RCBJ Retrospective: A Proven Compliance Platform will be Key to EB-5 Success in 2016

06.27.16 | Archived

Proven Compliance

Last year’s EB-5 media was dominated by negative stories and talk of program reform leading up to the last program sunset date. Proposed reforms were put forth in several draft bills, notably including S.1501 – American Job Creation and Investment Promotion Reform Act of 2015, the draft legislation based on S. 1501, S.2415 – EB-5 Integrity Act of 2015, and H.R. 4530 – EB-5 Integrity Act of 2016.

The different drafts of proposed legislation contained many controversial items, such as how to define a Targeted Employment Area (TEA) or when the proposed changes would go into effect; however, the legislative drafts also contained many undisputed provisions related to integrity and compliance. On these points, the industry largely agreed and the drafts remained largely consistent. As such, the draft legislation provides a preview of changes in the EB-5 program that will inevitably become law. The EB-5 industry will likely have to adapt to and accept these changes, particularly in reference to new or enhanced compliance or integrity requirements for Regional Centers and their projects and companies. The enhanced integrity provisions include extensive annual reporting requirements and certifications, agent monitoring, and background checks for Regional Center principals/owners, among other requirements.

Enhanced integrity measures are good for all industry stakeholders, but, it’s only good if the project, and by extension the Regional Center for that project, implements appropriate measures to ensure compliance. The stakes are high. Noncompliance could result in a Regional Center’s designation being terminated and an investor’s immigration petition being denied and investment being lost. Noncompliance by a Regional Center negatively impacts all involved parties.

The past standard for maintaining compliance is no longer going to be good enough.

Some key compliance components that Regional Centers will need to focus on moving forward include:

Ability to pass a USCIS audit – With or without legislative mandate, the USCIS will begin performing site visits to Regional Centers to audit their compliance with the law. For a successful audit, the Regional Center needs to maintain accessible records, including evidence of job creation, amount and use of foreign capital invested, agreements/contracts with promoters, and evidence of policies/procedures in place to ensure compliance with securities laws.

Ability to meet the annual filing requirements – The proposed legislation includes much more comprehensive annual reporting than the industry has seen in the past. The Regional Center would still be required to report the details of foreign capital infusion and use for job creation, but they’d also be required to provide annual certifications that no one involved with it or its associated companies has been convicted of criminal or civil fraud or violated securities or banking laws or various other criminal or civil offenses.

The RC would also be required to provide for each New Commercial Enterprise:

  • Accounting of aggregate foreign capital in each project
  • Description of capital being used
  •  Evidence that 100% has been committed to the project
  • Detailed evidence of progress
  • An accounting of aggregate direct jobs created/preserved
  • To the best of the Regional Center’s knowledge, for all fees collected from investors in connection with the Regional Center, New Commercial Enterprise, and Job Creating Enterprise, including loan management fees:
    • Description
    • Accounting of entities received, including promoter, finder, broker-dealer
    • Purpose
  • Material changes to investment or offering documents
  • Certification that the statements are accurate after due diligence

The USCIS has already taken steps to enhance its compliance oversight over Regional Centers and projects before any legislation is enacted. These include:

  • More than doubling staff in the Fraud Detection and National Security Unit
  • Creating new Regional Center Compliance Unit
  • Developing audit program to increase Regional Center oversight
  • Announcing commencement of interviews of I-829 petitioners, requiring Regional Centers and projects to provide updated information to the USCIS

The Regional Center would certify that each person involved is a U.S. national or lawful permanent resident; no foreign government entity provided capital to or was directly involved with the ownership or administration of the Regional Center; neither the Regional Center nor anyone associated with it is barred from offering securities; and all parties associated with the Regional Center remain in compliance with securities laws.

Financial strength of the RC – Under proposed laws, cost of owning a Regional Center is going to increase significantly. In addition to the cost of the additional back-office reporting and recordkeeping, Regional Centers will be forced to fund the incremental efforts of the USCIS, including site visits, by paying considerable annual fees. For groups who operate Regional Centers in multiple states, cost on an annual basis will be substantial. Failure to meet the financial obligations will result in the Regional Center being terminated.

While this is a significant increase in the compliance obligations, it serves to bring EB-5 closer to the standards imposed on the management of more traditional fund industries, such as Private Equity and hedge funds. EB-5 is growing up, and going forward, we can expect to see even more consistency in the oversight of this program and other financial industry sectors.

Just like these other sectors, Regional Centers will need procedures in place to collect information across multiple areas of operation for accurate reporting. They will need to be prepared to institute procedures for continual monitoring of their securities offerings, promoters, and associated businesses to enable timely fulfillment of their annual reporting requirements. Regional Centers will no longer be able to fulfill compliance requirements with a burst of activities come year end.

The model Regional Centers will seek out compliance experts to help establish compliance policies/procedures in accordance with expected legislation and will also have implemented systems to accurately track and maintain required information long before any change in legislation takes effect. Best practices will lead them to implement a state-of-the-art, technology-enabled compliance platform.

These increased compliance standards serve to protect all stakeholders and, in particular, investors. Aligning the compliance standards of the EB-5 industry around proven models in other sectors and focusing on protecting the investor is a good thing for EB-5.

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