Regional Center Oversight Obligations and the RC Affiliation Agreement: Key Provisions
By Osvaldo F. Torres | Torres Law; IIUSA Editorial Committee Chair
It is difficult to reasonably refute that “[r]unning a regional center will be much more demanding”[1] after passage of the EB-5 Reform and Integrity Act of 2022 (the “Reform Act”).[2] Among other material changes, the Reform Act requires regional centers (“Regional Centers”) to provide detailed annual statements that include certifications confirming compliance with applicable laws, including federal and state securities laws, records relating to each commercial project, an accounting of all investor capital and a description of material litigation. Clearly “[t]hese new [Reform Act] obligations will cause regional centers and the new commercial enterprises (“NCE”) to assert more contractual control over developers and charge more for their services and risk.”[3] Consequently, a thoughtful and properly drafted regional center affiliation agreement (the “RC Agreement”) will be necessary—as it has always been—to ensure Regional Centers can properly oversee and enforce compliance measures with respect to the commercial projects they sponsor.
This article (i) explores the essential investment “oversight” obligations of Regional Centers as set forth in sample pre-Reform Act Regional Center designation letters[4] issued by the U.S. Citizenship and Immigration Services (“USCIS”), (ii) examines whether such pre-Reform Act oversight obligations are similar to those under the Reform Act and (iii) summarizes the key provisions that should be considered by the parties to the RC Agreement.
An Introductory Retrospective
It is irrefutable that the Reform Act imposes new obligations on Regional Centers. Arguably one of the main purposes of the Reform Act was to codify existing U.S. Citizenship and Immigration Services (“USCIS”) rules, policies and pronouncements, especially relating to a Regional Center’s responsibilities with respect to compliance with securities laws. The impetus for the Reform Act was rooted in preventing fraud and abuse, which came to light in a handful of Securities and Exchange Commission actions and other court cases relating to EB-5 projects. The gravamen of the complaint in those actions and cases almost invariably involved allegations of securities laws violations, including the diversion or misappropriation of EB-5 investor funds. The Reform Act attempts to clamp down on such potential abuses by expressly requiring Regional Centers to ensure that the EB-5 projects they sponsor comply with applicable securities law, as to which Regional Centers must certify in their initial applications and on an annual basis thereafter. In other words, Regional Centers must monitor and oversee the investments they sponsor in their approved geographic or economic zone (the “Economic Zone”).
But are the Reform Act oversight requirements truly different from the responsibilities that pre-Reform Act Regional Centers were charged with to oversee investments? An examination of the sample Regional Center designation letters we reviewed from 2007 to 2018 makes clear that pre-Reform Act Regional Centers were always required to “monitor” and exercise “oversight” responsibility regarding the EB-5 investments they sponsored in their Economic Zone. For instance, in an amended designation letter issued in 2007, the following paragraph appeared under the heading “Designee’s Responsibilities Inherent in Operation of the Regional Center” [emphasis added]:
Therefore, in order for USCIS to determine whether your regional center is in compliance with the above cited regulation, and in order to continue to operate as a USCIS approved and designated regional center, your administration, oversight, and management of your regional center shall be such as to monitor all investment activities under the sponsorship of your regional center, and to maintain records, data and information on a quarterly basis in order to report to USCIS upon request year to date for each Federal Fiscal Year1, commencing with the current year as follows:
A similar requirement to “monitor” appears in the following excerpt form a 2010 designation letter [emphasis added]:
Therefore, in order for USCIS to determine whether your Regional Center is in compliance with the above cited regulation, and in order to continue to operate as a USCIS approved and designated Regional Center, your administration, oversight, and management of your Regional Center shall be such as to monitor all investment activities under the sponsorship of your Regional Center and to maintain records, data and information on a quarterly basis in order to report to USCIS upon request …
3. Be prepared to explain the following:
a. How the Regional Center is actively engaged in the evaluation, oversight and follow up on any proposed commercial activities that will be utilized by alien investors.
b. How the Regional Center is actively engaged in the ongoing monitoring, evaluation, oversight and follow up on any investor commercial activity affiliated through the Regional Center that will be utilized by alien investors in order to create direct and/or indirect jobs through qualifying EB-5 capital investments into commercial enterprises within the Regional Center.
