Money and structure
Equity model
Also called equity structure.
Equity model is the industry name for a structure in which the new commercial enterprise takes an ownership stake in the job creating entity instead of lending to it. It describes only that leg of the deal: the investor's own capital always goes into the new commercial enterprise as equity, never as a loan.
What it decides
USCIS does not use the phrase. Its guidance asks only that the comprehensive business plan filed with Form I-956F identify the form of the investment from the new commercial enterprise into the job creating entity, offering an equity stake, a loan, or some other financial arrangement as examples, and adding "if any" because an offering need not fund a separate job creating entity at all. That is written as a should. The must is filing a credible and comprehensive business plan. The choice sits between the two entities, not between the investor and the fund. Under 8 CFR 204.6(e), a contribution of capital in exchange for a note, bond, convertible debt, obligation or any other debt arrangement between the investor and the new commercial enterprise is not a contribution of capital for these purposes, so the investor holds equity in every EB-5 deal. Only the money moving from the new commercial enterprise onward can take the form of a loan. The consequences of equity differ from those of a loan. There is no maturity date, so an exit depends on a sale or a refinancing rather than a loan coming due, and returns move with the project instead of being fixed. Redeployment is framed around repayment: 8 U.S.C. 1153(b)(5)(F)(v)(I) directs the Secretary of Homeland Security to prescribe regulations allowing a new commercial enterprise to redeploy funds to keep investor capital at risk, and conditions that on the job creating entity having repaid the capital initially deployed in conformity with the initial investment contemplated by the business plan. That condition fits a loan more neatly than a share of a building.
Where this is explained properly
Pages here that go into equity model rather than mentioning it.
Related terms
- Loan modelThe loan model is the regional center structure in which the new commercial enterprise lends the pooled investor capital to a separate job creating entity, most often a company the project developer controls, instead of taking an ownership stake in it.
- Preferred equityPreferred equity is an ownership interest that ranks ahead of common equity for distributions and for the return of its capital, and behind the debt of the entity that issued it. In EB-5 the phrase most often describes the form the new commercial enterprise's investment in the job-creating entity takes.
- Capital stackThe capital stack is the ranking of a project's funding sources by priority of claim, from senior debt, which is paid first and absorbs losses last, down through mezzanine debt and preferred equity to common equity, which is paid last and absorbs the first losses. It is a finance term rather than an EB-5 one: nothing in the EB-5 statute or regulations fixes where a project's EB-5 money must rank.
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