The following was recommended to the IIUSA membership and Board of Directors by 2012-2013 Best Practices Committee in June 2013 and is up for formal ratification at an upcoming Board meeting this month.
The IIUSA Best Practices Committee was charged with developing a list of best practices to provide guidance to regional centers seeking to conduct business in a manner that will foster the growth and success of the EB-5 program. IIUSA believes that a set of best practices would be useful both because of the relative youth of the regional center EB-5 program and because of the complexity of the concepts and principles that govern regional center activity under the auspices of multiple government agencies and under the laws and practices of multiple countries.
As a preliminary matter, it is important to make clear what the Committee considers a “best practice” to be and not to be. A best practice is not meant to be a minimum legal or ethical standard of conduct by which every regional center must abide. To put it another way, failure to abide by a best practice is not meant to be considered a legal or ethical breach or failure of the regional center. Furthermore, the list of best practices is not meant to be a list of legal requirements. Rather, it is meant to provide guidance to regional centers seeking to enhance their operations and provide protection to themselves, investors and other involved parties. We view this document as a start to an evolving process to which additions and refinements will be made as we benefit from time and experience.
Throughout this process, we benefited from the active and tireless involvement of many committed professionals, including regional center owners/operators; project developers; immigration lawyers; securities attorneys; economists; insurance advisor; and others. It was truly an extraordinary group making an extraordinarily committed effort. The end result contains those best practices which achieved consensus or near consensus within the group.
We all hope that this exercise will prove to be a valuable resource and guiding light for many regional centers and for the EB-5 industry as a whole.
IIUSA RECOMMENDED BEST PRACTICES
1) No regional center can express or imply endorsement by IIUSA or USCIS.
2) A regional center should budget a sufficient amount of funds to hire necessary staff and/or outside consultants and to purchase or adapt software and/or systems necessary to monitor job creation, complete annual reporting requirements and communicate with investors. A regional center should have sufficient staff (in house or outsourced) to be able to handle investor relations, accrediting investors, keeping securities records, dealing with I-526 RFEs, distributing materials, updating investors, preparing I-829 templates, tracking job creation and handling I-829 RFEs, among other functions. Regional centers have an obligation to do ongoing monitoring of job creation. Every regional center should have at least one full-time person on staff. Outsourcing of additional responsibilities is acceptable. The attached is a list of services that approved regional centers and/or EB-5 project developers need to perform either in house or through outside immigration counsel.
3) A regional center should develop record keeping policies and procedures. At a minimum, the following should be tracked and compiled: information for I-924A filings; information on prospective investors, including contact information; distribution of offering documents; age out dates for children of investors; dates of I-526 filings, RFEs and receipt notices; conditional residence dates of all investors; I-829 filings, RFEs and receipt notices; master I-829 records for each project; job data. All recordkeeping can be in house or outsourced to a reliable third party.
4) A regional center should have insurance against investor claims and actions of regulatory bodies. The insurance is a combination of directors and officers insurance and errors and omissions insurance.
5) A regional center should not file I-526 petitions for a project that the regional center knows requires approval of a geography or industry code amendment until the amendment is approved.
6) Regional centers and project developers should be guided by USCIS approval standards, which often require impartial third party experts to provide appraisal of the value of contributed land, market conditions in a specific industry, project budgets and timeline and projections of future revenues and expenses.
7) Preparation of the template for I-829s and I-829 RFEs is the responsibility of the regional center and/or the new commercial enterprise based on the division of responsibility agreed to between those entities.
8) The attached list of documents should be collected by the regional center or the project developer for I-829 purposes.
9) A general partner should not waive its fiduciary responsibility even if it is acceptable according to state law.