The following designation letter issued in 2014 contains similar requirements relating to the monitoring of the EB-5 investment [emphasis added]:
As provided in 8 CFR § 204.6(m)(6), to ensure that the regional center continues to meet the requirements of section 610(a) of the Appropriations Act, a regional center must provide USCIS with updated information to demonstrate the regional center is continuing to promote economic growth, improved regional productivity, job creation, and increased domestic capital investment in the approved geographic area. Such information must be submitted to USCIS on an annual basis or as otherwise requested by USCIS. The applicant must monitor all investment activities under the sponsorship of the regional center and to maintain records in order to provide the information required on the Form I-924A Supplement to Form I-924.
A more recent designation letter, this one issued in 2018, also refers to the investment monitoring requirement, but goes a bit farther by reinforcing the obligation to comply with applicable laws and warns that the failure of the NCE or job creating entity (“JCE”) to also comply with all laws relating to investment offerings may be cause for USCIS to issue a notice of intent to terminate the Regional Center [emphasis added]:
Each approved regional center must continue to demonstrate that there are sufficient management, oversight and administrative functions in place to monitor all investment offerings and activities under the sponsorship of the regional center. The failure of an associated new commercial enterprise or job creating entity to comply with all laws and regulations related to such investment offerings and activities may result in the issuance by USClS of a notice of intent to terminate the regional center designation.
What is most curious about the aforementioned 2018 letter is the clear admonition that the acts of NCEs and JCEs, even if apparently unaffiliated with the Regional Center, could result in the termination of the Regional Center’s designation. The Reform Act clearly codifies that notion.[5]
In summary, the designation letter provisions noted above make it abundantly clear that Regional Centers were always required to evaluate, oversee and monitor EB-5 related activity they sponsored. As noted in the sample designation letter from 2007, that responsibility was “inherent” to, and part and parcel with, engaging in the promotion and effectuation of EB-5 investment activity. After all, Regional Centers were tasked with creating and/or sponsoring investment opportunities for foreigners for the purpose of creating jobs for American workers. Endowed with that responsibility surely must also have imposed the concomitant obligation to ensure compliance with applicable laws by requiring that Regional Centers monitor and oversee that same EB-5 investment activity. Did some rogue actors disregard their fundamental Regional Center obligations to oversee and monitor? Apparently so, but that did not erode the plain meaning of the words contained in designation letters. As such, it stands to reason that responsible Regional Centers that understood and abided by their regional center designations never needed the Reform Act to coerce compliance or reinforce their oversight responsibilities—most always did. Unfortunately, however, other Regional Center operators feigned ignorance or otherwise skirted the law—and to the extent the Reform Act now better induces outlier Regional Center operators to undertake their oversight responsibilities in a serious manner, the playing field should be evened. As was required in each of the designation letters examined above, the Reform Act now codifies the essential EB-5 investment oversight obligations imposed on all Regional Centers, each of which must under the Reform Act “[…] use commercially reasonable efforts to monitor and supervise compliance with the securities laws in relations [sic] to all offers, purchases, and sales of, and investment advice relating to, securities made by parties associated with the regional center…[emphasis added].”[6]
Anatomy of the Post Reform Act RC Agreement
Whether representing a mature Regional Center or one just starting out, a well drafted RC Agreement is an essential document that must be carefully considered and properly drafted. The RC Agreement is typically entered into among (i) Regional Center, (ii) the NCE, as the issuer of the securities to be subscribed for by the EB-5 investors and (iii) the JCE or project entity, usually in its capacity as the borrower of the NCE’s loan or recipient of the NCE’s equity investment, in either case, utilizing the pooled EB-5 investors’ funds subscribed for in the NCE.
A typical RC Agreement, whether pre or post the Reform Act, should, among other things (i) evidence the Regional Center’s grant of the right of the NCE to conduct EB-5 Program investment activity within the Economic Zone; (ii) recite the compensation payable to the Regional Center for its agreement to permit the NCE to operate with its Economic Zone for the purposes of promoting EB-5 Program activity; and (iii) memorialize the obligations of the Regional Center, NCE and JCE to comply with the provisions of EB-5 Program, including with USCIS rules, policies and pronouncements, record keeping requirements and securities laws compliance, etc.
