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The Good, The Bad, and The Ugly - Getting Bad Actors out of the EB-5 Program - SEC Rule 506(d) and Beyond
The EB-5 program is starting to get a somewhat shaky reputation overseas as word spreads on the prosecution of fraudulent project sponsors. First, there was the Chicago Convention Center case in February and then in October, a husband and wife Ponzi-scheme team from Texas. There is one business broker in Florida who is trying to sell direct EB-5 investments – he is a convicted felon and subject to deportation proceedings. I have recently heard rumors of one or more principals at major regional centers who have criminal backgrounds. It’s no wonder that potential foreign investors are becoming aghast at the seeming lack of quality control over who is and is not allowed to participate in the US Immigrant Investor Program. Given that the prosecutorial interest in the EB-5 program is recent, one could only imagine the number of prosecutions if the SEC and Justice Department would have started looking at practices much sooner. At this point, these prosecutions are probably the tip of the iceberg.
It’s high time that we get the bad actors out of the EB-5 program.
Fortunately, congress and the SEC have provided the legal infrastructure for doing so. Under Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, congress required the SEC to create rules to disqualify bad actors from private placements that rely upon Rule 506 of Regulation D, which is the typically relied upon exemption to registration requirements under the Securities Act of 1933. The SEC did so on July 10th of this year:
“‘Bad actor’ disqualification requirements, sometimes called “bad boy” provisions, disqualify securities offerings from reliance on exemptions if the issuer or other relevant persons (such as underwriters, placement agents and the directors, officers and significant shareholders of the issuer) have been convicted of, or are subject to court or administrative sanctions for, securities fraud or other violations of specified laws.” See http://www.sec.gov/rules/final/2013/33-9414.pdf, P.7.
The persons covered under this rule are:
the issuer, including its predecessors and affiliated issuersdirectors, general partners, and managing members of the issuerexecutive officers of the issuer, and other officers of the issuers that participate in the offering20 percent beneficial owners of the issuer, calculated on the basis of total voting powerpromoters connected to the issuerfor pooled investment fund issuers, the fund’s investment manager and its principalspersons compensated for soliciting investors, including their directors, general partners and managing members
See http://www.sec.gov/info/smallbus/sec...ance-guide.htm for the full text of the SEC’s compliance guide.
Under the rule: “Disqualification will apply only for triggering events that occur after the effective date of the amendments; however, pre-existing matters will be subject to mandatory disclosure”. Accordingly, bad actors are getting a free pass for disqualifying events that took place before September 23, 2013. Disclosure of such act is still required, but is that really enough?
Immigrants under the EB-5 program are held to a higher standard. An immigrant who seeks admission to the United States as a conditional lawful permanent resident would be denied entry based on a great number of felonies committed before September 23, 2013. Are we telling the world that it is fair and acceptable to deny entry to felons who have paid their debts to society, but that the same person, if a US citizen, who committed the same crime, is perfectly free to sell EB-5 investments?
If congress will not hold the EB-5 industry to higher standards, then we must impose these burdens on ourselves. With this article, I am calling on IIUSA, all regional centers and all direct EB-5 investment sponsors to make the following pledge and to certify to all their investors: That no person who has ever been convicted of any felony be allowed to hold the position of an officer, director, general partner, managing member or otherwise have control over a sponsor or issuer of EB-5 investments.
I call on all broker dealers and law firms that work on EB-5 projects to conduct the needed due diligence to ensure sponsor compliance with the existing Rule 506(d) and the heightened standards proposed here for all sponsors who agree to the pledge.
We do not need the SEC, Justice Department and state prosecutors to do this job. We can and should do it ourselves. If we, the EB-5 sponsors, do this ourselves, we can get rid of both the bad actors and the ugly projects. Projects can and will fail, that is the essence of risk, which is fundamental to the EB-5 program. An immigrant’s dream should never be dashed because of the bad-faith and ill-intent of criminals in our midst. Every immigrant participant in the EB-5 program should have a fair and fighting chance to realize their dream to walk among us on American soil. Let us work hard, so that the good prevail.
