The EB-5 NCE Operating Agreement: How the At-Risk Requirement Changes Standard Fund Drafting
An EB-5 New Commercial Enterprise looks, on paper, like many other private investment vehicles. Investors contribute capital, the entity pools that capital and deploys it to a Job Creating Entity, and the operating agreement governs how the investment is structured, managed, and ultimately resolved.
The drafting is meaningfully different from a standard fund or partnership operating agreement. EB-5 imposes constraints that do not appear in other private investment contexts. The capital must remain at risk for a defined period. Distributions that reduce the qualifying investment below the required amount, or otherwise remove required capital from risk, can create immigration exposure. Redemption mechanics that are routine in other funds can jeopardize eligibility for EB-5 purposes. The transfer of interests is constrained in ways that affect both the investor’s flexibility and the immigration qualification tied to the investor’s petition.
For project-side counsel, the result is that an NCE operating agreement cannot be adapted from a standard fund template without careful attention to the EB-5 overlay. Provisions that look protective and commercially reasonable in a standard fund can create immigration risk across the investor pool. The work is to structure those provisions so they satisfy commercial expectations without compromising the EB-5 framework, in coordination with immigration counsel.
This post focuses on the at-risk requirement, which is the single most pervasive influence on how an NCE operating agreement is drafted. It is not the only part of the EB-5 overlay. Manager and regional center authority, redeployment rights and limits, I-956F consistency and material change concerns, job creation contingencies, and investor reporting needed for later filings all shape the document as well. The at-risk requirement is where the standard fund drafting most often does not translate, and where the analysis below is focused.
The “At Risk” Requirement
At the center of EB-5 structuring is a single regulatory requirement: the investor’s capital must remain at risk through a defined sustainment period. USCIS interprets this requirement to mean that the capital must be subject to real economic exposure, with no guaranteed return and no agreed arrangement that allows the investor to withdraw the required capital during the sustainment period.
The practical effect of this requirement runs throughout the operating agreement. A provision that gives the investor a right to demand return of the required capital during the sustainment period, that treats the investor’s contribution as a loan with a fixed repayment obligation, or that effectively guarantees recovery regardless of project performance, can jeopardize the EB-5 eligibility of the investment. The at-risk requirement functions as the central organizing principle of the operating agreement, affecting how nearly every economic provision is drafted.
The duration and starting point of the sustainment period changed materially under the EB-5 Reform and Integrity Act of 2022. For post-RIA investors, USCIS guidance generally measures the required two-year investment period from the date the full qualifying investment is made to the NCE and placed at risk under applicable requirements, including being made available to the JCE as appropriate. That starting point can be difficult to determine in transactions involving escrow, staged deployment, or multiple advances to the JCE. Investors whose petitions were filed before the RIA took effect generally remain subject to the earlier sustainment framework, under which the investment was ordinarily required to remain at risk through the investor’s period of conditional residence.
How to think about it: Every economic provision in an NCE operating agreement should be tested against the at-risk requirement. If a provision provides a way for the investor to recover the required capital outside of normal investment outcomes, or treats the investment as functionally a loan rather than equity exposure, it requires restructuring or confirmation from immigration counsel before it goes into the document.
Redemption Provisions That Don’t Translate
Depending on the type of vehicle, conventional fund documents may include withdrawal, redemption, compulsory-transfer, or repurchase provisions addressing specified investor events: voluntary redemption with notice, mandatory redemption for cause, redemption on events such as death or disability, and repurchase rights triggered by changes in fund performance or strategy. These provisions serve both the investor and the manager by providing orderly exits in defined circumstances.
In an EB-5 NCE, several of these provisions can create significant immigration risk.
An investor generally cannot hold a contractual right to compel redemption or repayment of the required capital during the sustainment period, because that right itself can be deemed inconsistent with the at-risk requirement. A genuinely discretionary repurchase right held by the NCE presents a different analysis, but it still must be drafted and exercised consistently with the at-risk requirement.
Redemption on death requires careful drafting. A provision that addresses the investor’s death may be structured as a transfer of the membership interest to heirs or the estate rather than a return of capital, so that the required capital remains invested and at risk. The right structure depends on the facts and on when the event occurs relative to the sustainment period.
Redemption on disability is different and should not be grouped with death. Disability does not automatically justify or require a return of capital, and a mandatory repurchase on disability can create the same early-exit problem as any other redemption right. A disability buyout that returns the required capital during the sustainment period requires close scrutiny.
Redemption tied to project performance is particularly sensitive. A provision that returns the required capital if the project underperforms or fails certain milestones can be characterized as eliminating the at-risk nature of the investment. Even a redemption mechanism that activates only on a clear project failure has to be drafted carefully to avoid undermining EB-5 eligibility.