While well drafted pre or post Reform Act RC Agreements will contain many similar provisions, the intent of the table below is to highlight the essential provisions that are necessary to aid compliance with the Reform Act:
| HEADING
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SUBSTANCE OF PROVISION/COMMENTS |
| Access to the EB-5 Program or Affiliation Rights | The Regional Center hereby agrees that it shall sponsor the Project for participation in the EB-5 Program as provided herein. The Regional Center will review and conduct a due diligence analysis of the following documents to verify their underlying compliance with the RIA: (i) the Project Business Plan; (ii) the offering documents proposed to be used to solicit investment from foreign investors under the EB-5 Program for the Project (including the Memorandum); (iii) the loan documents between the Company and the Borrower (the “Loan Documents”); (iv) fund administration agreements and other documents necessary for compliance with the RIA and other laws, regulation, and policy; and (v) any and all filings with USCIS with respect to the Project.
COMMENT: Often this clause may refer to granting “affiliation” rights to the Project, which is substantively similar.
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| Compensation or Affiliation Fees | Initial Fee: An initial, non-refundable fee of $30,000, payable upon the execution of this Agreement by wire transfer of immediately available funds to RC (the “Initial Fee”), subject to refund if the RC does not otherwise sponsor the Project for any reason whatsoever prior to the NCE’s acceptance of its first EB-5 investor.
Per Investor Fee: (i) $5,000 for first eight (8) EB-5 Investors; and (ii) $2,500 for each EB-5 Investor thereafter (as applicable, the “Per Investor Fee”). The Per Investor Fee shall be payable by wire transfer of immediately funds to RC within ten (10) business days upon the earlier of such EB-5 Investor’s capital contribution being (i) released from escrow, if applicable, or (ii) invested in the Project.
Annual Fee: An annual fee of thirty (30) basis points (the “Annual Fee”) on the amount invested in the JCE/Project, with same to be determined on a monthly basis based upon the amount of the invested capital at such time. The Annual Fee shall be payable within ten (10) business days following the end of each calendar quarter by wire transfer of immediately available funds to RC. The Annual Fee shall continue to be paid until all of the EB-5 Investors have received the return of their investment in the NCE, with the Annual Fee being based upon the outstanding amount of the Capital Contributions of the EB-5 Investors in the NCE.
COMMENT: Compensation may obviously vary and could include three elements: (i) an initial or “gate” fee; (ii) a one-time per investor fee and (iii) an annual fee usually expressed as a percentage of the loan or investment amount made in the JCE. Based solely on the RC Agreements we have drafted or have reviewed, the fees could range: (i) 10,000 to $50,000 for the initial fee; (ii) $2,000 to $7,500 for the per investor fee; and (iii) 0.10% to 0.50% for the annual fee. Some deals do not include all three types of fees and as such the pricing combinations and amounts will vary.
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| Increased or New Fees | In the event that any additional or increased fees, expenses, contributions, costs, or other additional expenditures (annual, quarterly, one-time, or any other frequency), including any oversight or regulatory fees, are incurred by the RC as a result of any USCIS or any other governmental action including, but not limited to, new, amended or revised legislation in connection with the EB-5 Program, new or revised U.S. federal law and the rules established and administered by USCIS, guidelines, requirements, or any other applicable law (the “Regulatory Fees”), such Regulatory Fees shall be divided, pro rata, in equal shares, on an annual basis among the NCE and any other third parties with projects sponsored by the RC. These fees, if any, shall be in addition to all other fees listed herein. In the event that any Regulatory Fees are incurred by the RC, the RC shall provide an invoice to the NCE with respect to the NCE’s share of such Regulatory Fees.
COMMENT: Given the recent “surprises” surrounding USCIS’ announced fee additions or increases, an essential provision of the RC Agreement is the Regional Center’s right to pass through any increased or additional fees that USCIS may impose. Usually, such fees are shared ratably amongst the active NCEs affiliated with the Regional Center.