Updated 11-18-2013 at 04:52 PM by EB-5Blog
Are YOU an EB5 Lemming?
By Joseph P. Whalen (October 17, 2013)
“Because of their association with this odd behavior,
lemming "suicide" is a frequently used metaphor in
referenceto people who go along unquestioningly
with popular opinion, with potentially dangerous
or fatal consequences.” 
What “odd behavior” you may ask? Well, I shall endeavor to explain.
These small rodents that inhabit the tundra have been known; at least in pop culture; and at least since the mid-1500s; to do such things as:
· attempt to swim such vast bodies of water that they die trying;
· jumping off a cliff en masse [the most popular image of them];
· following a lousy leader off of that cliff. [also very popular]
If you have ever read any of my musings before then you know I can and will make a point and tie it up with a bow all while relating it to whatever I want. In this case, I want to relate my opinions and feelings about some of the outrageous misconceptions and the behaviors associated with them that I have witnessed both near and far. People around the world want to come to America and live free but some have nobody to file a petition for them. They have no qualifying relative; or eager potential employer that just can’t get along without them. Still others do have kin or a boss but the waiting time may be years which, just won’t suffice. Their only hope is EB5.
EB5 or employment-based fifth preference immigrant visas are for folks willing to take a chance by investing a million bucks and hopefully creating at least ten (10) full-time jobs for qualified U.S. workers. Great! That sounds easy enough; where do I sign up and how is USCIS going to put my money to use to create those jobs?
That last sentence contains three (3) popular misconceptions.
1. That it is easy!
2. You merely hand over the money.
3. The government will use the money to create jobs.
I suppose that some poor souls out there truly believe all three of those myths. Well, I don’t just “suppose”; I know it for a fact as surely as I know that water is wet in its liquid form. Did you notice how I qualified what I was willing to say exactly and precisely what I knew for a fact? If I had merely said “water is wet” then I would be open to challenges from folks who want to argue about such nuisance notions as; ice and steam are “not wet” but they are merely water in another form; ice as the solid and steam as the gaseous, forms of water.
Once “debunking” the error of the obviously flawed moron (me) who declared that it is a fact that “water is always wet”; the great new leader is followed by his or her flock of sheep (or bunch of EB5 Lemmings) into the abyss, for a hefty finder’s fee of perhaps 50K per sucker.
Notice that I added the word “always”. It happens that it was the key element needed by the great new leader (foreign “agent”) to debunk the person urging caution. Not all foreign EB5 agents are unscrupulous. Some are and some are just as confused as MOST people are about EB5. Lastly, some of the foreign EB5 agents truly believe that they understand EB5 and that the misconception de jure, is actually true. There are too many “dead lemmings” in EB5!
EB5 Stakeholders’ vs. USCIS’ “Misconceptions”
EB5 stakeholders may be the intending immigrant investor Petitioners, EB5 “agents”, EB5 practitioners of all sorts, EB5 detractors, Regional Center Applicants, as well as Designated Regional Centers. USCIS is represented by its EB5 economists and business analysts (if any), adjudicators, OCC, management, and of course AAO. The cast of characters is quite large, dauntingly so! I believe it is the sheer magnitude of opinions that is at the heart of the problems in EB5. The adage “too many cooks spoil the broth” has no better real life example than the EB5 Immigrant Investor and Regional Center Program.
I will list and link some examples of situations, cases, notions, and questionable decision-making and leadership; that pushed, pulled, kicked, dragged, or blindly lead some EB5 Lemmings over the cliff:
· In the Carlsson case, the actual on the ground specific project that was happening was insufficient and unsuitable for an EB5 investment of that magnitude. Re-read the case. EB5 Lemmings!