Regional Center Oversight/Project Selection
10) A regional center should perform due diligence with respect to both project and developer before it agrees to host or sponsor a project. The due diligence should include no less than criminal, governmental and bankruptcy – background checks normally required under S‑1 registration. Regional centers should document in writing reasonable due diligence procedures, which may be performed internally or by a third party and relied upon by the regional center. A regional center should independently verify basic financial information provided by the developer. The regional center should have documents to support factual statements and analyses used to support the issuer’s project costs and projections of future revenues and expenses, which documents should be readily available in the regional center’s due diligence files with copies available to be provided to investors or marketing agents. A regional center that acts as an administrator of EB‑5 regulatory compliance but does not sponsor a specific offering should require the project sponsor to perform the same due diligence that the regional center would otherwise perform.
11) Reasonable and good faith underwriting standards should be applied by regional centers in project selection. Underwriting assumptions should be communicated in offering documents or be available upon request. Regional centers should require the project developer to certify that the offering documents contain no misstatements on project information before the offering documents are distributed. Documents should indicate clearly that projections are based on assumptions reasonably and consistently applied.
12) A regional center should insist on the right to oversee the progress of a project and require regular reporting by the target investment, borrower or developer of each regional center sponsored project. The regional center, whenever possible, should exercise that right and take appropriate action where necessary if the project is not proceeding as planned or as necessary for investors to be successful in removing conditions.
13) Regional centers should regularly communicate with project developers to ask about material changes in the project that may require further disclosure in the offering documents.
14) A regional center should insist that a project developer must provide the information necessary for the regional center to perform its annual reporting function.
15) A regional center should insist on full indemnity from the developer and any marketing agent.
16) If a developer puts together the professional team that will be preparing the EB-5 project documents, the regional center should insist on a right to have its own professional team review and provide comment on all documents.
17) A regional center should have internal controls necessary and appropriate to make certain that conflicts of interest are identified and avoided. Every relevant conflict of interest should be disclosed in the offering documents.
18) It is a suggested, but not required best practice to avoid having an owner of a regional center also be a developer in a loan model and essentially be both lender and borrower because of the potential conflicts of interest. When the new commercial enterprise is managed by a manager, managing member or a general partner that is affiliated with the developer (project company/borrower), especially where such manager equivalent is also affiliated with the applicable regional center, there should be disclosure of the potential conflicts in sufficient detail to be comprehensible and meaningful to the investor and a disclaimer made regarding the conflict of interest. All payments made by the capital recipient to the general partner/regional center should be disclosed. In addition, the new commercial enterprise should have a co-manager/general partner or a “fund control agent” who is unaffiliated with the developer/business and also with any other interested participant (such as migration broker) for the purposes of:
(i) co-signing checks related to loan disbursements under the loan; and
(ii) oversight control over the administration of the loan and dealings with the borrower under the applicable loan documents, including having the sole authority to declare a default under the loan.
19) The purpose of the above-referenced policy is to guarantee some level of independence in the loan disbursement and administration process. This will also avoid an obvious conflict of interest between the manager/general partner of the NCE and the developer/borrower if there is no such independent control imposed on the NCE. Independent agents to provide these services should include professionals such as attorneys, accountants, or organizations familiar with the loan process for the applicable industry for which the loan is being made. All costs should be clearly covered by non-EB-5 funds.
20) The owner of a regional center should not represent investors in legal matters of the regional center because of actual and potential conflicts of interest.
21) EB-5 offerings are offerings of ‘securities’ and thus are regulated by the U.S. securities laws. To be conducted lawfully, offerings (including EB-5 offerings) must be registered with the Securities and Exchange Commission (a costly and time-consuming process), unless the offering can claim an available exemption(s) from the registration requirement. There are two primary exemptions typically used, Reg D and Reg S. To lawfully avoid the registration requirement, only one exemption is needed, hence an EB-5 issuer’s compliance with either Reg D or S should suffice to constitute the offering as exempt. Inadvertent non-compliance with an exemption requirement can lose the exemption, so issuers who are able to satisfy the requirements of both D and S in the same offering may secure the additional protection of having redundancy; in effect, a “fall-back” exemption in the event of a loss of one or the other exemption. It is a best practice to require all investors to be accredited investors, but it is only required in a Reg D offering. Accreditation is not required in a Reg S offering. However, if the issuer claims both Reg S and Reg D, then investors need to be accredited.