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| Integrity Fund | Pursuant to the Act, the RC shall make a contribution of $20,000 (or $10,000 if the Regional Center has 20 or fewer EB-5 Investors at the end of the Fiscal Year), to an EB-5 Integrity Fund administered by USCIS. The obligation to pay this contribution will be shared pro rata, in equal shares, by the NCE and all other third parties with projects sponsored by the RC (the “EB-5 Integrity Fund Contribution”). The NCE shall be responsible for its pro rata portion of the EB-5 Integrity Fund Contribution, regardless of the date of this Agreement and whether the NCE has subscribed EB-5 Investors.
COMMENT: The RC Agreement should address the new Integrity Fund contribution. Again, this fee would likely be shared ratably amongst the active NCEs affiliated with the Regional Center.
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| Reimbursement of Expenses | A NCE shall reimburse RC for all actual and reasonable legal fees and expenses incurred by it in connection with its review of the Transaction Documents (as defined below), which amount has been fixed at $15,000 and shall be payable upon the execution of this Agreement by wire transfer of immediately available funds to RC (the “Compliance Review Fee”). For the avoidance of doubt, the Service Fees do not include the expenses relating to the (i) preparation and filing of the RC Filings (as defined in Section 4 below) or (ii) cost to engage, as required by the Act, (A) an independent auditor and (B) an independent construction consultant, as applicable, the cost of each of which expenses shall be borne by, and be the sole obligation of, NCE.
COMMENT: Another critical provision that addresses the costs to process the instant Project, namely the expenses related to the preparation and filing of Form I-956F. In this case, the Regional Center requires a “Compliance Review Fee” as well, which would be in addition to the preparation and filing expenses relating to the I-956F. This review fee will vary by deal. Because the Regional Center is tasked with ensuring that the proposed EB-5 project meets the EB-5 Program requirements, it makes sense for the Regional Center pass through the compliance/due diligence review fee.
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| Associated Persons | Of special importance on the Regional Center Affiliation Form is the section entitled, “Persons in Positions of Substantial Authority,” which requests certain identifying information about all persons of in positions of substantial authority involved with the RC Affiliate, the job-creating entity (the “JCE”), and parent and subsidiary entities of the RC Affiliate and JCE, accurately and without omission (collectively, the “Associated Persons”). Unless otherwise defined in the EB-5 Regulations, a position of substantial authority is one in which the person holding the position is, directly or indirectly, involved in to making operational or managerial decisions over pooling, securitization, investment, release, acceptance, or control or use of any EB-5 capital that was procured under the EB-5 Program.
COMMENT: The Reform Act requires Regional Centers to focus on and provide disclosure relating to those persons that have substantial authority in connection with the EB-5 project. As such the RC Agreement could benefit from incorporating a pertinent clause. As a reminder, an individual may be in a position of substantive authority, and therefore an Associated Person, if the person serves as a principal, representative, administrator, owner, officer, board member, manager, executive, general partner, fiduciary, agent, or similar position for the RC Affiliate or the JCE.
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| Fund Administration | Unless the RC Affiliate elects to obtain audited financial statements, the RC Affiliate shall utilize the services of an independent third-party fund administrator (a “Fund Administrator”) and the Regional Center must approve the Fund Administrator as a condition of Affiliation. The Regional Center, in its sole but reasonable discretion and in accordance with the EB-5 Regulations, may approve a Fund Administrator that is either (a) a certified public accountant, (b) a licensed attorney, or (c) a firm, such as a commercial bank or escrow service, deemed by the Regional Center to be qualified to provide EB-5 fund administration services. Unless the RC Affiliate elects to obtain audited financial statements, all funds from the RC EB-5 Investors must first be received into an account controlled by the Fund Administrator. The RC Affiliate shall, to the extent applicable, obtain from the Fund Administrator periodic detailed financial reports which show the receipt from, transfers, expenditures, and subsequent return of capital to the RC EB-5 Investors. Such reports shall promptly be provided to the Regional Center (if applicable). Notwithstanding the foregoing, the RC Affiliate may, at its sole discretion and in accordance with the EB-5 Regulations, provide the Regional Center with audited financial statements of the RC Affiliate, prepared by a certified public accountant in accordance with the Generally Accepted Auditing Standards of the United States, in lieu of utilizing a Fund Administrator.
