Ask and ye shall receive, but you will go horribly wrong

Many EB-5 project developers call us and want to obtain from us all of the information we know about the EB-5 Program.  Then they go away and try to do it on their own with often horrible results for themselves and their foreign investors.

EB-5 investors warned about scams

U.S. Citizenship and Immigration Services (USCIS) has issued a warning to EB-5 investors about scams.  One of the scams mentioned was the Chicago convention center.  Read the investor alert here:

http://tinyurl.com/l25b5zq

The Chicago convention center was a $156 million fraud investigated jointly by USCIS and the Securities and Exchange Commission (SEC).  The SEC has become increasingly involved in the EB-5 arena.

FINRA publishes guidance for broker-dealers concerning EB-5 securities offerings

FINRA (Financial Industry Regulatory Authority, Inc.), the largest independent regulator for all securities firms doing business in the United States, has published guidance for broker-dealers in performing due diligence on EB-5 securities offerings or "private placements."  Read a summary by clicking on the URL below:

http://tinyurl.com/pappqva

10 requirements for an EB-5 compliant business plan

Great article written by some friends of mine.  Highly recommended.

http://tinyurl.com/nzpdnlt

Stuck in the mud and spinning away

"The '64 Skylark had a regular differential, which, anyone who's been stuck in the mud in Alabama knows, you step on the gas, one tire spins, the other tire does nothing." - Lisa Vito, as played by Oscar-winning actress Marisa Tomei in the 1992 movie "My Cousin Vinny"

     The tire that's stuck in the mud is U.S. Citizenship and Immigration Services (USCIS) and the tire that's spinning is the Administrative Appeals Office (AAO).  How so?
     The AAO issued two regional center decisions overturning the California Service Center's denial of an application  to amend a regional center's geographic area and approved industries and an application for regional center designation by applying the May 30, 2013, EB-5 adjudications policy memo issued by -- who else? -- USCIS.
     In the first case (decision dated June 12, 2013), the AAO wrote that because the May 30 memo no longer requires regional centers to file amendments to "amend" their geographic areas and approved industries, that application for five states in the Midwest and 12 more industries, was due to be approved.
     In the second case (dated July 19, 2013), the AAO wrote that "verifiable detail" is not required because the May 30 memo now requires only "general predictions" with respect to job creation, capital investment, and timeframe for an EB-5 investment project. Federal law says that regional center applicants must submit a "general proposal".
     True to form, USCIS is not following the law, its own regulations or policy guidance.  So it's stuck in the mud.

FBI raids McAllen TX regional center

Regional center principals allegedly defrauded Mexican investors in a Ponzi scheme that took new investors' money to pay off earlier investors.  See:

http://tinyurl.com/lklpxxh

Cowboys at the border

Dang, Jose, who do these guys think they're protecting?

http://tinyurl.com/mf3tje2

These guys are not professionals; they're just bullies in uniform with guns.  Unfortunately, they are paid with our tax dollars.  More's the pity.

Homeland Security IG investigates USCIS director

USCIS Director Alejandro Mayorkas, President Obama's nominee to be deputy secretary of the Department of Homeland Security, is under investigation by the DHS Inspector General for allegedly helping a Chinese investor get an EB-5 immigrant investor visa after the investor's petition was denied and his appeal rejected.
According to the Associated Press, the matter came to light based upon information obtained from an FBI analyst in the counter-intelligence unit in Washington, D.C.
According to an email message sent by the IG, the complaint against Mayorkas is that he helped Anthony Rodham, the brother of former Secretary of State Hillary Rodham Clinton and the owner of a regional center named Gulf Coast Funds Management, L.L.C., of McLean, Va., to get approval for the Chinese investor's visa after the visa petition was denied and the investor's appeal was rejected.

