SEC/USCIS Offer Guidance on EB-5 Due Diligence, Adding Growing Body on the Subject

10.07.13 | Archived

EB-5 Due DiligenceOn Tuesday, October 1, the U.S. Securities and Exchange Commission’s (“SEC”) Office of Investor Education and Advocacy and U.S. Citizenship and Immigration Services (“USCIS”) jointly issued an “Investor Alert” warning individual investors about fraudulent investment scams that exploit the EB-5 Immigrant Investor Program.  This alert comes in concert with the SEC taking action to stop a Regional Center in Texas (non-member) from allegedly defrauding EB-5 Investors.  Earlier this week, IIUSA issued a statement of support for the SEC/USCIS inter-agency collaboration to protect the integrity of the EB-5 Program through heightened due diligence.

The Investor Alert contains 14 specific suggestions that investors can use to undertake due diligence on investment opportunities and affiliated partners to protect the safety of their investment and compliance with immigration and securities laws.  All industry stakeholders should take special note of these welcome recommendations from as authoritative a source you can ask for, the SEC:

– Confirm that the regional center has been designated by USCIS. If you intend to invest through a regional center, check the list of current regional centers on USCIS’s website at www.uscis.gov. If the regional center is not on the list, exercise extreme caution. Even if it is on the list, understand that USCIS has not endorsed the regional center or any of the investments it offers.

– Obtain copies of documents provided to USCIS. Regional centers must file an initial application (Form I-924) to obtain USCIS approval and designation, and must submit an information collection supplement (Form I-924A) at the end of every calendar year. Ask the regional center for copies of these forms and supporting documentation provided to USCIS.

– Request investment information in writing. Ask for a copy of the investment offering memorandum or private placement memorandum from the issuer.  Examine it carefully and research similar projects in evaluating the proposal. Follow up with any questions you may have. If you do not understand the information in the document or the issuer is unwilling or unable to answer your questions to your satisfaction, do not invest.

– Ask if promoters are being paid. If there are supposedly unaffiliated consultants, lawyers, or agencies recommending or endorsing the investment, ask how much money or what type of benefits they expect to receive in connection with recommending the investment. Be skeptical of information from promoters that is inconsistent with the investment offering memorandum or private placement memorandum from the issuer.

– Seek independent verification. Confirm whether claims made about the investment are true.  For example, if the investment involves construction of commercial real estate, check county records to see if the issuer has obtained the proper permits and whether state and local property tax assessments correspond with the values the regional center attributes to the property. If other companies have purportedly signed onto the project, go directly to those companies for confirmation.

– Examine structural risk. Understand that you may be investing in a new commercial enterprise that has no assets and has been established to loan funds to a company that will use the funds to develop projects. Carefully examine loan documents and offering statements to determine if the loan is secured by any collateral pledged to investors.

– Consider the developer’s incentives. EB-5 regional center principals and developers often make capital investments in the projects they manage.  Recognize that if principals and developers do not make an equity investment in the project, their financial incentives may not be linked to the success of the project.

– Look for warning signs of fraud. Beware if you spot any of these hallmarks of fraud:

  • Promises of a visa or becoming a lawful permanent resident.Investing through EB-5 makes you eligible to apply for a conditional visa, but there is no guarantee that USCIS will grant you a conditional visa or subsequently remove the conditions on your lawful permanent residency. USCIS carefully reviews each case and denies cases where eligibility rules are not met. Guarantees of the receipt or timing of a visa or green card are warning signs of fraud.
  • Guaranteed investment returns or no investment risk. Money invested through EB-5 must be at risk for the purpose of generating a return. If you are guaranteed investment returns or told you will get back a portion of the money you invested, be suspicious.
  • Overly consistent high investment returns. Investments tend to go up and down over time, particularly those that offer high returns.  Be suspicious of an investment that claims to provide, or continues to generate, high rates of return regardless of overall market conditions.
  • Unregistered investments.  Even though a regional center may be designated as a regional center by USCIS, most new commercial enterprise investment opportunities offered through regional centers are not registered with the SEC or any state regulator.  When an offering is unregistered, the issuer may not provide investors with access to key information about the company’s management, products, services, and finances that registration requires. In such circumstances, investors should obtain additional information about the company to help ensure that the investment opportunity is bona fide.
  • Unlicensed sellers. Federal and state securities laws require investment professionals and their firms who offer and sell investments to be licensed or registered.  Designation as a regional center does not satisfy this requirement.  Many fraudulent investment schemes involve unlicensed individuals or unregistered firms.
  • Layers of companies run by the same individuals. Some EB-5 regional center investments are structured through layers of different companies that are managed by the same individuals. In such circumstances, confirm that conflicts of interest have been fully disclosed and are minimized.

