EB-5 fund administrator required under new RIA transparency measures
By Anayat Durrani
The EB-5 Reform and Integrity Act of 2022 brought with it many changes for the EB-5 industry. One of those changes was adding more transparency measures, which include that New Commercial Enterprises need to retain a third-party fund administrator.
“The goal of these transparency measures is to raise the standard of care for what is required of Regional Centers and Issuers that accept immigrant investment,” says Jill Jones, General Counsel of ICS USA at JTC Americas. “It will help to legitimize the industry and get the focus back on the program doing the good that it was always intended to do.”
Jones says if these new transparency measures are properly implemented, the RIA could reduce or deter incidents of fraud and abuse in the EB-5 program.
“It is too easy for a few bad actors to tarnish the reputation of government programs,” says Jones. “More comprehensive reporting requirements can help weed out those bad actors while allowing Regional Centers who embrace best practices to contribute to the success of the reformed EB-5 program.”
The role of EB-5 fund administrators
Fund administrators are required to perform such tasks as monitoring and verifying fund transfers, preparing financial statements, documenting income and expense allocation, tracking assets, creating reports for investors, performing regulatory administration and compliance support, financial accounting and audit coordination.
“With the passing of this new legislation, we’re seeing a regulator signal that it’s time for EB-5 to get caught up, and, overall, this is certainly a net positive as it boosts investor confidence and will re-enforce the US as one of the top CBI/RBI destinations in the world,” says Bryan Caulkins, founder of Proxy Financial.
An independent fund administrator assumes the role of a liaison between the fund and participants to help EB-5 investors and also to ensure investor interests are safeguarded and adequately processed.
“Not only can these new rules aid regulators in finding and putting a stop to predatory practices, they can also help investors by requiring access to more information about the project, the Regional Center, and how funds are being handled, requiring third party oversight and prohibiting participation in the program by bad actors. The RIA takes great strides in the area of investor protection,” says Jones.
Who can be an EB-5 fund administrator?
Caulkins says the RIA requires a fund administrator to be a Registered Investment Adviser (RIA), an attorney, a CPA or a broker-dealer.
“We, Proxy Wealth Advisors, are a licensed RIA and therefore we qualify to perform these services under the statute. In terms of a fund administrator’s duties, our essential role is to oversee the activity and movement of funds to ensure alignment with the fund’s purpose,” says Caulkins.
Jones says JTC provides “a comprehensive suite of offerings including fund accounting, recordkeeping, escrow and co-signatory services.”
Some may wonder if fund administration comes at a hefty cost to projects, but Jones says the costs of complying with the fund administrator requirements “should have minimal impact.”
She says the fund administrator’s role will be to perform tasks that have always been recognized in the industry as best practices. She says these were things that were to some extent already in place that had reasonable and expected costs.
“And for those pieces that are new, like the co-signatory requirement, the cost can be viewed as an opportunity to minimize costly errors and create efficiencies that may end up saving money in the long run,” says Jones.
How to select an EB-5 fund administration service
When it comes to selecting a fund administrator, Caulkins recommends looking for groups that have an established and successful track record, have EB-5 industry expertise and experience and possess the responsiveness and technology solutions along with the ability to streamline the experience for all stakeholders.
“Finding the right fit here is important as you will work with your administrator, and their tools, throughout the life of your project,” says Caulkins.
Jones says not all fund administrators, such as a traditional private equity fund administrator, are familiar with the intricacies of an EB-5 fund or may not be equipped to handle all tasks outlined in the RIA.
“An EB-5 fund administrator may be tasked with knowing the difference between qualifying EB-5 expenditures and other operating outflows, or keeping records on multiple extra accounts in order to prevent the commingling of investor funds with operating funds, or even tracking immigration-related milestones,” says Jones.
She says an EB-5 fund administrator will now take on the role of “co-signing on all disbursements of investor funds from the new commercial enterprise to the project, in some cases even co-signing on the deployment of funds by the project/developer as well.” An entirely different skill set is required, she says, including knowledge of what may be considered proper expenditures under the offering documents and how to track the immigration milestones.
Due to the change, investors will nowhave access to information they previously wouldn’t have had. Jones says under the RIA, Regional Centers must keep financial records and subject themselves to audits, but also “have to make parts of those records available to the investors during the offering and for five years beyond the last transaction.”
She says the transparency requirements also makes Regional Centers have to publish information “about who may have been paid to source the investors and how much those agents/brokers were compensated.”
While the use of fund administrators is a new feature that came about from part of the transparency measures in the EB-5 program, industry stakeholders feel it can make for a smoother and more successful EB-5 program overall.
“This opens the door for better practices, innovation,” says Caulkins. “And revitalized investor sentiment should make for a vibrant market.”
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