What indirect job creation means in EB-5

I have planned a series of educational articles to help support efforts to reauthorize the regional center program. Each article will tackle an area of misconception about what the regional center program involves and how it works. To begin: what does “indirect job creation” mean?

Key Features of Indirect Job Creation

Please note these critical and oft-misunderstood features of “indirect job creation” in the EB-5 context:

1. Indirect job creation is a defining characteristic of the regional center program, as distinct from the permanent “direct EB-5” program. (See Point 1 below for quotes from the statute and policy.)
2. The EB-5 definition of “indirect job” is NOT THE SAME as the economic model/common usage definition of “indirect job.”  In its EB-5 definition, an indirect job is a job that resulted from an EB-5 investment, yet not a W-2 employee of the particular entity in which the EB-5 investor is an equity member. This definition comprises jobs that would be considered both direct and indirect from an economic perspective. For example, for an EB-5 investor in a hotel development, all construction workers and hotel employees at the hotel site are EB-5-defined “indirect jobs,” assuming that they’re on the payroll of various contractors and a hotel management company, not on the payroll of the investor-owned entity. By contrast, in the economic model definition, those construction workers and hotel employees would be defined as direct jobs for the hotel project, while indirect jobs would have a different meaning: employment in supplier industries. (See Point 2 below for additional discussion drawn from policy and a training for USCIS adjudicators.)
3. EB-5 indirect job creation explains why regional center and direct EB-5 are not interchangeable, such that over $20 billion dollars and over 80,000 in-process EB-5 applicants currently depend on the regional center program being reauthorized into the future. Nearly 100% of regional center investments are structured with an EB-5 new commercial enterprise (NCE) that invests in a job-creating entity (JCE). That degree of separation makes all verifiable JCE direct employees and other job creation by the investment project structurally “indirect” by the EB-5 definition, and thus only countable by investors with a regional center sponsor, under the regional center program. It doesn’t matter if you can go and talk to the employees at your project, or if an economist would count direct job creation by the project. Those jobs are still “indirect” by EB-5 definition and for EB-5 purposes, except as on the payroll of the NCE. (See Point 3 below for an example from an AAO decision, discussing why an investor who lost regional center sponsorship could not go on to qualify under the direct EB-5 program.)    

Misconceptions about Indirect Job Creation

I’ve written this post before (for example back in 2015, when we were in the same square we’re still in today, facing a reauthorization deadline, a Grassley reform bill, and popular misconception about how EB-5 works). But here’s to trying again.

Senator Grassley has apparently remained under the mistaken impression that “indirect job” means an unreal and unverifiable job. (He worries that “None of the jobs created have to be ‘direct’ or verifiable jobs but rather are ‘indirect’ and based on estimates or economic modeling. Again, not knowing for sure if jobs are created.”) The Congressional Research Service report “EB-5 Immigrant Investor Visa” (January 26, 2021) appears to conflate the EB-5 definition and economic model definitions of “indirect job.” (Footnote 25: “Indirect jobs are held outside of the NCE but are created as a result of it. For example, they can include persons employed by the producers of materials/inputs for the immigrant investor’s enterprise.” The first sentence gives the EB-5 definition of an indirect job. The second sentence gives an example from the economic model definition of an indirect job.) Our Congressional representatives need to understand that “jobs created indirectly” in the EB-5 context indeed include the real people employed on site at projects receiving EB-5 investment, not just economic fictions or tangential impacts in supply industries.

And people may believe incorrectly: couldn’t regional center investors who have yet to get visas still go on to qualify under the permanent EB-5 program based on direct job creation? The investor might assume that a job should count as “direct” so long as it’s a real and verifiable employee on site at the project she funded – but that’s not how it works. In the EB-5 definition, the direct/indirect distinction is a matter of investment structure, not just of economic fact. The typical regional center investment structure (new commercial enterprise investing in a separate job-creating entity) makes all job creation “indirect” according to the EB-5 definition. Thus, loss of regional center program sponsorship would not only prevent regional center investors from counting economic model “indirect jobs,” but from any counting any jobs at all based on how regional center investments were structured. (This problem specifically applies to past investors who have not yet been admitted to conditional permanent residence. The regional center statute specifies that people who were already admitted under the regional center program (i.e. at the CPR or I-829 stage) can go on to count jobs created indirectly. If by chance the regional center program were allowed to expire, it’s possible that Congress would agree to pass new protections that would also cover past regional center investors who do not yet have conditional permanent residence.)