IIUSA will be integrating this SEC guidance in all industry education efforts going forward, with the first opportunity coming up on the October 29, 2013 webinar at 3pm EST titled “Tools for EB-5 Due Diligence” (CLICK HERE TO REGISTER).  IIUSA’s expert panel of speaker will examine industry best practices and present some tools on how to take proper precautions when considering business opportunities in the EB-5 Regional Center industry. This theme will be further broken down into a parallel discussions on immigration and financial due diligence.

As the EB-5 Regional Center Industry’s trade association, it is IIUSA’s duty to maintain open and effective communication channels with governmental and regulatory authorities, such as the USCIS, SEC,Financial INdustry Regulatory Authority (FINRA), and the North American Securities Administrators Association (NASAA), and relay information to our members and to the industry at large. Dissemination of information relating to investor education and safety, thanks to thorough due diligence, is key.

In February, IIUSA published blog postsrelating to investment due diligence tools, resources and outreach from both the SEC and FINRA:

  • The SEC-developed web portal investor.gov offers investors a variety of resources to help navigate the complexities of U.S. securities laws and to avoid financial fraud.  CLICK HERE TO VIEW THE FULL BLOG POST.
  • FINRA, which is an independent organization overseeing all securities firms operating in the United States, created the Broker Check search tool, which allow investors to do background research on FINRA registered brokerage firms and finance professionals. Furthermore, FINRA’s web page Protect Yourself provides educational resources aimed at current and future investors. Tools include an interactive Risk Meter and Investor Alert bulletin. CLICK HERE TO VIEW THE FULL BLOG POST.

Additionally, FINRA issued guidance on the suitability rule (Rule 2111), clarifying that it applies to broker dealers’ assessment of EB-5 transactions, but that the broker can and should assess the immigration benefit among the economic interests of the investor. Rule 2111 requires a broker-dealer to conduct a certain amount of diligence on the issuer to confirm that the securities may be suitable for some investors, and to evaluate each investor’s risk profile to confirm that the securities are suitable for a particular investor.  An article summarizing the FINRA guidance, By IIUSA VP, Robert C. Divine and his colleague Jackie Prester (both of Baker Donselon), was published to the IIUSA blog just last week.  CLICK HERE TO VIEW THE FULL BLOG POST.

In March, IIUSA posted about NASAA’s investor education tools to its website. NASAA, which is comprised of State Securities Regulators, is responsible for “licensing securities firms and investment professionals, such as broker-dealers and investment advisers, registering certain securities offerings, reviewing financial offerings of small companies, auditing branch office sales practices and record-keeping, promoting investor education, and most importantly, enforcing state securities laws. In addition to protecting investors, many state regulators also help small businesses raise money and comply with securities laws.”  CLICK HERE TO VIEW THE FULL BLOG POST.

Lastly, in June IIUSA’s Best Practices Committee recommended a list of best practices to provide guidance to the industry to promote business practices that will foster the growth and success of the EB-5 program. This list, comprising 47 points on matters from Regional Center Oversight, Securities Issues, Escrow, Agents/Marketing, Immigration attorneys and investors relations are meant to provide guidance to regional centers seeking to enhance their operations and provide protection to themselves, investors and other involved parties.  CLICK HERE TO READ THE FULL RECOMMENDATION.

By providing this information to any and all investors through their various websites, the U.S. government is clearly sending a message to investors from all over the world that they are protected under U.S. securities laws, which exist to deter fraud and punish those who partake in it.  It is the responsibility of the investor, however, to perform thorough due diligence on investment opportunities and affiliated business partners.  Thanks to U.S. securities laws, and the outreach and resources of the SEC, FINRA and NASAA, the tools are not hard to find.  Combined that guidance with the recommendation provided by IIUSA’s hard working leadership, committees, and membership to promote ethically sound business practices, there is now a robust body of work with several layers for the industry to turn to for guidance.

Register today for the first installment of the IIUSA Fall Webinar Series:

 “Tools for EB-5 Due Diligence” Webinar- October 29, 2013 at 3pm EST