First Ever SEC Enforcement Action Against an EB-5 Immigrant Investor Regional Center

imagesBy: Wassem M. Amin

Overview of the EB-5 Program

Recently extended by President Obama, the Eb-5 Immigrant Investor Pilot Program provides a pathway to U.S. citizenship for foreign nationals by investing in domestic projects that will create or preserve a minimum number of jobs for U.S. Workers.  The program is administered by the United States Citizenship and Immigration Services (“USCIS”) and provides that foreign nationals may qualify to obtain a green card if the individuals invest $1,000,000 (or at least $500,000 in a “Targeted Employment Area”-i.e., a high unemployment or rural area), creating or preserving at least 10 jobs for U.S. workers, excluding the investor and his or her immediate family.

Under the EB-5 Program, a project developer may apply to be designated as a “Regional Center” by the USCIS.  If approved, this allows the developer to raise capital from foreign nationals while at the same time enabling the foreign investors to obtain permanent residency.  The benefit to the developer, or Regional Center, is usually minimal cost of capital (ROI on these projects are usually negligible) and the ability to charge the investor an “administrative fee.”  Most Regional Center investments are structured as Limited Partnerships, where the investor is sold a limited partnership interest and the developer is the general partner.

The SEC Enforcement Action

In the first-ever enforcement action against an EB-5 Regional Center, the SEC alleged that a Chicago-based Regional Center, through its owner, Anshoo Sethi, fraudulently sold over $145 million in securities and collected an additional $11 million in administrative fees from more than 250 investors.   However, according to the Complaint, the project, purportedly for a hotel development, was non-existent, and the investors (mostly from China) were duped on the basis of false and misleading information from Sethi.

To obtain USCIS approval for the Regional Center, Sethi made “materially false and misleading statements and provided falsified documents” to secure preliminary approval for the project and the investors’ provisional visas.  For example, Sethi forged a document to purport that the Qatar Investment Authority (“QIA”), a sovereign wealth fund, was guaranteeing the funding of the project in the amount of over $340 million–a claim that was denied by the QIA.

By the time the SEC caught up with Sethi, he had spent over 90% of the $11 million collected in administrative fees.  However, the SEC was able to obtain an emergency order freezing all remaining funds.   The foreign investors, of course, never received a visa, and most likely will not be able to recover the administrative fees misappropriated by Sethi.

Having personally worked with several Regional Centers on behalf of foreign investors, most are legitimate and very reputable developers.

Implications

The Association to Invest in the USA (“IIUSA”), a trade group which advocates on the behalf of Regional Centers nationwide, lauded the SEC’s enforcement action.  As the use of EB-5 investment capital continues to rise, the need for oversight is greatly enhanced.  Current FY ’13 forecasts estimate that EB-5 foreign direct investment will account for over $2 Billion.  Since  2005, the program has raised over $6 billion in capital and added over 95,000 U.S. jobs.

It is likely that, due to the growing recognition of the program, dishonest individuals, such as Sethi, will attempt to use it to defraud foreign investors.  Foreign investors need to be diligent in their research and vetting process of such projects.  Not surprisingly, counsel for the foreign investors usually plays an integral role in this process.  However, unlike a traditional private offering, an attorney evaluating a Regional Center’s offering documents needs to be well-versed in, not only business and securities laws and regulations, but Immigration law as well.  It is a unique intersection of two areas of the law–both with their own complex regulatory and statutory regime.

Below is an outline of the USCIS requirements for a foreign investor to qualify for an EB-5 visa, followed by a list of typical offering documents which I have seen from Regional Centers.

EB-5 Eligibility (Qualification of Foreign Investor)

The EB-5 employment-based immigrant visa is designated for foreign investors in new commercial enterprises.  There are 10,000 annual visas in this category (this quota has never been met).  This category covers two major types of investors: (1) those who invest in targeted employment areas ; and (2) those who invest anywhere else .  A targeted employment area is defined as (1) a rural area; or (2) any area experiencing high unemployment of at least 150% of the national average rate.