SEC eliminating prohibition on general solicitation, advertising in certain offerings

Companies seeking to raise capital through the sale of securities must either register the securities offering with the SEC or rely on an exemption from registration. Most of the exemptions from registration prohibit companies from engaging in general solicitation or general advertising -- that is, advertising in newspapers or on the Internet among other things -- in connection with securities offerings.
Rule 506 of Regulation D is the most widely-used exemption from registration.  In an offering that qualifies for the Rule 506 exemption, an issuer may raise an unlimited amount of capital from an unlimited number of "accredited investors" and up to 35 non-accredited investors. Under SEC rules, accredited investors are individuals who meet certain minimum income or net worth levels, or certain institutions such as trusts, corporations, or charitable organizations that meet certain minimum asset levels.

JOBS Act

In April 2012, Congress passed the Jumpstart Our Business Startups Act (JOBS Act). Section 201(a)(1) of the JOBS Act directs the SEC to remove the prohibition on general solicitation or general advertising for securities offerings relying on Rule 506 provided that sales are limited to accredited investors and an issuer takes reasonable steps to verify that all purchasers of the securities are accredited investors. By requiring the SEC to remove this general solicitation restriction, Congress sought to make it easier for a company to find investors and thereby raise capital.
While issuers will be able to widely solicit and advertise for potential investors, the JOBS Act required the SEC to adopt rules that "require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission." In other words, there is no restriction on who an issuer can solicit, but an issuer
faces restrictions on who is permitted to purchase its securities.
The law also directed the SEC to amend Rule 144A under the Securities Act, an exemption from registration that applies to the resale of securities to larger institutional investors known as qualified institutional buyers (QIBs). Under current Rule 144A, offers of securities can only be made to QIBs. Under the new rule, Rule 144A is amended so that offers of securities can be made to investors who are not QIBs as long as the securities are sold only to persons whom the seller reasonably believes are
QIBs.

2012 proposal

Last August, in order to comply with the congressional mandate to implement Section 201(a)(1) of the JOBS Act, the Commission proposed a rule that would remove the general solicitation ban for certain 506 offerings in which sales of securities would be limited to accredited investors and issuers would be required to take reasonable steps to verify such accredited status. After doing so, the Commission received numerous comments, including requests seeking greater clarification on the types of verification that would be considered reasonable under the rule.
Commenters also suggested that the SEC consider measures that they believed would provide additional protections for investors in connection with removing the general solicitation ban. Several of those additional measures identified by these commenters are included in a separate proposal that the Commission approved today.

New rulemaking

Rule 506

The final rule approved on July 10 makes changes to Rule 506 to permit issuers to use general solicitation and general advertising to offer their securities provided that:

The issuer takes reasonable steps to verify that the investors are accredited investors.
All purchasers of the securities fall within one of the categories of persons who are accredited investors under an existing rule (Rule 501 of Regulation D) or the issuer reasonably believes that the investors fall within one of the categories at the time of the sale of the securities.

Under existing Rule 501, a person qualifies as an accredited investor if he or she has either:
An individual net worth or joint net worth with a spouse that exceeds $1 million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence.

An individual annual income that exceeded $200,000 in each of the two most recent years or a joint annual income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.

The determination of the reasonableness of the steps taken to verify an accredited investor is an objective assessment by an issuer. An issuer is required to consider the facts and circumstances of each purchaser and the transaction. Nevertheless, in response to commenters' requests, the final rule provides a non-exclusive list of methods that issuers may use to satisfy the verification requirement for individual investors.
The methods described in the final rule include the following:
Reviewing copies of any IRS form that reports the income of the purchaser and obtaining a written representation that the purchaser will likely continue to earn the necessary income in the current year.
Receiving a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify the purchaser's accredited status.
The existing provisions of Rule 506 as a separate exemption are not affected by the final rule. Issuers conducting Rule 506 offerings without the use of general solicitation or general advertising can continue to conduct securities offerings in the same manner and aren't subject to the new verification rule.

Rule 144A

Under the final rule, securities sold pursuant to Rule 144A can be offered to persons other than QIBs, including by means of general solicitation, provided that the securities are sold only to persons whom the seller and any person acting on behalf of the seller reasonably believe to be QIBs.