COMMENT: In light of the Reform Act’s requirement regarding the inclusion of a Fund Administrator, unless the requirement is waived, it makes sense to address it in the RC Agreement. Here the Regional Center has the right to approve the Fund Administrator, which makes sense to ensure that a reputable firm will properly perform the function.
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| Certificate of Compliance | The Company shall deliver to Regional Center every year, no later than November 15, a certificate of compliance (“Certificate”) wherein the Company will certify, on behalf of itself and all affiliates, directors, officers, employees, agents, and representatives that to its knowledge, they have complied with all laws, so that, pursuant to the requirements of the RIA, Regional Center may also certify compliance with all laws. The Company will make any reasonable changes to the Certificate requested by Regional Center so as to ensure compliance with the RIA.
COMMENT: Another important provision given the Regional Center’s obligation to certify compliance with laws. This hopefully allows the Regional Center to “piggy back” on the certifications made by the NCE and JCE and possibly shield the Regional Center from liability.
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| Promoters | The use of direct and third-party promoters, as defined in the EB-5 Regulations (“Promoters”), by the RC Affiliate, the JCE or any affiliated entity, for the purpose of offering an investment in the RC Affiliate to potential RC EB-5 Investors shall at all times be in compliance with the EB-5 Regulations.
COMMENT: Perhaps one of the more controversial or difficult provisions from the Reform Act to comply with (and especially monitor and enforce) due to the lack of guidance and the apparent breadth of the clause, and so another worthwhile provision to include to spark awareness and compliance.
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| Cooperation with Regional Center Audits | Pursuant to the EB-5 Regulations, USCIS shall periodically conduct an audit of the Regional Center. The RC Affiliate agrees, to the extent practicable, to cooperate with the Regional Center by providing information to the Regional Center and USCIS.
COMMENT: Self-explanatory and useful reminder.
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| Site Visits | Either the Regional Center or USCIS may notify the RC Affiliate of its intent to perform an in-person inspection (a “Site Visit”) at the Project’s location. Performance of a Site Visit may require the JCE or an affiliate of the JCE to grant access to one or more representatives of the Regional Center or USCIS. There is no limit to the number or frequency of Site Visits which may be performed; provided, however, that the Regional Center (i) may only conduct a Site Visit upon providing fifteen (15) days prior written notice to RC Affiliate and JCE and (ii) shall be limited to one Site Visit per calendar year. The policies and procedures for Site Visits are more fully described in Exhibit E. All costs incurred by the Regional Center in connection with a Site Visit shall be borne by the Regional Center. The RC Affiliate’s failure to grant full access to the Project or otherwise reasonably cooperate with a Site Visit shall, after written notice thereof and an opportunity to cure, constitute a breach of this Agreement by the RC Affiliate.
COMMENT: This may be considered a fairly aggressive provision because it gives the Regional Center almost unfettered rights to perform site visits, which would be in addition to USCIS’ right to conduct site visits. On the other hand, there is nothing wrong with “kicking the tires.” One may actually learn something about the project and as such a key element to keep the honesty.
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READ THE FULL Q1/2 2023 EDITION
[1] Robert C. Divine, https://www.bakerdonelson.com/analysis-of-new-eb-5-reform-and-integrity-act-of-2022
[2] See the EB-5 Reform and Integrity Act of 2022, Div. BB of the Consolidated Appropriations Act of 2022, Pub. L. 117-103, 136 Stat. 1078 (March 15, 2022).
[3] Divine, supra note 2.
[4] A “designation letter” is the letter USCIS issues upon its approval of Form I-924, Application For Regional Center Designation Under the Immigrant Investor Program (which under the Reform Act has been replaced by Form I-956, Application for Regional Center Designation).
[5] 8 U.S.C. §1153(b)(5)(I)(iv)
[6] 8 U.S.C. §1153(b)(5)(I)(iii)
