Follow-up to EB-5 Coalition Meeting in Washington D.C. on April 13, 2016
I attended the EB-5 Coalition meeting in Washington, D.C. on April 13 and was a panel member along with several distinguished EB-5 experts. The purpose of the panel was to address the proposed governmental reforms to the EB-5 Program and what would be best for the EB-5 industry, as well as what is practical under the current climate of EB-5. It is noteworthy that the conference took place before the publication of the disastrous SEC enforcement action against Jay Peak in connection with all of their offerings.
The major takeaways are the following:
- An acknowledgment that the EB-5 Program does need certain reforms and integrity measures to assist in promoting the credibility of the Program given the political climate and the fact that it is very important to try to minimize the amount of bad actors in the industry, the transactions that are undertaken without proper diligence and supervision, and the elimination of projects that do not satisfy reasonable feasibility standards.
- Focus on solutions to the various immigration issues involving TEA designations, visa quotas and the like. It was acknowledged that there will need to be a compromise solution that will not otherwise have a serious impact on the viability of the Program, yet provide more guidance from an immigration standpoint. Many solutions were suggested that included methods of effectively increasing the visa quotas by creating special classifications of projects and/or borrowing from unused visas in other immigration categories.
- From an integrity standpoint, the EB-5 Securities Roundtable, for which I am a member, presented a position paper that among other things provided the following considerations:
- Establishing definitions for many of the generic terms that were not actually defined to provide clarity and consistency.
- Clarification that not every party, including the regional center, is an “issuer” if they are not actually involved in raising funds in connection with securities offering. Many regional centers do not undertake the fundraising process in connection with the Program.
- Regional Center Responsibilities. The Roundtable was very concerned about imposing unnecessary and burdensome obligations on the regional center that would be either expensive or even potentially impossible to comply with. It was recommended that the regional center certification should be based upon reasonable diligence and reasonable reliance on other professionals to provide guidance and assistance in the entire process. Surely the regional center should be able to rely upon professionals such as immigration counsel, corporate securities counsel, the economist, the business plan writer and the escrow administrator with respect to the various components of the offering in order to insure compliance with SEC rules and regulations. Otherwise, as currently stated, there could potentially be strict liability on the regional center for any deficiency even if the regional center acted in good faith.
- Promoter Registration. Confirmation that only those parties involved with the active solicitation of investors would be required to register.
- Registration Process of Foreign Agents. The concern here is that the new legislation would require foreign agents who are classified as Promoters would need to register with the Department of Homeland Security. It is unclear whether this registration would automatically subject foreign agents to U.S. jurisdiction. Certain of the members of the Roundtable have raised the issue that expanding the jurisdictional reach through registration that could result in foreign agents being automatically sent to service of process could have a very chilling effect on the industry, in particular in China. This is an open issue that will need to be addressed in the future.
- Modifications of the “bad actor” exclusion to delete from the bad actor definition:
- Attorneys that have been suspended and then reinstated by the applicable bar; and
- The provision that entering into a consent order with a government agency that provides for an order that “prohibits fraudulent, manipulative or deceptive conduct” should not be a factor since virtually every consent decree has that language. Most fraud cases involving SEC action have in part resulted from the lack of independence between the regional center/manager/general partner who controls the NCE and the funding of monies to the developer. This concept also applies to the equity model as well as witnessed by the Jay Peak situation.
- An addition to the proposed legislation to create a definition of “at risk” so that the industry will have guidelines to redeploy funds in a manner that is not subject to the current ambiguity given the fact that USCIS has yet to provide guidelines. The proposed definition is as follows:
- “AT RISK. The term ‘at risk’ means exposure of Capital to a chance of loss and opportunity for gain, however great or modest (so long as not nominal or sham). A guarantee of repayment or redemption of Capital or of a return on Capital by a New Commercial Enterprise or Issuer to its EB-5 Investors shall render that Capital not At Risk. For purposes of clarity, Capital shall still be deemed At Risk if there exists a contractual commitment, security, collateral, guarantee, or other undertaking intended to be used to fund the repayment or redemption of that Capital or a return on that Capital to the New Commercial Enterprise by a Job Creating Entity, affiliate of a Job Creating Entity or of a New Commercial Enterprise, or unaffiliated third party.”
The day after this conference the Jay Peak bomb shell hit with the SEC action taken against the principals and their affiliated entities. This case has had an immediate impact on both Congress and the EB-5 industry as a whole, including the foreign migration agents. It is difficult at this time to predict the fall-out from this pending action.
The Jay Peak matter further supports the need for enhanced integrity measures as well as the need to have independence between the developer and the borrower and/or agent that distributes or loans investor funds to the developer.
- Ronald R. Fieldstone
- U.S. Citizenship and Immigration Services
- UNITED STATES SECURITIES AND EXCHANGE COMMISSION
- Saul Ewing Arnstein & Lehr LLP
- Jay Peak - Q Burke Mountain Resort, Hotel and Conference Center L.P.
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