Form D

The final rule amends Form D, which is the notice that issuers must file with the SEC when they sell securities under Regulation D. The revised form adds a separate box for issuers to check if they are claiming the new Rule 506 exemption that would permit general solicitation or general advertising.

What's next

The rule amendments become effective 60 days after publication in the Federal Register.

BEA eliminates RIMSII in future years due to budget cuts

See

http://tinyurl.com/kmj5du3

Smart immigration reform

http://tinyurl.com/kco2vv8

USCIS publishes new EB-5 adjudications policy for EB-5 petitions

This is a pdf document.

http://tinyurl.com/yhrw9z

SEC relaxes restrictions on companies' use of social media

     The Securities and Exchange Commission (SEC) says that companies can use Twitter, Facebook and other social media to announce key information as long as they alert investors about which websites they plan to use for such disclosures.

      The SEC said it would apply its disclosure rules to social media and other emerging forms of communication in the same way that it applies those rules to the websites of public companies.

      The announcement stems from a post last July on the personal Facebook page of Netflix's chief executive, sharing company information that the SEC said had not been revealed through more traditional means. The SEC said it did not initiate an enforcement action or allege wrongdoing in that case. -- Reuters

USCIS releases draft EB-5 adjudication guidance

     I was tempted to fire off some comments quickly on the new EB-5 draft policy guidance to show I am out there in front of EB-5 issues.  I'm not, so I waited, and I'm glad I did.  This new draft policy guidance recognizes some basic facts about the EB-5 Program, which is a good thing.
     Read it here.
     I find some language I can agree with, but I still have some disagreements with the draft guidance, and that is troubling, because I am an end-user and have to explain this program to lawyers, investor recruiters, and investors.  This draft guidance shows me that I am not even close to doing this competently.  This guidance and other guidance and memoranda issued by USCIS have always been uniformly bad for the EB-5 Program.  Where USCIS makes pronouncements about EB-5, it always reveals its misunderstanding of how the EB-5 Program is supposed to operate and what standards, requirements, guidance and procedures should apply.
     USCIS is great at quoting law and regulations in its guidance, memoranda, requests for additional evidence, and administrative appeals office decisions, but it is lousy at applying them or even understanding them.  So many of USCIS "impressions" about how the EB-5 Program should work are blatantly confused between the regular (sometimes referred to as the "standalone") EB-5 Program and the regional center statutory version.  They are very different.  Often USCIS doesn't recognize this or even appreciate it.
     This situation is not hopeless, but it's not good.  I come at this with an acknowledged agenda.  I think the EB-5 Program should be managed well and properly, by a federal agency with an economic development mission, for the benefit of the people of the United States.  Not what we have now.  Not even close.
     I was doing well during my first review of the draft policy guidance, which stated law and regulations (as USCIS normally does in the early going in an attempt to prove they know how to copy stuff), until I got to the bottom of page 18 and the top of page 19 (of 25).
     "For an immigrant investor who is investing in a new commercial enterprise that is part of a regional center:
     "o The entity seeking designation as a regional center will file a Form I-924 that, together with the supporting evidence, demonstrates by a preponderance of the evidence that the requirements for a regional center have been met. The individuals who establish the regional center can be, but need not be, the immigrant investors themselves; and,
     "o Once USCIS designates the entity as a regional center, each immigrant investor will file a Form I-526 that, together with the supporting evidence, demonstrates by a preponderance of the evidence that the immigrant investor has invested, or is actively in the process of investing, lawfully obtained capital in a new commercial enterprise in the United States that will create directly or indirectly full-time positions for not fewer than ten qualifying employees."
