State: Scams targeting immigrant investors

State: Scams targeting immigrant investors

EB-5 Visa, EB5 Visa, EB-5 Investment

The Tennessee Department of Commerce & Insurance's (TDCI) Securities Division joins the North American Securities Administrators Association (NASAA) in issuing an investor fraud alert concerning the federal government's EB-5 Program, an initiative aimed at stimulating the U.S. economy through job creation and capital investment by foreign investors.

In the early 1990s, the U.S. Congress authorized the creation of a new type of immigrant visa known as the Employment-Based, Fifth Preference (EB-5) visa. Under the EB-5 program, foreign investors who meet certain eligibility requirements can apply for conditional resident alien status (i.e., a conditional "green card") in the United States by investing in the American economy.

"The EB-5 program has resulted in many new business enterprises and the renewal and preservation of previously troubled businesses," said TDCI Assistant Commissioner for Securities Frank Borger-Gilligan. "Unfortunately, with that success comes an increase in fraud allegations. We encourage foreign investors to thoroughly vet any potential EB-5 investments before committing funds."

To be eligible for an EB-5 visa, a foreign citizen must invest at least $1 million (or $500,000 for certain targeted high unemployment or rural areas) in a commercial enterprise that within two years creates at least 10 new full-time jobs or preserves at least 10 jobs in a pre-existing, troubled business. After two years, assuming the investment has resulted in the creation or preservation of at least 10 jobs, the immigrant investor may apply to become a lawful permanent resident -- and, eventually, may apply for potential U.S. citizenship.

An immigrant investor could invest the funds directly into a new or troubled business, or indirectly through a "regional center" approved for this purpose by the U.S. Citizenship and Immigration Services (USCIS). Most EB-5 visa applicants have chosen to invest through these regional centers. But while the USCIS approves each regional center, the specific investments offered by regional centers generally do not undergo review or approval by any federal or state regulatory agency.

Scammers have preyed upon unsuspecting EB-5 investors through the use of illegitimate businesses or sham regional centers.

The TDCI Securities Division shares the following tips from NASAA to help immigrant investors seeking EB-5 visas better protect themselves.

Do Your Research

l Thoroughly research any potential EB-5 investment, particularly one in which the individual is not personally involved. If considering investing through a regional center, conduct due diligence on the claimed investment opportunity as well as the regional center itself. A list of approved regional centers is available on the USCIS website.

l Monitor the uses of any funds to ensure funds are not directed towards expenses that do not meet EB-5 requirements, such as promoters fees, administrative fees, or (of course) a con artist's own pocket.

l Get it in writing. The sponsor of an investment should have a business plan and offering documents, such as a private placement memorandum, outlining the proposed terms of the investment. Do not invest unless you receive such information.

l Understand how the sponsors/developers of an investment opportunity will be compensated, particularly if they are not investing in the opportunity.

l Understand how the sponsors/developers are incentivized. Are they investing their own money into the projects they are managing? Absence of developers' personal investments could mean their financial incentives are not linked to a project's ultimate success.

l Understand the structure of the investment and any affiliates. If there are layers of entities managed by the same individuals, there may be conflicts of interest that should be disclosed and evaluated. Don't get caught in a shell game.

l Many EB-5 investments help finance real estate developments. Real estate developments require permits and approvals from appropriate zoning or planning authorities. Contact these agencies to verify that permits or approvals have been received.

l If the project involves the sale of land, inquire whether an independent appraisal has been conducted and request a copy. Check local property tax assessments for how property has been valued and whether that value reasonably supports the investment opportunity.

Look for Warning Signs

l Most immigrant investors seeking to take advantage of the EB-5 program presumably do so principally because of the potential path to legal U.S. residency and not because of the potential investment returns on their EB-5 investment. What level of risk are you exposed to? How is your investment protected, if at all?

l No investment promoter should ever promise a visa or permanent residency in exchange for an EB-5 investment. Investment promoters have no ability to make such promises. The EB-5 program does not guarantee a visa will be issued, or that permanent residency will result; EB-5 only provides an avenue for such eligibility.

l Claims of guaranteed returns or low/no investment risk are classic red flags. Every investment involves some degree of risk, and EB-5 investments are usually far from risk-free. If it sounds too good to be true, it probably is.



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