22) The issuer must undertake good faith efforts to verify the accredited investor status based on either (or both) of the net worth or income tests. This applies only if the regional center is taking advantage of the Act’s provisions which permit advertising of private offerings to the general public. Incorporating into the questionnaire more detailed questions regarding income and net worth is advisable, including written confirmation. At least attempting to get verifiable detail on net worth or income is very likely invaluable to show good faith. Verification is required of offerors (including the regional center, if the offeror) by the SEC under the JOBS Act.
23) Although the law is evolving relating to accessibility by investors to offering information on websites, at present the most conservative and safest best practice for a regional center is to take steps to make certain that only accredited investors residing/located and with web addresses outside the U.S. can access website information. This is necessary to preserve the Reg S exemption, especially after JOBS Act revisions. If an investment is made by a person in the U.S. (often a child) with money provided by an offshore source (often a parent), there can be an impact on the Reg S or D exemption. The best practice is to consult with a securities lawyer experienced in the issue regarding whether to accept such an investor or how to structure the investment transaction. Checkbox questionnaires are not acceptable for self-verification to confirm accredited investor qualification.
24) In order to promote the integrity of the EB-5 investment market, all regional centers should adopt similar practices as are used in U.S. securities markets with respect to the preparation and use of offering documents.
25) The offeror is responsible for dissemination of documents to investors. This responsibility cannot be delegated. The regional center must take reasonable steps to control the process and to ensure the integrity of the agents. There should be document control mechanisms for offering documents, ideally including numbered and signed versions for hard copy documents. Electronic tracking of offering documents using standard methodologies (e.g., email logs, controlled-access data rooms) is also acceptable. Agents should be educated on the importance and challenges of properly disseminating drafts. Any non-final document should be clearly marked “draft”. It is vital that the investor sign the final version and that the offeror make best efforts to accomplish that goal (actively assisted by its agents). The regional center must maintain copies of all signed offering documents.
26) Either the regional center or a trusted source of the investor should provide enough information in a translated version of a PPM that would enable a reasonable investor to decide whether to request a fully translated PPM or analysis by his or her professional advisors. Regional centers should notify investors that they may request a translated version or that they should obtain their own translated version. If offering documents presented to investors are translated, the offeror should specify which version (typically the English language version) of the offering documents is the official version and should clearly mark any translated version with a disclaimer to this effect in both languages.
27) It is a best practice to disclose in the offering documents the exact amount of dollars that will go to the regional center, to the investor and to the broker or agent. Although it is a best practice to disclose all compensation to all parties, there may be reasons why this is not feasible. It is best to inquire of agents regarding all sources of compensation that the agent will receive from the transaction and, to the extent that the regional center learns information regarding sources of compensation, it should be disclosed in the offering documents. At a minimum, there should be disclosure that some of the administrative fees or interest payments will be used to compensate migration agents, consultants, lawyers or third parties; and the gross amount of compensation going to third parties should be disclosed with a range of compensation for each recipient. The more disclosure that is provided, the less chance of any securities violation.
28) It is not a best practice to include in a PPM too many risk factors, which the SEC could deem dilutive. Risk factors should be mentioned in the PPM if they are germane to the specific deal.
29) Every regional center should have a reasonable basis for determining that the material facts stated in the offering documents for every EB-5 offering they sponsor are true and not misleading and that if EB-5 investors contribute their capital to a project, that project has a reasonable chance of being completed in accordance with the business plan described in the offering documents. Appropriate due diligence in connection with a securities offering includes verifying that every material factual statement in an offering circular is accurate and supported by documented evidence.
