John Reilly: EB-5 A Flawed Program With Poor Results
Among the many troubling questions raised by the financial disaster that has befallen the Northeast Kingdom since the government has accused the operators of the Jay and Burke ski areas of operating a Ponzi scheme is one aimed at the heart of the entire financing structure:
Why is the government selling immigration visas to foreigners in exchange for substantial investment in economic development programs?
Acknowledged, this is a region long on natural beauty but short on capital necessary for development and job creation. In the face of such needs, government officials often decide to address the issue by creating incentives to attract investment. The record on many such programs is mixed at best, and in the case of the EB-5 program to attract investment to Burke and Jay it is nothing short of disastrous.
For starters, why is a nation like the United States, founded on principles of equal opportunity for all, granting special immigration status to those who are capable of paying for it? Should we now change the wording of the famous Emma Lazarus poem at the Statue of Liberty to read, “… give me your huddled masses, yearning to be free, and willing to drop a half million to help us develop our ski areas …”
Secondly, are incentives like this a good idea in capital formation? Most economists would say no. In a free market economy, capital tends to flow to where it will achieve its highest return. Incentives designed to encourage benefits external to the underlying investment tend to cloud the picture.
And thirdly, if investors are going to make sound decisions about how to allocate their capital, they need adequate disclosure to help them evaluate the soundness of the investment, how the project managers are doing as stewards of their capital and what type of return they can expect on their investment, beyond the basic incentive in this case of a visa.
This type of disclosure is the province of securities regulators like the federal Securities and Exchange Commission and the Vermont Department of Financial Regulation. Yet in their zeal to attract international investment the architects of the EB-5 program have enabled financiers to solicit investment through private offerings exempt from SEC registration (although the Burke and Jay operators neglected to file for such an exemption as they were supposed to have done). In Vermont the program was overseen not by financial regulators but by economic development officials, at least until improprieties began to surface and the regulators stepped in to straighten out the mess.
While the Vermont case is particularly troubling, it is far from the only case to demonstrate problems in the EB-5 program. Although the regional economic benefit requirement is a modest gain of 10 jobs in exchange for the $500,000 investment demanded, proof of actual direct job creation is inconclusive. A July 2014 Fortune magazine quoted a December 2013 study by the Department of Homeland Security’s inspector general that found that the government “cannot demonstrate that the program is improving the U.S. economy and creating jobs for U.S. citizens.”
Certainly the creation of jobs in the Northeast Kingdom is very much in doubt now, and in fact a number of pre-existing jobs are now in jeopardy as the receiver handling Jay and Burke warns they may need to be shut down imminently due to insufficient assets and cash flow to cover operating expenses.
It’s a lamentable situation. Champions of the program in Vermont like Sen. Patrick Leahy and Gov. Peter Shumlin acknowledge the need for reforms but also defend the oversight, saying it uncovered the problems now being addressed. Too little too late for those who invested in the projects or whose economic livelihood depends on them.
- Vermont EB5 Regional Center
- Jay Peak - Q Burke Mountain Resort, Hotel and Conference Center L.P.
- UNITED STATES SECURITIES AND EXCHANGE COMMISSION
- Peter Shumlin
- Patrick Leahy
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