RCBJ Quarterly Retrospective: The Institutionalization of the EB-5 Program by Dan Healy

07.01.14 | Archived

q2 cover

Good news for all IIUSA followers and EB-5 stakeholders: the Q2 editions of the Regional Center Business Journal (“RCBJ”) has hit the printing press and should be sent in the mail by next week! Furthermore, we will provide a sneak-peak to our digital version in the coming days. The forthcoming edition of the RCBJ includes a full recap of the May EB-5 Advocacy Conference, articles on I-829 petition and RC approval trends, combining EB-5 capital with other economic development tools, newly enacted self-regulatory procedures for the industry, IIUSA’s international bridge building efforts, and much more. Stay tuned!

Today, we spotlight an article from the December 2013 edition of the RCBJ titled, “The Institutionalization of the EB-5 Program” (Pg. 18) written by Dan Healy, President/CEO of Civitas Capital Group; Director, IIUSA; Chair, IIUSA Best Practices Committee.

healyThe Institutionalization of the EB-5 Program

by Daniel J. Healy,  President/CEO of Civitas Capital Group; Director, IIUSA; Chair, IIUSA Best Practices Committee

As an industry, we are witnessing the increasingly rapid institutionalization of the EB-5 investor visa program. When I started in this industry in 2008, very few large investors were focused on EB-5; in those dark days, most were more concerned with their survival. But what a difference a few years makes!

Today, EB-5 remains a narrow niche in the world of finance and capital markets, but it is fair to say that EB-5 capital is no longer exotic, especially in the commercial real estate context. Interest in the program among institutional investors and their capital managers is widespread and swelling. Many major companies, such as Lennar Corporation, the Related Companies, and Forest City Enterprises, are using EB-5 capital to create jobs via a diverse range of projects. My firm, Civitas Capital Group, has made EB-5 investments alongside capital from insurance companies, pension funds, and private equity investors, and we are not alone. While the program does face various challenges, there is every indication that the use of EB-5 capital in institutional quality investments will be more and more common.

The numbers tell the story. U.S. Citizenship and Immigration Services (USCIS), the federal agency that administers the program, received approximately 2,000 investor petitions in 2010, compared to over 6,000 in 2012 – a 300% increase. For 2013, IIUSA estimates that more than $2 billion of EB-5 capital will be deployed, all at absolutely zero cost to the taxpayer. And because the return on each foreign investor’s capital is partially in the form of an immigration benefit, EB-5 capital is in- expensive – and will be increasingly valuable when market interest rates rise (someday).

This explosive growth has not been without setbacks of the sort that keep institutional investment managers like me awake at night. In recent weeks and months, the EB-5 program has quite justifiably come under increased scrutiny from both regulators and the media. Serious questions have been raised about some EB-5 investment sponsors, as well as the effectiveness of the regulatory oversight structure governing the program. For example, the U.S. Securities and Exchange Commission (SEC) recently teamed up with USCIS to issue an ‘Investor Alert’ linked to a fraudulent EB-5 investment scam in McAllen, Texas. This wasn’t the first such fraud alert. We’ve seen similar scams before, including one that resulted in a major enforcement action in Chicago in which the SEC – and here I don’t mind mentioning they got a critical assist from IIUSA – helping enable the recovery of $149 million for foreign investors who had been defrauded.

Fortunately, USCIS has responded by aggressively beefing up its capabilities. The agency moved the program’s administrative headquarters from California to Washington, D.C., where it opened an Immigration Investor Program Office with 60 full-time employees and 20 economists in May of 2013 [Editors Note: At IIUSA’s EB-5 Advocacy Conference, EB-5 Chief Nicholas Colucci stated that USCIS intends to have 100 staff members by the end of FY2014]. They are also coordinating closely with the SEC, recently issuing the first joint USCIS-SEC investor alert. Finally, USCIS is strengthening inter-agency relationships with the Federal Bureau of Investigation and U.S. intelligence agencies – critical steps to ensure the integrity of the program and protect our national security.

Other financial regulators have also taken note, and I can say from personal experience that the EB-5 business is starting to feel like the regulated investment advisory business I have been in for years. For example, the Financial Industry Regulatory Authority (FINRA), the securities industry’s self-regulatory organization, recently issued formal guidance affirming that EB-5 investment offerings are subject to the same suitability requirements as any other offering an important clarification. IIUSA has been actively collaborating with the North American Securities Administrators Association (NASAA), the umbrella group representing state securities regulators, for the better part of a year to provide state officials responsible for investor protection with accurate information about EB-5. This enhanced regulatory scrutiny, which brings the program into line with the mainstream of private securities offerings, will go a long way toward institutionalizing the use of EB-5 capital.

Despite many growing pains – processing times for individual investors, for example, remain far too long – progress continues apace, and investor interest in the EB-5 program shows no sign of slowing. Regulators are doing their part to protect the integrity of the program – the recent series of high-profile fraud investigations sent an unmistakable message to would-be bad actors – while ensuring it remains an effective economic development tool. And the robust industry growth has led to the creation of a wide range of new investment options for overseas investors to choose from.

The bottom line: this is all very healthy. As an investment professional and chairman of IIUSA’s Best Practices Committee, I am pleased that the EB-5 program’s evolution is toward higher quality offerings from Regional Centers and project sponsors, as well as increasingly rigorous due diligence on the part of investors, lenders, and intermediaries. As a former compliance officer for a broker-dealer and having filled out countless due diligence questionnaires for various institutional investors over the years, I smile when a prospective investor or an overseas marketing agent demands to review the legal documentation for a Civitas EB-5 investment or presses one of my salespeople on how we protect confidential customer data.

In the not-too-distant future, Regional Centers and investment sponsors will find it difficult to compete for scarce EB-5 capital if they cannot prove to the satisfaction of both prospective EB-5 investors and the institutional capital providers that the diligence processes – including project evaluation, investor screening, and securities compliance – are up to snuff. It is the right thing to do. Just as importantly, though, it is a rare institution indeed that will tolerate the headline risk associated with the alternative.

Dan Healy is the Chief Executive Officer of Civitas Capital Group, a leading independent specialty asset management and financial services firm with operating divisions focused on Alternative Investments, EB-5 Funds and Wealth Management. More information can be found at civitascapital.com.

RCBJ Retrospective articles are reprinted from IIUSA’s Regional Center Business Journal trade magazine. Opinions expressed within these articles do not necessarily represent the views of IIUSA and are provided for educational purposes.

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