Criteria for Qualification:

    1. Investment of at least $500,000 (if in a targeted employment area) or $1,000,000 if any other area;
    1. Required capital must be placed “at risk” for the purpose of generating a return on the capital (Actual commitment of the capital is required);
    2. The enterprise must create full time employment for not less than 10 U.S. workers (includes citizens and permanent residents, but not immediate family members of the investor);
    1. Investment must be in a “new commercial enterprise,” defined as: (1) creating an original business; (2) by buying and reorganizing an existing business; OR (3) investing in an existing “troubled business”, created after November 29, 1990, if the capital infusion will result in, at least 40% increase in net worth or number of employees;
    2. Capital must be obtained through lawful means; and
    3. Investor must be engaged in the management of the enterprise, through either day to day management or policy formulation (inapplicable if through a Regional Center).

Immigration Filing Requirements:

Amount of Capital Invested – To show that the petitioner is in the process of investing $1million or $500,000 (targeted area), petition must be accompanied with:

    1. Bank Statements showing amounts deposited in the United States business accounts for the enterprise (or held in an irrevocable escrow account);
    2. Evidence of all the assets purchased in the United States;
    1. Evidence of all property transferred from abroad for use in the US enterprise, including applicable commercial entry documents and fair market valuations; or
    1. Evidence of Monies transferred to the new commercial enterprise in exchange for shares of stock (voting or nonvoting, common or preferred) or convertible debentures.

Lawful Means Evidence – to prove the investor’s funds are derived from a lawful source, the investor must show evidence such as:

    1. Foreign business registration records;
    1. Corporate, Partnership, and personal tax returns;
    1. Evidence identifying any other source of capital; OR
    1. Certified copies of judgments or evidence of all pending civil or criminal actions involving monetary judgments against the petitioner.

Job Creation Evidence Required – to show that the new commercial enterprise will create not less than 10 full time positions for qualifying employees, the petition must be accompanied by:

    1. Documentation consisting of photocopies of Form I-9, tax records, or other similar documents for 10 employees (if already hired); OR
    2. A Copy of a comprehensive business plan showing that, due to the nature and projected size of the new commercial enterprise, the need for not fewer than 10 employees will result, including approximate dates, within the next two years, when such employees will be hired.

Management – Evidence that a petitioner is or will be engaged in management (day to day or policy formulation), the petition must be accompanied by:

    1. A statement of the position title that the petitioner has or will have in the new enterprise, and a complete description of his duties;
    2. Evidence that the petitioner is a corporate officer or holds a seat on a corporate board of directors; OR
    3. If the new entity is a partnership, evidence that the petitioner is involved in management or policy-making.

Targeted Employment Area

    1. Evidence that the metropolitan statistical area, a specific county within such an area, or a county in which a city or town with a population of 20,000 or more is located, has experienced an average unemployment rate of 150% of the national average rate; or
    2. A letter from an authorized body of the government or political subdivision of the metro statistical area, or of the city or town with a population of 20,000 or more in which the enterprise is principally doing business, has been designated a high unemployment area.

Typical EB-5 Regional Center Offering Documents:

    1. Project Summary Sheet
    1. Memorandum of Terms (Term Sheet)
    1. Private Placement Memorandum
    1. Partnership Agreement
    1. Subscription Agreement
    1. Targeted Employment Area Designation
    1. Business Plan(s)
    1. Approved Economic Impact Report
    1. Escrow Agreements for Subscription Fees & Capital Contribution
    1. Completion or Performance Bond
    1. Payment Bonds
    1. USCIS Regional Center Approval Letter
    1. Investor Qualification Questionnaire
    1. Brochure(s) and other marketing material

 

Disclaimer: This article is for informational purposes only and it is not intended as legal advice.  Their are many other factors that may impact an applicant’s eligibility.  Consultation with a knowledgeable Immigration and Corporate Attorney is important.  For more information, please contact Wassem M. Amin.

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