30) If there is a material change to offering documents after an investor signs up, a disclosure should be circulated to all investors. Securities counsel should be consulted as to whether a change is material. The best practice is to have the investor sign the final version, and thereafter to clearly disclose all subsequent material revisions. If the change is material, and occurs after signing, the investor must be given rescission (reaffirmation) rights. Ideally, wherever possible no material changes should be entertained post-execution.
31) Especially given the uncertainty in SEC policies relating to overseas marketing of EB-5 projects by non-registered broker dealers, every regional center and project developer involved in the marketing of an EB-5 project is advised to seek the counsel of an experienced EB-5 securities lawyer.
32) Administrative fees should be expressly non-refundable or otherwise escrowed until adjudication. Administrative fees may be refunded to the extent not previously (and permissibly) expended by the general partner so long as so disclosed to investors in the PPM. With an escrow that involves an early release from escrow upon approval of some percentage of the I-526 petitions, the investment amounts released should either be non-refundable or else the developer should have a reserve to pay back any investors. The early release must be disclosed in the PPM.
33) An escrow agent or escrow holder and any third party escrow administrator should be competent, unaffiliated with the regional center and familiar with EB-5 processes.
34) An economic report should make clear the expenditures, revenues, occupancy rates, etc. that must occur in order for the required job creation to take place.
35) A regional center should not rely on direct construction job creation unless a projected construction timeline of greater than 2 years is both realistic, consistent with industry standards and well documented.
36) Every project presented to investors should have some job cushion (job projection above the minimum necessary). This is one of many factors to be considered by investors.
37) A job allocation agreement should be included in the PPM. This agreement should make clear to investors how jobs are allocated in the event that there is a shortage of jobs to cover every investor.
38) If a regional center EB-5 project will be commencing prior to the infusion of EB-5 investment money, the record should be well documented that EB-5 money is a necessary part of the capital stack prior to the commencement of the project.
39) The economic report should be made available to investors and/or summarized for investors in the offering documents.
40) Regional centers should instruct in writing all representatives of the requirement to act in accordance with U.S. laws and the laws of their country.
41) The regional center must review and approve all marketing materials, translations, licenses of agents and websites, both for accuracy and for consistency with offering documents. Marketing materials should make specific reference to the offering documents and should state that the offering documents (and not the marketing materials) are the official documents on which investors should rely.
42) Offering documents should not be made available to investors until the business plan and economic report have undergone final review by immigration counsel.
43) A regional center should not insist on its own immigration attorney being the investor’s immigration attorney. However, it is acceptable for the regional center to provide a recommended list of attorneys, which could include the regional center’s attorney. It is permissible for a regional center to refuse to work with any investor whose attorney is deemed to be inexperienced, or in the event an attorney is unwilling to cooperate with a regional center in terms of ensuring that filings are consistent among investors in a particular regional center offering.
44) If a regional center’s attorney will not be representing investors, the regional center should review the investors’ source of funds.
45) Regional centers should advise potential EB-5 investors of the best practices that have been implemented by the regional center to protect investors.
46) The regional center or project developer should have at least semiannual (quarterly is better) communication with investors. The MOU between the regional center and the developer should include this obligation. In addition, the general partner of the new commercial enterprise should communicate at least semiannually (quarterly is better) with the investors. Failure to disclose information can be fraud. Failure to disclose is a bigger potential litigation problem than the failure of the business. Regional centers should notify investors promptly of any problems, denials, material changes, shortages of jobs, etc. The standard in deciding whether the issue must be disclosed is whether it would have a material adverse effect on the investor. Issues that should be disclosed timely include:
– Material change in the business plan;
– I 526 project denial;
– Job creation deficiency;
– I-829 denial;
– Significant change in the inputs in the economic report;
– Rejection, late filing or non-filing of I-924.
47) For purposes of I-829 filings, regional centers should take every action possible to determine the conditional permanent residence date of each investor. Regional centers should provide notice to investors thirty days before the ninety day conditional residence window.
Respectfully recommended by the IIUSA Best Practices Committee:
H. Ronald Klasko, Chairman
Peter D. Joseph
E. Robert Roskind