· As the Chicago Convention Center case still crawls to the bitter end, we see that perhaps some “EB5 agents”, hmm, what’s the best way to put it? Oh yes! They LIED through their teeth as they smiled all the way to the bank. But this case also tells us that probably 290 investors did absolutely ZERO Due Diligence—EB5 Lemmings!
· The Chung case, involving the Winters Dairy Farm, had EB5 Lemmings on both sides of the equation. This is best illustrated in the AAO Decision. In this one, CSC was somewhat of a lemming in trying to revisit things inappropriately (they attempted to deny on the issue of multipliers it had previously OK’d). They didn’t have to and should not have gone there. The I-829 could not be approved based on an illegal alien workforce and fraudulent documents submitted. Also, the investment failed when the farm went under! EB5 Lemmings!
· The issue of FTEs (full-time equivalents) was a central problem in TSC and CSC Culture of NO! EB5 Attitudes for years. FTEs are a staple in econometric modeling but USCIS and Legacy INS simply fought it tooth and nail. Since the issue of FTEs ONLY arises in the Regional Center context because it is the context where “reasonable methodologies” arises, that’s where it should stay. The May 30, 2013, Memo, goes a long way towards fixing this problem. It has inadvertently caused a new one. There are folks out there right now trying to pass off the idea that in a non-Regional Center NCE it will be OK to add up part-time jobs and are offering ****ty projects to desperate wannabe immigrants. Watch out for the backlash when USCIS gets blamed for it! Until such time as Congress changes the basic ten (10) full-time jobs requirement, anyone swindled through reference to the Memo will likely sue USCIS for denying their greencards. On this issue, there may be quite a lot of EB5 Lemmings in waiting!
Once a strong leader with a charismatic smile and the accompanying forceful personality figures SOME ANGLE of any sort to swindle the EB5 Lemmings around the world; all hell may break loose. Do me a favor; remember where you heard it first! There are other ways than described.
That’s my two-cents, for now.
 From: http://en.wikipedia.org/wiki/Lemming#cite_note-10 Text is not italicized in original.
 See: http://www.drbeetle.com/lemming.html
 There are MANY more misconceptions but I don’t want to overwhelm the reader.
 At least for this article at any rate.
 Including but not limited to: attorneys, consultants, project developers, brokers/dealers, bloggers, various associations, advocates, many authors, etc… . You know who you are.
 Includes but is not limited to: the press, lobbying groups, certain members of Congress, various associations, so-called advocates, many authors, etc… . You know who you are.
 Visit http://www.slideshare.net/BigJoe5/ where I have at least 9 items posted. Search “Carlsson” 2 ss’s.
The Securities and Exchange Commission announced today the filing of fraud charges against a husband and wife team in Texas who raised capital from EB-5 investors and then failed to invest the capital in the promised job creating businesses. See:
Like the now famous Chicago case (SEC v. A Chicago Convention Center, et al.), the SEC chose to use their authority under the anti-fraud provisions of the securities laws. Also notable was the action given the size of the fraud, just $5 million. This action makes it clear that the SEC is closely monitoring activity in the EB-5 space and willing to invest its limited prosecutorial resources even to go after relatively small instances of fraud or other violations.
Concurrent with the charges, the SEC and USCIS issued a joint alert in which they “warn individual investors about fraudulent investment scams that exploit the Immigrant Investor Program…”
See http://www.sec.gov/investor/alerts/ia_immigrant.htm for the full text.
