standards and ones that offer the necessary insurance coverage that protects investors. 

One of the biggest risks that EB-5 investors face is the complete loss of capital. The magnitude of investor losses can be averted with insurance solutions available for EB-5 projects today. Due to the fact that regulatory agencies don’t require risk insurance protecting investors, it’s the responsibility of project sponsors to ensure that such coverage is provided. 

EB-5 investors should make risk management a high priority, and invest in projects that offer this type of coverage to diminish the risks connected with an EB-5 project.

Investment Peace of Mind

Foreign nationals invest in EB-5 projects with an expectation to gain Lawful Permanent Status (a.k.a. Green Card) along with a full return of their investment capital within 5 to 10 years. This is a long wait time for potential risks to become problems.

The Regional Centers raising capital today for their projects can help foster this peace of mind and instill a sense of investment protection by instituting a risk management and mitigation platform for their investors. Seasoned project sponsors know how important this is and will explore ways to manage the risks thus ensuring EB-5 investors are protected.

To create a project’s risk management framework, the focus should be on the insurance policies that protect investors with respect to fraud, mismanagement and failure to pass the I-526 and I-829 application processes.

The table below defines and identifies these risks and the potential solutions:

Table 1 Investor Risk Exposures and Mitigration Tools


Loss of capital risk resulting from fraud, theft, or misappropriation of the investor’s funds.In order to guard against this possibility, projects should be required to carry a Fidelity Bond, which protects the investor against the risk of fraud, theft, and misappropriation of assets. The Fidelity Bond may be bought by the project.   

Misrepresentations risks, breach of fiduciary duty and general partner mismanagement.  The Management and Professional Liability Insurance policy, which projects should also carry, should be designed to ensure that it provides the required protections needed. If the structure is a Limited Partnership, the policy would provide coverage for the indemnification obligation of the limited partners (the investors) to the General Partner for any omission, error, breach of fiduciary duty, misstatement, etc.

Risks connected to a denial of the I-526 petition:

   - Loss of capital risk.

   - Disruption in life risk resulting from disapproval.

An I-526 Insurance Policy provides coverage offering a greater amount of protection against the risk of denial of an investor’s I-526 petition than a standard developer guarantee or no guarantee. To quality for coverage, projects must pass a significant due diligence underwriting process by the insurance company. 

Note: In the event a project is using "early release" of funds from escrow (before the I-526 petition is approved), insurance is important to make sure the investor receives a return of their investment in the event the petition is denied.

Denial of I-829 petition risks:

   - Loss of capital risks.

   - Disruption in life risk resulting from disapproval.

An I-829 Insurance Policy can be purchased for projects that have adopted the I-526 policy to ensure they get a return of capital for protection in case of the failure of an I-829 petition. In the event projects cannot prove that jobs were created, or funds sustained in the investment, an investor’s petition could be denied.   

Note: In the case of an I-829 petition denial, the I-829 Insurance Policy serves as a direct contract between the investor and insurance company.

Requesting Risk Protections

Many individuals understand that the EB-5 program is an ideal method to enter the U.S. and obtain Lawful Permanent Status.  Alas many EB-5 projects do not have a strong risk management framework or insurance that protects investors from unexpected risks.  Fortunately, financial markets provide many choices for foreign investors with healthy risk management programs thus protecting them from risk. Although, risk is a required element of the EB-5 program, but it can be managed and mitigated.