     The predicate is just wrong, and USCIS mixes up administrative procedures.  This is not at all helpful to an understanding of the process.
     Regulations permit investors to prove that they have created 10 jobs -- direct, indirect, or induced -- if the new commercial enterprise in which they invested is within the geographic boundaries of a regional center and has been adopted as a regional center investment project.  8 C.F.R. § 216.6(a)(4)(iii-iv). 
     Although USCIS seems to recognize this, we have seen few statements that it does.
     There is a very troubling paragraph on page 20 concerning creation of jobs "within a reasonable time".
     "The regulations require that the business plan submitted with Form I-526 establish a likelihood of job creation 'within the next two years.' 8 C.F.R. § 204.6(j)(4)(i)(B), demonstrating an expectation that EB-5 projects will generally create jobs within such a timeframe."
Every EB-5 lawyer knows that the so-called "two-year rule", which USCIS in this paragraph incorrectly identifies as a "law", was literally lifted from the "marriage fraud amendments" wherein an alien who marries a U.S. citizen obtains "conditional residence", which is converted to lawful permanent residence if the alien can demonstrate that a bona fide marriage has existed for two years.  But it gets worse.
     USCIS wrote in that same paragraph:  "Jobs projected to be created beyond that time horizon (that is, more than three years after USCIS approved the petitioner’s Form I-526) will usually not be considered to be created within a reasonable time, unless extreme circumstances, such as force majeure, are presented."
    Strict adherence to this "two-year rule", which bears no relationship to any principles in the business world, sound business practices, or the painfully slow-growing economy, and the corollary "within a reasonable time" rule is neither logical nor helpful.
     Although still very "project-centric" when discussing regional centers, there is one little phrase at the top of page 21 that seems to recognize my regional center's project hosting business model:  " ... [A]n affiliated commercial enterprises's organizational structure."
     USCIS seems to have taken a more reasonable view of "material change".  I write "seems" because it's not clear.  We'll see when some new adjudications start coming out of the California Service Center bunker in the near future.  The agency pulled a definition of "material change" from a denaturalization case.  It has adopted the following:  "A change in fact is material if the changed circumstances would have a natural tendency to influence or are predictably capable of affecting the decision," citing Kungys v. United States.
     The recognition that changed circumstances may not be the fault of the EB-5 project developer(s) on page 21 is a watershed moment in EB-5 history.  Also, for the first time, USCIS has recognized that the law does not require a direct connection between the business plan and job creation in accordance with the business plan.
     "While that position [the business plan and job creation] is a permissible construction of the governing statue, USCIS also notes that the statute does not require that direct connection."  And there is this:
     "Pursuant to this policy, USCIS will no longer deny petitions to remove conditions solely based on failure to adhere to the plan contained in the Form I-526 ...."
     While acknowledging its "deference" policy and recognizing "the fluidity of the business world" and material changes to the business plan after the alien obtained conditional resident status, USCIS states that alien investors who avail themselves of this new flexibility decreases the degree of predictability they would enjoy if they (or project developers) adhered to the business plan.
     I am rarely able to praise USCIS for doing or not doing something, so I take this opportunity to
congratulate USCIS for some tweaks that could actually benefit the EB-5 Program and the national EB-5 community.

EB-5 project developers embrace ‘EB-5 Lite’