How to think about it: In an NCE operating agreement, redemption provisions should be tested against a single question: does this provision provide a way for the investor to recover the required capital independent of the project’s actual economic outcome and before the sustainment period is satisfied? If the answer is yes, the provision requires restructuring or confirmation from immigration counsel.
Distribution Waterfall Constraints
Distribution provisions in standard fund operating agreements typically follow a familiar structure: return of capital first, then preferred return, then carried interest or promote. Sometimes there are catch-up provisions, hurdle rates, or other refinements, but the basic logic is that investors get their capital back before profit is distributed.
In an EB-5 NCE, the “return of capital first” logic creates immediate tension with the at-risk requirement. A distribution that returns the required capital during the sustainment period, or that reduces the qualifying investment below the required amount, can be characterized as removing capital from risk, which conflicts with the regulatory framework.
Labeling a distribution as profit does not resolve the analysis. The documents, capital accounts, cash flows, and economic substance all have to support the conclusion that the investor’s required capital remained invested and at risk for the applicable period. A distribution characterized as profit in the operating agreement can still present a problem if, in substance, it returns the required capital. Tax, capital-account, and financial-reporting terminology may not align perfectly with the immigration analysis. That makes coordination among transactional, immigration, tax, and accounting professionals more important, not less.
For that reason, distribution waterfalls in EB-5 NCE operating agreements are generally drafted so that distributions during the sustainment period do not reduce the required capital. The structure must preserve the investor’s required capital as an at-risk investment for the applicable period, whether through continued deployment to the JCE or another treatment permitted under the governing EB-5 framework. Return of the required capital is typically contemplated only after the sustainment period, through a defined wind-down process.
How to think about it: The relevant question is whether the investor’s required capital stays invested and at risk for the applicable period, not how a given distribution is labeled in the documents. Project-side counsel should coordinate the operating agreement with immigration counsel, tax counsel, and the NCE’s accounting treatment rather than relying on a contractual characterization alone.
Transfer and Withdrawal Restrictions
Standard fund operating agreements typically restrict transfers of interests through consent requirements, rights of first refusal, and tag-along or drag-along provisions. The objective is generally to control who is in the fund and to preserve the manager’s discretion over capital and governance.
In an EB-5 NCE, transfer restrictions serve an additional purpose tied to the personal nature of EB-5 eligibility. Eligibility belongs to the petitioning investor, not to the membership interest. A sale or assignment of the interest before the sustainment period ends can mean that the investor no longer owns or remains engaged with the qualifying investment reflected in the petition. A transferee generally cannot inherit the transferor’s immigration qualification by acquiring the interest. A third-party transfer does not necessarily cause capital to leave the NCE, but it can still undermine the transferring investor’s petition.
Different categories of transfer raise different issues. Transfers by operation of law, including on death, raise succession questions and are often addressed through estate-administration mechanics. Estate-planning transfers, pledges or security interests, sales to third parties, and transfers accompanied by an NCE repurchase each carry their own analysis. Transfers occurring after the investor has completed the applicable sustainment period are generally less sensitive than those during the period. The common thread is that any transfer during the sustainment period requires close scrutiny and, in many structures, is prohibited or tightly limited.
How to think about it: Transfer provisions in an EB-5 NCE need the same at-risk and eligibility analysis that applies to redemption and distribution provisions. A transfer that returns the required capital, that changes the substance of the investor’s economic exposure, or that operates as a mechanism for early exit can jeopardize EB-5 eligibility and should be reviewed with immigration counsel before it is permitted.
The Takeaway
The EB-5 NCE operating agreement requires a different approach than a standard fund template. The at-risk requirement and the sustainment period framework affect nearly every economic provision in the document, often in ways that are not obvious from the face of the EB-5 statute or regulations. They also interact with other parts of the EB-5 overlay, including redeployment, material change, and the consistency of the documents with the project’s I-956F filing.
For project-side counsel, the work is to translate standard transactional protections into a structure that satisfies commercial expectations and the EB-5 framework, in coordination with immigration and tax counsel. The result is an operating agreement that may look familiar in form but operates differently in substance from a standard fund agreement.
Investors rely on those structural differences without seeing them. So do the regional centers, fund managers, and project sponsors who depend on the EB-5 eligibility of the deal to attract capital. Drafting that does not respect the framework can create problems that surface long after the deal closes, when an investor’s immigration application turns on whether the required capital remained at risk in the way the framework requires.
This post is general information only and does not constitute legal advice, including immigration advice. For questions about a particular EB-5 project or operating agreement, contact Cruxterra Law Group.
