EB-5 Investment Fraud

In 1990, the U.S. Congress created the Immigrant Investor Program, more commonly referred to as “EB-5,” with the intention of stimulating the U.S. economy through job creation. Under the EB-5 Program, a special category of immigration visa was created for high-net-worth international investors, in order to encourage foreign investment in U.S. business that creates jobs for U.S. workers.

Most investors in the program, approximately 80%, come from five (5) countries: China, South Korea, Taiwan, Hong Kong, and the United Kingdom. In 2014, of the 10,692 EB-5 visas issued, approximately 85% were for Chinese nationals.

Essentially, the EB-5 Program offers a method for foreign nationals to obtain a green card through investing in a “commercial enterprise” in the U.S. In exchange for investing in a commercial enterprise that creates jobs for U.S. workers, foreign nationals and their family members then become eligible in due course for permanent residency in the United States.

Investment Avenue Options:

While the program has evolved a good deal since its inception in 1990, there are currently two ways for foreign investors to obtain an EB-5 visa:

• Direct Investment: investing capital in a new or existing commercial enterprise that creates jobs; or

• Investment in a Regional Center: investing capital in a “Regional Center,” which is a government-approved firm that actively manages investor funds, as well as the immigration approval process. A Regional Center is defined as “any economic unit, public or private, which is involved with the promotion of economic growth, including increased export sales, improved regional productivity, job creation, and increased domestic capital investment.” 8 C.F.R. § 204.6(e) (2015).

Benefits of Investing in a Regional Center:

Investing capital through a Regional Center offers several benefits to the EB-5 investor, including:

• Ability to Count Both Direct and Indirect Jobs for Job Creation: if an EB-5 investor chooses Direct Investment, then only direct jobs are eligible to meet the job creation criteria set forth in the EB-5 Program -- direct job creation is defined as the result of an investment which has created and sustained at least ten (10) new identifiable jobs over the course of a two-year period.

  However, under the Regional Center Program, investors may satisfy the job requirement mandate by also showing indirect job creation from the pooled funds of all investors who have committed capital to the project.

• No Need to Participate in Management: by investing in a Regional Center, a foreign national seeking an EB-5 Visa will not need to be involved in the day-to-day management of the business.

Minimum Capital Requirement for EB-5 Investor:

• $1,000,000: whether the EB-5 investor chooses a Direct Investment or investing in a Regional Center to secure a pathway to a permanent residence visa, the investor will need to make a qualifying capital investment of at least $1 million;

• Targeted Employment Area / $500,000: the $1 million investment threshold is lowered to only $500,000 if the investment is made in a Targeted Employment Area (TEA) in the U.S. and in a new commercial enterprise that meets job creation requirements;

  • TEA defined: a Targeted Employment Area is an area which, at the time of investment, is in a rural area or an area with an unemployment rate at least 150 percent of the average national unemployment rate.

Unfortunately, the EB-5 Program has been particularly susceptible to fraudulent investment scams. Accordingly, in late 2013, the Securities and Exchange Commission’s (“SEC”) Office of Investor Education and Advocacy, working in conjunction with the United States Citizenship and Immigration Services (“USCIS”), issued an Investor Alert and undertook emergency enforcement action, aimed at warning individual investors about the potential for fraud and other abuses associated with the Immigrant Investor Program (EB-5).

In this regard, the SEC cautioned potential EB-5 investors to remain mindful of potential fraudulent scams and take the following steps as a safeguard:

• Confirm that a Regional Center has been designated by USCIS: a foreign investor considering investing in a Regional Center should first check the list of current centers on USCIS’s website. Even if the center is on the list, the investor should remain cautious because USCIS has not endorsed the regional center or any investments it offers;

• Obtain copies of documents provided to USCIS: Regional Centers are required to file a Form I-924 to obtain USCIS approval and designation, and must submit an information supplement (Form I-924A) at the end of every calendar year. An investor should ask USCIS for copies of these documents;

• Request investment information in writing: an investor should ask for a copy of any investment offering or private placement memorandum, often referred to as a PPM, from the issuer. If the investor does not understand the information, or if the issuer is unwilling to further discuss or answer any questions (ideally in writing), then the investor should not invest;

• Ask if promoters are being compensated: an investor should inquire how consultants, promoters, attorneys, or agencies are being compensated for recommending or endorsing the investment. The investor should be skeptical of any inconsistencies between the information in the offering documents versus information relayed by the promoter;

• Seek independent verification: an investor should seek independent verification (e.g., if the investment involves commercial real estate construction, then the county records can be checked to determine if the issuer has obtained proper permits, or whether the local property tax assessments correspond with the values associated with the property by the issuer and Regional Center;

• Examine structural risk: particularly where an investor is investing in a new venture or business, the investor should carefully examine any loan documents or related offering documents to determine what assets (if any) and debts are associated with the enterprise, as well as to determine if any loan is secured by any collateral pledged to investors;

• Consider the developer’s incentives: often, EB-5 Regional Center principals (owners) and developers will make capital investments in the projects they manage. Therefore, an investor should understand that for a project in which the principals and developers have chosen not to invest, then their financial incentives may not be linked to the success of the project;

• Look for warning signs of fraud: an investor should beware of the investment if any of the following hallmark signs of fraud are present –

  • Promises of a visa or guaranteed lawful permanent residency: while investing through the EB-5 Program makes one eligible to apply for a conditional visa, there is no guarantee that USCIS will grant a conditional visa, or subsequently remove the conditions on an investor’s lawful permanent residency;

  • Guaranteed investment returns or no investment risk: an investor should be highly suspicious of a guaranteed return on investment or statements concerning no investment risk;

  • Overly consistent and/or high investment returns: because investments tend to go up and down in value over a period of time, an investor should be suspicious of any claim regarding an investment that provides steady and high rates of return, regardless of market conditions;

  • Unregistered investments: even though numerous Regional Centers are designated as such by USCIS, most new investment opportunities offered through Regional Centers are not registered with the SEC, or any state securities regulator. In these circumstances, an issuer may not provide investors with access to key information about a company’s management, products, services, and financial condition. Accordingly, an investor should seek to obtain additional information about the company and remain cautious;

  • Unlicensed sellers: federal and state securities laws require that investment professionals and their firms be properly registered and licenses in order to sell securities products. An EB-5 investor should be aware that Regional Centers do not satisfy this requirement. Furthermore, an investor should understand that many fraudulent investment schemes involve unlicensed individuals and/or their unregistered firms;

  • Multiple layers of companies run by the same individuals: some EB-5 Regional Centers have a complex corporate structure in which layers of different companies are managed by the same individuals. In these circumstances, an investor should seek to confirm that any conflicts of interest have been fully disclosed and that safeguards are in place to minimize any such conflicts.

The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience representing investors in a variety of forums who have suffered considerable losses due to investment fraud and related misconduct. If you or someone you know has been victimized by EB-5 investment fraud, you may contact us via the contact form on this website, at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.