Particularly notable is the interagency coordination. In this case, “the SEC and USCIS worked together to stop an alleged investment scam.…” The Joint Alert goes as far to recommend to investors suggestions for specific due diligence actions they should take to help avoid being victimized:
For investors in Regional Center sponsored investments:
- Confirm that the regional center has been designated by USCIS
- Obtain copies of documents provided to USCIS
Generally for both Regional Center and Non-Regional Center based investments:
- Request investment information in writing
- Ask if promoters are being paid
- Seek independent verification
- Examine structural risk
- Consider the developer's incentives
- Look for warning signs of fraud
Promises of a visa or becoming a lawful permanent residentGuaranteed investment returns or no investment riskOverly consistent high investment returnsUnregistered investments Unlicensed sellersLayers of companies run by the same individuals
These suggested activities, while directed at the individual investor, should be noted by Broker Dealers who are acting in the EB-5 arena, as areas in which to focus their due diligence activities. FINRA recently provided a letter of guidance to a member Broker Dealer indicating the heightened standards for due diligence requirements in the context of acting as a placement agent for EB-5 investment sponsors. Broker Dealers who fail to undertake the needed due diligence activities consistent with this alert, may find themselves subject to liability and/or sanction. For a recent article on the FINRA letter, see:
Many of the items are simple common sense. Two items, ‘Examine structural risk’ and ‘Consider the developer's incentives’ are typically less examined areas of EB-5 Investments. Examining structural risk is understanding how a transaction really works in terms of its legal mechanics. Many transactions and projects need to have layers of entities to function properly (while this is an area of examination as noted by the alert, by itself, it is not an area of concern). They key is to understand which entities do what for the overall organization. Which receives the investment capital? Which deploy it? Where are the jobs created, and what is the legal relationship between those entities? What are their respective rights and obligations? When an investor (or broker dealer) understands the structure, then they will understand the potential results – what happens to the money, assets and jobs in both good and bad scenarios.
Understanding the developers’ incentives is particularly important as a properly structured transaction can reinforce a self-policing environment. In transactions where sponsors/developers get all of the benefit of the investment out at the very beginning, then the investor must question what incentive there will be to ever repay the investor’s capital. Historically, most EB-5 investor’s capital has been orphaned in their investment vehicles (even where there is no fraud and even when the investor’s I-829 is positive adjudicated). Legally, at the onset of the relationship, transactions cannot be structured to give investor’s redemption rights. In this context, the only way an investor can have a hope of receiving its investment capital returned is if the sponsor is motivated by the incentive structures in the transaction. Look for transactions that are structured so that the investor gets out what they want, before the sponsor gets what it wants. Those are few and far between in the EB-5 program. If the sponsor can only accomplish its financial goals by delivering on the investor’s financial and immigration goals, then the investor will know the sponsor will be hard at work each and every day until their promises are fulfilled.
In all likelihood, this is far from the last action we will see from the SEC. The good news is that they and USCIS are watching and acting. This will help clean up the EB-5 community and result in greater investor confidence and a better program for all those looking to do things the right way.
by Joseph Whalen
There were two non precedent AAO Regional Center decisions posted for each of these two years, as of this writing. The 2012 decisions of Aug062012_01K1610.pdf and Dec042012_01K1610.pdf, are both dismissals of appeals of requests that relied on insufficient or substandard evidence. In the August decision “[t]he director determined that the economic analysis and business plan were insufficient to allow USCIS to approve the application.” In the December decision, “[t]he applicant ...[sought]... approval of an extremely vague proposal that cover[ed] 10 broad industrial categories over a geographic area that includes [REDACTED--...an unknown part...] of the State of North Carolina. The director determined the applicant failed to meet the regulatory requirements outlined for regional centers, including those related to funds committed to the regional center, verifiable detail of indirect job creation, and a discussion of the positive impacts of the regional center on the regional or national economy.”
Just because the second above case pre-dates the Policy Change brought about by the issuance of the final policy memo, don’t get the idea that that last listed aspect will change all that much. While CSC will be prevented from being overly detail oriented and will not be allowed to demand such items as commitment letters in connection with a hypothetical project, as will be revealed, if and when you actually read these 2012 and 2013 AAO non-precedent decisions (if you haven’t done so already), “reasonable methodologies” must be put forth and properly supported. While each and every individual applicant would not be expected to produce their own feasibility studies for their projects, especially their hypothetical projects, verifiable detail always has been and remains available through existing reliable sources such as governmental agencies, industry organizations, or studies carried out or commissioned for other purposes (city, county, regional, or state-wide planning or through University research grants, as examples). An I-924 applicant is never going to be allowed to simply “make up” facts, figures, and statistics out of thin air with zero basis in reality.
