Money and structure
Preferred equity
Also called pref equity, preferred interest.
Preferred 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.
What it decides
The phrase appears nowhere in the immigration statute and nowhere in 8 CFR 204.6. It is a capital markets term that EB-5 borrows, and which rules bite depends on the level of the structure it describes. Between the investor and the new commercial enterprise, the statutory definition of capital controls every petition filed on or after 15 March 2022. Capital excludes anything invested in exchange for a note, bond, convertible debt, obligation or any other debt arrangement, 8 U.S.C. 1153(b)(5)(D)(ii)(III)(bb), which 8 CFR 204.6(e) states as well; anything invested with a guaranteed rate of return, (cc); and anything subject to an agreement with the enterprise giving the investor a contractual right to repayment, such as a mandatory redemption at a certain time or on a certain event, or a put or sell-back option held by the investor, (dd). Clause (dd) shuts the obvious escape: the right still disqualifies the capital even where it is contingent on the success of the enterprise, sufficient available cash flow being the example the statute gives. Clause (dd) opens with an exception, and it is the one that matters here. Subclause (IV)(aa) includes capital subject to a buy back option exercisable solely at the discretion of the new commercial enterprise. USCIS treats such an option as permissible, unless ancillary provisions oblige the enterprise to exercise it or to liquidate and repay if it does not, which converts it back into a mandatory redemption. The line is who holds the right, not whether repayment is likely. The older regulation is narrower and is an evidence provision, not a menu of structures. 8 CFR 204.6(j)(2)(iv) lists money transferred for shares of stock, voting or nonvoting, common or preferred, as proof of investment, and bars terms requiring the enterprise to redeem at the holder's request. It is drafted for corporations; most new commercial enterprises are limited partnerships or LLCs, where the investor holds an LP or membership interest rather than stock. Between the enterprise and the project, preferred equity is one permitted form among several. USCIS asks that the business plan identify the form of the investment from the enterprise into the job-creating entity, offering equity stake or loan as examples. The bars on guaranteed return and on redemption are written against agreements between the investor and the new commercial enterprise, and do not reach down to this level. A preference is not a guarantee. An investor may take a preferred return paid as a distribution of profits, during conditional residence and before the jobs exist. What he may not have is a return guaranteed to him, or a distribution that hands back part of the minimum qualifying investment.
Where this is explained properly
Pages here that go into preferred equity rather than mentioning it.
Related terms
- 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.
- Equity modelEquity 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.
- Mezzanine debtMezzanine debt is a loan ranking below the senior lender and above every equity holder, and in a regional center loan model it is a common position for the loan the new commercial enterprise makes to the job creating entity. It describes that loan, not the investor's own stake, which has to be equity in the new commercial enterprise rather than debt.
- Developer equityDeveloper equity is the project sponsor's own money in a deal, normally the most subordinate position in the capital stack: repaid only after the lenders and after the EB-5 capital, and first to absorb a loss. It is a project finance term rather than an immigration one, and no EB-5 rule sets a minimum for it.
Checked against primary sources on . Back to the glossary