On the surface, EB‑5 legislation brings together investors with capital from abroad and businesses with opportunities for investment in the United States. The EB‑5 Immigrant Investor visa program aims to further the U.S. economic goal of job creation while offering the foreign investor the prospect of obtaining a U.S. green card. However, for many foreign investors, the process is a labyrinth that can result in them both failing to acquire the green card status they were pursuing and losing all of the capital they invested.
What causes EB-5 investments to fail?
Much of the complication is fundamental to the participants and the projects: the majority of the investors are Chinese; English is not their primary language, and they are thousands of miles away from the projects in which they invest. The projects are diverse, often startups, ranging from dairy farms to student housing. Further complicating matters is the investor perception that because the EB‑5 visa is a U.S. government program, approved projects are somehow validated or guaranteed by the government or the United States Citizenship and Immigration Services (USCIS), when neither is the case.
In addition, complicated programs such as EB-5 are often opportunities for fraud. In 2015, the U.S. Securities and Exchange Commission (SEC) filed more EB‑5 fraud cases than in all prior years combined. Here are a few high-profile examples:
- SEC v. Robert Yang, et al. – Developers of Suncor Care Inc. allegedly raised $20 million from 40 Chinese investors and then misspent more than $10 million, in part by commingling funds and siphoning money off for personal use. One of the developers, a physician, is accused of spending more than $1 million to pay off loans from friends and family, to pay expenses for his medical practice, and to buy property. About $3.5 million went to the “finder” who lined up the Chinese investors.
- SEC v. A Chicago Convention Center, et al. – The SEC and USCIS coordinated to halt an alleged $156 million investment fraud. An individual and his companies used false and misleading information to solicit investors in the “World’s First Zero Carbon Emission Platinum LEED certified” hotel and conference center in Chicago, including falsely claiming that the business had acquired all necessary building permits and that the project was backed by several major hotel chains. According to the SEC’s complaint, the defendants promised investors that they would get back any administrative fees they paid for their investments if their EB‑5 visa applications were denied. The defendants allegedly spent more than 90% of the administrative fees, including some for personal use.
- SEC v. Marco A. Ramirez, et al. – The SEC and the USCIS stopped an alleged investment scam in which the SEC claimed that the defendants, including the USA Now regional center, falsely promised investors a 5% return on their investment and an opportunity to obtain an EB‑5 visa. The promoters allegedly started soliciting investors before the USCIS had designated the business as a regional center. The defendants also misused investor funds for personal use, such as funding their Cajun-themed restaurant. According to the SEC complaint, the investors did not obtain even conditional visas as a result of their investments through the USA Now regional center.
This congressional season, Congress is deliberating major changes to the EB‑5 program, including a greater role for the Department of Homeland Security. During the last few years, two important promulgations have been made by regulators:
- The SEC issued an investor alert entitled, “Investor Alert: Investment Scams Exploit Immigrant Investment Program” (last updated October 1, 2013). This document functions as essentially a caveat emptor to investors and concludes with the following statement, “If your investment through EB‑5 turns out to be in a fraudulent securities offering, you may lose both your money and your path to lawful permanent residency in the United States. Carefully vet any EB‑5 offering before investing your money and your hope of becoming a lawful permanent resident of the United States.” (Emphasis in the original.)
- At approximately the same time, the Financial Industry Regulatory Authority, Inc. (FINRA) published its “Interpretive Letter to Brian Sweeney, Trustmont Financial Group, Inc.” FINRA is the self-regulatory organization (SRO) of the securities industry. In the letter, FINRA highlighted that a broker-dealer offering an EB‑5 must both consider FINRA Rule 2111, which is the investor suitability rule, AND conduct reasonable due diligence on the offering, as described in Regulatory Notice 10-22. In short, the FINRA letter states that EB‑5 investments should be held to the same standard that all other securities investments are held. (Emphasis added.)
How can Greenfield Advisors’ due diligence services help?
Due diligence can never defend investors entirely from losses, but a review of a number of these bad EB‑5 investments suggests some common causes of losses that a due diligence reviewer could have identified:
- Intermediaries who are unlicensed by FINRA and not affiliated with a qualified broker-dealer
- Lack of a private placement memorandum (PPM) or a detailed review of that plan
- Presentation of exaggerated project prospects and returns
- Misleading information on project approvals (such as lease approvals by local government)
- Exaggeration of the likelihood of job creation (the required economic benefit)
- Mischaracterization of the likelihood of green card approval in order to attract funding
For these reasons, Greenfield Advisors is now offering due diligence reviews of EB‑5 investments, including regional centers. Our team has years of experience in project-related work; it is staffed by highly trained professionals (including PhD economists and MBAs) with experience conducting economic impact reports and business plans to support EB-5 visa applications, and it is highly familiar with the regulatory requirements described in this blog. Call me today at 770-334-3952 if you’d like to discuss our work in the EB‑5 realm.