Between the time that the above cases and the 2013 cases were decided, USCIS sorted out its EB-5 Adjudication Policy and issued a final Memo on May 30, 2013. The 2013 decisions of JUN122013_01K1610.pdf and JUL192013_01K1610.pdf both cite to and invoke the May 30th Memo. The June case involved an amendment of an Existing Regional Center Designation to expand geographic boundaries and add industries. CSC sought to deny the request but certified its decision to AAO. AAO withdrew the denial and approved the expansion based on “hypothetical projects” which would receive no deference in future adjudications. The July case involved an application for Initial Regional Center Designation. CSC denied, but certified, the July decision to AAO. AAO again withdrew the denial and approved the I-924. AAO again labeled the approval as being based on hypotheticals with zero deference in future adjudications.
I believe that the underlying message to be garnered from studying these cases is this: While the applicant need not always put forth solid shovel-ready specific projects to gain approval, that same applicant must demonstrate competence in their Form I-924 supporting documentation. If one submits their I-924 based on hypotheticals and thereby it is truly based upon “general predictions” based on a “general proposal” it must therefore rely more heavily on its explanation, discussion, display, and demonstration of its “reasonable methodologies” which it intends to utilize in order to predict job creation and/or preservation as well as explain their likely “other positive economic effects” upon the proposed region. I suggest that you treat the “hypothetical-based” I-924 like an acting audition, college admission essay, or job interview. In other words use the I-924 to demonstrate the fact that you have talent, are not a moron, and posses the required knowledge, skills, and abilities (KSAs) not only to succeed in the desired business or industry environments but also to competently run a Regional Center.
Although AAO dismissed the 2012 appeals before the May 30th Memo and then approved the 2013 certified cases, following issuance of the May 30th Memo, not having seen the actual evidence for comparison, I have no idea whether the 2012 cases could have been approved under the changed policy. We may never know. However, substandard and insufficient evidence, and the issue of being extremely vague, have not become desirable or blessed. The 2012 cases could have been supported by such lousy evidence that no amount of policy shifting could have saved them.
That’s my two-cents, for now.
e-mail the author at: firstname.lastname@example.org
By Joseph P. Whalen (September 5, 2013)
The proof is in the end result on the issue identified in the title of this article.
DISCUSSION: The May 30, 2013, EB-5 Adjudications Policy Memo allows the Regional Center to finalized projects, make certain changes to a project and skip filing an I-924 Amendment Application. Many folks out there may have overlooked one critical detail to their detriment when they choose to skip the I-924 Amendment. An approved I-526 Exemplar filed as an amendment means an approved I-924 Application which will result in a specific-project being written-up in an I-924 Approval Notice. A real I-526 filed by an EB-5 investor acting as a guinea pig for the project would only be issued a computer-generated approval notice on their own I-526 visa petition, lacking specific details of the project.
I can envision someone in another country (an “Agent”) holding up a copy of an I-526 approval notice for the “lead” investor in a specific project, i.e., their guinea pig investor, and claiming that it represents a basis for deference to all who follow suit. That might be true, or it might not. It depends on which specific project or even which Regional Center it actually represents as opposed to which project is then being offered to those other potential investors. Am I going slowly enough for everyone? In sum, many foreign based “Agents” in their own home countries, tend to stretch the truth and/or blatantly lie without any remorse.
I’d like to know if USCIS has changed their standard computer generated approval notices for I-526 visa petitions so as to tie it to a particular project, by name, as well as the Regional Center with which it is affiliated. Can anyone out there shed more light on this issue for the rest of us?
If you know of any I-526 Approval Notices that actually specifies the project and/or the Regional Center with which that Approval is affiliated, please share that with me. I will gladly play town-crier with that news and it would only give that project free advertising.
That’s my two-cents, for now.
E-mail me at: email@example.com