More Detail

Point 1: EB-5-defined indirect job creation is a defining characteristic of the regional center program.

The law that established the regional center program provides that:

the Attorney General shall permit aliens admitted under the pilot program described in this section to establish reasonable methodologies for determining the number of jobs created by the pilot program, including such jobs which are estimated to have been created indirectly…

(Public Law 102-395, Section 610(b), p. 47)

USCIS Policy Manual Vol. 6 Part G Chapter 1(B)2:

The Regional Center Program is different from the direct job creation (stand-alone) model because it allows for the use of reasonable economic or statistical methodologies to demonstrate job creation. Reasonable methodologies are used, for example, to credit indirect (including induced) jobs to immigrant investors. Indirect jobs are jobs held outside the enterprise that receives immigrant investor capital. 

Point 2: EB-5-defined “indirect job creation” is not the same as “indirect jobs” as defined by economists.

The special EB-5 definition of “direct” and “indirect” can be found in the USCIS Policy Manual Vol. 6 Part G Chapter 2(D)5:

Direct jobs are those jobs that establish an employer-employee relationship between the new commercial enterprise and the persons it employs. Indirect jobs are those that are held outside of the new commercial enterprise but are created as a result of the new commercial enterprise. For example, indirect jobs can include, but are not limited to, those held by employees of the job-creating entity (when the job-creating entity is not the new commercial enterprise) as well as employees of producers of materials, equipment, or services used by the new commercial enterprise or job-creating entity. 

By contrast, in the context of economic analysis, direct jobs are related to the specific industry, indirect jobs support that industry, and induced jobs result from employee spending in the community.

USCIS training for EB-5 adjudicators uses the words “legally direct” vs “economically direct” and “legally indirect” vs “economically indirect” to emphasize the distinction between terms as used by EB-5 legal authorities vs. economic models. (See “USCIS EB-5 Training Materials (Pre-Nov 2019)” p. 82-85 and 153)

Point 3: The structural nature of EB-5-defined indirect job creation makes regional center and direct EB-5 non-interchangeable.

In AUG032016_01B7203 Matter of J-C-, AAO explains why a petition filed as a regional center investment could not practically qualify as a direct investment. Without regional center sponsorship, the investor would lose the chance to count economically indirect jobs (which were needed in her case to reach the total job requirement) and also could not count economically direct jobs (which were created by a JCE not wholly owned by the NCE, and thus still “legally indirect” for EB-5 purposes.)

The Petitioner maintains that she should be able to pursue her immigrant investor visa even without being part a regional center that formed the basis of her initial Form I-526 petition. Specifically, she states a lack of the Regional Center involvement does not impact her eligibility because the project continues and will create a sufficient number of direct jobs within the two-year period.

…As explained below, for the Petitioner to continue to pursue an EB-5 visa as an individual investor independent of the prior Regional Center, she would need to demonstrate both the requisite direct job creation and that the JCE is a wholly-owned subsidiary of the NCE. The record does not currently reflect these conditions. Meeting these conditions would necessitate material changes and thus a new petition.

First, different rules apply to individual and regional center investments with respect to how qualifying jobs are tallied. The former Regional Center’s business plan included indirect job creation figures, which are not available to an individual investor without a regional center’s involvement. The Regional Center’s final business plan claimed 256.9 jobs, of which 202 were direct jobs. But, for the 24 foreign national investors to be able to proceed independently of the since-terminated Regional Center, the project(s) must create a minimum of 240 direct positions (10 per investor). The now defunct Regional Center’s business plan is short 38 direct jobs to support 24 independent foreign investors. As a result, the record does not establish that the Petitioner and her co-investors have met the direct job creation requirements.

Second, different rules apply to individual and regional center investments with respect to which entity must create the new jobs. For individual investors (not associated with a regional center), job creation must occur within a new commercial enterprise or within a wholly-owned subsidiary. The new commercial enterprise’s employees must provide “services or labor for the new commercial enterprise and [must receive] wages or other remuneration directly from the new commercial enterprise.” The Petitioner has not offered evidence that the JCE in this case is a wholly-owned subsidiary of the NCE. Thus, the Petitioner has not shown that the job creation will occur within the NCE or that the employees of the JCE meet the regulatory definition of employees.  Proceeding without regional center involvement would require the NCE to absorb the JCE and make it a wholly-owned subsidiary. This activity would constitute a material change to the original petition.

For additional explanation and examples, see my post What is Material Change?