by Reid Thomas and Daniel B. Lundy
Regardless of how the proposed bill by Senator Grassley and Senator Leahy evolves into law, the bar on EB-5 compliance requirements is going to be raised.
This should not be a surprise. EB-5 capital has evolved to be a mainstream source of development financing. It consistently finds a place in the capital stack along with more traditional funding sources. These other financial instruments, and the companies that provide them, are subject to significant regulatory compliance standards.
These requirements are implemented for good reasons. When met, they provide additional security and transparency for investors, help prevent fraud and abuse, and appropriately raise industry standards.
Tracking investment activity and job creation is at the heart of EB-5 compliance requirements. Regional centers must document initial due diligence, investor recruitment, immigrant petition filing, deployment of funds, job creation, I-829 petition filing and repayment of investor funds.
Preparing the necessary data and evidence for successful I-829 filing is one of the main compliance requirements for EB-5 regional centers. Because the I-829 petition carries significant data and reporting requirements, many issuers who did not proactively track this information when the industry took off a few years ago now find themselves scrambling to ensure their investors’ filings will be compliant.
Between the increase in volume of I-829s and the new regulations looming, regional center compliance requirements are set to expand dramatically.
The proposed requirements include:
- Financial Reporting Compliance Requirements
- Annual reporting of all funds received
- Reporting of deployment of funds into NCE
- Reporting of deployment of investor funds into JCE
- Economic Development Compliance Requirements
- Annual accounting of all direct jobs created or preserved
- Project Compliance Requirements
- Filings of material change
- Regional Center Operations Compliance
- Certification on status of regional center principals
- Payment of annual regulatory fund fee
- Status of any pending litigations
- Announced and unannounced site visits and audits by DHS
- Securities Laws Compliance
- Report of all service providers receiving fees
- Securities compliance certification
- Maintenance of policies and procedures for affiliates
These requirements span the life of the project from the subscription phase through development and return of capital, a process that typically lasts about five years or longer. To remain compliant with the new requirements, implementing a deliberate EB-5 compliance plan will be crucial.
At the heart of any compliance program is a system or set of procedures for collecting and preserving documentation evidencing compliance with the governing regulations and policies. In the EB-5 field, this means tracking investment activity and job creation. Regional centers need to establish and follow procedures for documenting every step of the process. From initial due diligence on a project, to recruiting investors and filing immigrant petitions, to deployment of funds and job creation, and finally to the filing of investor I-829 petitions and the repayment of investor funds, appropriate records must be kept. USCIS is working actively with the SEC and the Treasury Department to ensure that projects are creating jobs as the program intended and that the level of transparency provided to all stakeholders is consistent with the best practices in the broader financial services industry. Audit and reporting requirements are therefore likely to focus on the flow of funds and the sales process, including whether regional centers and related commercial enterprises are making full disclosures to investors, deploying capital in the manner described to investors and in USCIS filings, and whether escrow terms or other investment terms are being violated.
At a minimum, a good compliance program is one that is designed to allow a regional center to handle an audit or site visit, not just meet current reporting requirements. A compliance consistent with best practices, however, not only meets the above standard but also improves the operating efficiency of the regional center while enabling them to provide investors with the evidence they need to successfully file I-829 petitions to remove the conditions on their residence.
As industry regulation continues to grow, a robust EB-5 compliance program is likely to go from a best practice to a minimum requirement for regional centers hoping to remain viable in the long term.