by Jim Nail, Chief Investment Officer, AISA
For years the EB-5 industry has tolerated certain potential conflicts of interest. The lenders of investor funds may be affiliated with the borrower, for example, yet have an explicit right to waive or modify repayment terms. Or all the parties in a deal may be under common control, from the seller of land to the buyer, from the Regional Center to the builder, from the broker-dealer to the future business operator of a project.
Recently, in part perhaps because of stricter SEC enforcement actions, EB-5 promoters and migration agents are inquiring whether an independent co-manager could help protect investor interests in such cases. This article provides an overview of services an unaffiliated and regulated co-manager can provide.
A note of reassurance to begin. Nobody wants an outsider interfering with business decisions; and rest assured, nobody wants to exercise that role either. Supervising – and potentially second-guessing – the general partner’s every move would be a full-time job, expensive to implement, and no way to run a business. The independent co-manager function is much more focused: an unaffiliated and regulated fiduciary with the ability to step in at selected “pressure points” of the venture, to monitor and ensure that specific pre-agreed procedures are respected. This is a hands-off approach that stays out of the way, and yet that can still assure investors and regulators that a good-faith effort is being made to manage conflicts of interest.
Importantly, as litigation becomes more common in a maturing EB-5 industry, involving a co-manager will do more than just signal that the deal sponsor is offering a gold-standard product; it also gains a licensed and insured potential co-defendant to share some of the liabilities in case the project goes wrong.