     I am a principal in a regional center in the southeastern United States and represent a number of regional centers around the nation. Several years ago, I had just hung up on my umpteenth conference call with project developers interested in the EB-5 Program and using foreign investors’ capital when I had an epiphany. Why did project developers simply disappear after I told them about the costs of participating in the EB-5 Program? Simple. They called me to get money, not to spend money.
     That’s why I developed what I call "EB-5 Lite". The basic approach is to persuade EB-5 economists, business plan writers and translators to cut their normal fees in half to keep the costs of "EB-5 Lite" to less than $10,000. For example, the EB-5 economist, for a project in a regional center, will run the direct jobs or capital investment through a "reasonable methodology", such as RIMSII or IMPLAN, and issue a letter guessing at the indirect and induced job creation. The EB-5 business plan writer will write a 15- to 20-page document, not a 40-page plan.
     Project developers create an attractive brochure with some factual information about the project but heavily relying on photographs. Once completed, I turn this brochure over to translators to translate into Mandarin and Hangul for the Chinese and South Korean markets. I work with project developers on a termsheet that sets out the terms of the deal, including the capital raise from EB-5 investors, the ROI and takeout strategies for the investors.
     Then I package the whole thing up in a merged portable document file and send it to registered investor recruiters I know in China and South Korea. It is the best way I have found to get valuable feedback from the investor recruiters in the marketplace.
     I have been fortunate to be associated with some great EB-5 economists, business plan writers and translators. The greatest benefit of "EB-5 Lite", of course, accrues to the EB-5 project developers, who tell me they love this approach. It doesn’t cost a lot of money and they get something valuable for their money.
     Basically investor recruiters will come back to us with "no, I can’t sell it" to "yes, it looks great", to "if you changed this term and bumped up the ROI, I think I can sell it." They know what sells in the marketplace. Chief among these are big real estate projects. Unfortunately the Chinese and Koreans do not know that the U.S. real estate market — both commercial and residential — will probably not fully recover for three or four more years. Some of these big real estate projects are too big to succeed, in my opinion.
     I focus on small projects — $5 to $20 million, 10 to 40 investors — which produce a product or provide a service that is an absolute necessity in the U.S. marketplace and in today’s slowly recovering economy. Chief among these are assisted living facilities and the dairy industry. The former benefits from today’s demographics, i.e., the baby boomers are retiring and will soon need assisted living care if they don’t already. The latter benefits from a robust return of this industry as well as dairy contamination scares in China.
     Today’s EB-5 world is all about the investors. There are lots of EB-5 investment projects out there. Some are good; some are bad, and it is hard for EB-5 investors and their legal counsel to divine the difference. Due diligence is key. To my colleagues, I say please consult a qualified financial services advisor or broker/dealer to examine the securities offering and business plan for your investors. It is the best money you can spend. I wouldn’t buy a house without paying a few hundred for a home inspection. You shouldn’t put your client into a project without first having it professionally evaluated. Everything from the regional center, to the regional center principals, to the project developer, to the project itself should be scrutinized.
     With "EB-5 Lite" now a new tool in the toolbox, EB-5 project developers who call me no longer complain about the high cost of participating in the EB-5 Program. They now have a way to kick the tires or test the waters, if you will, and find out if their project is going to sell in the Chinese and South Korean marketplaces.

     Note about the author: Boyd Campbell has practiced immigration and nationality law in Montgomery, Alabama, since 1988. He served on AILA's EB-5 Investors Committee for four years, one year as vice-chair and one year as the EB-5 Committee liaison to the California Service Center. He has served as an AILA mentor for many years and is a frequent speaker at AILA national and chapter conferences and seminars. He represents regional centers and is general counsel and director of America's Center for Foreign Investment, the largest regional center in the nation. He is included in The Best Lawyers in America in the field of immigration law, and his law firm is listed in Best Lawyers / U.S. News & World Report Best Law Firms. His website, the Immigration Law Center on the Internet — visaus.com — which provides information about immigration and U.S. visas, has been on the World Wide Web since 1994.

SEC halts $150 Million scheme, charges it duped foreign investors

Read the complaint

     Washington, D.C., Feb. 8, 2013 — The Securities and Exchange Commission (SEC) has announced charges and an asset freeze against an Illinois man and two companies behind an investment scheme it alleges defrauded foreign investors seeking profitable returns and a legal path to U.S. residence through a federal visa program.
     The SEC alleges that Anshoo R. Sethi created A Chicago Convention Center (ACCC) and
Intercontinental Regioal Center Trust of Chicago (IRCTC) and fraudulently sold more than $145 million in securities and collected $11 million in administrative fees from more than 250 investors primarily from China. The SEC alleges that Sethi and his companies duped investors into believing that by purchasing interests in ACCC, they would be financing construction of the World's first "Zero Carbon Emission Zero Platinum LEED certified" hotel and conference center near Chicago’s O’Hare Airport.
     The SEC alleges that foreign investors were misled to believe their investments were simultaneously enhancing their prospects for U.S. citizenship through the EB-5 Immigrant Investor Pilot Program (aka, the EB-5 Program for regional centers), which provides foreign investors an avenue to U.S. residency by investing in domestic projects that will create or preserve a minimum number of 10 jobs per investor for U.S. workers.
     The SEC alleges that Sethi and his companies falsely boasted to investors that they had acquired all the necessary building permits and that several major hotel chains had signed onto the project.  They also provided falsified documents to U.S. Citizenship and Immigration Services (USCIS) — the federal agency that administers the EB-5 program — in an attempt to secure the agency’s preliminary approval of the project and investors’ provisional visas. Meanwhile, Sethi and his companies have spent more than 90 percent of the administrative fees collected from investors despite their promise to return this money to investors if their visa applications are denied. More than $2.5 million of these funds were directed to Sethi’s personal bank account in Hong Kong.
     Swift coordination between the SEC and USCIS has brought the scheme to a halt in its application stage at USCIS. The SEC filed its complaint under seal earlier this week and obtained an emergency court order to protect the remaining $145 million in investor assets that were at risk of being similarly
misappropriated by Sethi and his companies.
     “Sethi orchestrated an elaborate scheme and exploited these investors’ dream of earning legal U.S.
residence along with a positive return on their investment in a project that was not nearly the done deal that he portrayed,” said Stephen L. Cohen, Associate Director in the SEC’s Division of Enforcement. “The good news is that working closely with USCIS, we intervened early and stopped him from getting very far, and the asset freeze preserves nearly all of the money invested.”
     The EB-5 program enables foreign investors to possibly qualify for a green card if they invest $1
million (or $500,000 in a “Targeted Employment Area” with a high unemployment rate) in a project that creates or preserves at least 10 jobs for U.S. workers, excluding the investor and his or her immediate family.
     The SEC alleges that Sethi and his companies used the lure of a pathway to U.S. citizenship to
convince investors to wire a minimum of $500,000 apiece plus a $41,500 “administrative fee” to U.S.
bank accounts. These administrative fees are separate from the investment capital that the EB-5 program requires to be deployed into a job-creating enterprise. More than $11 million in administrative fees were collected with the claim that they were fully refundable to investors if their visa applications are rejected.
     Sethi and his companies have instead been spending those funds.
     The SEC alleges that Sethi submitted false claims about the project to USCIS. Among the phony
documentation that he provided to the agency in seeking preliminary approval for the project under the EB-5 program were a comfort letter from Hyatt Hotels and a backup financing letter from the Qatar Investment Authority.
     The SEC alleges that Sethi and his companies made a number of misrepresentations about the
project to dupe investors. Offering materials stated that investors’ funds would help build “a convention center and hotel complex, including convention and meeting space, five upscale hotels, and amenities including restaurants, lounges, bars, and entertainment facilities.” Sethi and his companies prominently featured in their marketing materials the purported participation of three major hotel chains in the project: Hyatt, Intercontinental Hotel Group, and Starwood Hotels. However, none of these hotel chains executed franchise agreements to include a brand hotel in the project as represented to investors in offering materials. Two of the chains actually terminated prior deals with other Sethi-related entities more than two years before offering materials were circulated to investors.
      The SEC further alleges that offering materials falsely stated that construction would begin in summer 2012 and occupancy of the first tower would occur in early spring 2014. A search of the Chicago building permits database for the project address shows that the only recent permits are for a tent for a purported groundbreaking ceremony held in November 2012, a demolition permit, construction of a fence, and a minor electrical wiring permit.
     According to the SEC’s complaint, Sethi, 29, misrepresented to investors in offering materials that he has “over fifteen years of experience in real estate development and management, specifically in the lodging area.” Offering materials also misleadingly state that the project’s developer Upgrowth LLC has “more than 35 years of experience.” Illinois corporate records show that Upgrowth was organized in 2010.
     The SEC alleges that Sethi, ACCC, and IRCTC violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In addition to the temporary restraining order and asset freeze granted by the court, the SEC’s complaint seeks permanent injunctions and other monetary relief.
     The SEC acknowledges the substantial assistance of USCIS.