How EB-5 due diligence can help detect fraud -

How EB-5 due diligence can help detect fraud Staff

By Marta Lillo

The recent Securities and Exchange Commission (SEC) lawsuit, which involved a Nevada developer and an EB-5 regional center, serves as a reminder of the importance of EB-5 due diligence

The case illustrates what could happen to EB-5 funds if not handled properly. 

The lawsuit alleges that the developer and firms used EB-5 investors’ capital as collateral for unrelated real estate debt rather than for the intended construction of a nursing home project.

According to the SEC complaint, about $10 million of EB-5 investors’ funds pledged for four years, between March 2017 and February 2021, were allegedly used by Los Angeles real estate developer JL Real Estate Development Corporation and EB-5 offering and developing entities Nevada Skilled Nursing Lender, LLC (lender) and Nevada Skilled Nursing Development, LLC, in an unrelated real estate venture.

The SEC complaint highlights a significant issue: What’s included in the EB-5 project offering documents

“The Nevada Project’s offering documents did not disclose to investors that investor funds could be used by or for JL Real Estate Development Corporation. Nor was it disclosed that investor funds would be or were at risk as pledged collateral for an unrelated real estate debt. While these funds were allegedly pledged as collateral, they were unavailable for their promised use – the construction of three skilled nursing facilities in Las Vegas,” said the SEC in a press release about the lawsuit.

To date, the Nevada project has not been completed as originally designed, and none of the 28 EB-5 investors that had pledged funds have received their EB-5 visa from their investment. 

As this case took place before the Reform and Integrity Act of 2022 (RIA) implementation but came to light in 2024, there’s concern in the EB-5 industry that due diligence in offering documents would not be enough and that similar situations are yet to be detected. In this case, an SEC investigation led to the complaint.

EB-5 attorney Robert Cornish, founder and manager of the Law Offices of Robert V. Cornish, Jr., PC, explains that it is challenging to track fraud cases like these but that obtaining information from public records and track records is still possible.

“Frauds like this are difficult to track given that wrongdoers necessarily seek to cover their tracks through being opaque.  However, there were likely public records of liens, loans, and property dispositions in which the principals of the EB-5 Regional Center were involved.  In this regard, it is often useful to obtain information on the other corporations and entities in which developers and others are involved and continually monitor them, as well as newly formed entities as well.”

Red and green flags to prevent EB-5 project fraud

EB-5 attorney Dennis Tristani, the managing attorney at TristaniLaw, LLC, explains that EB-5 investors can prevent potential fraud by thoroughly looking into the track record of developers and regional centers, not just the project documents. 

“For investors looking at regional center projects, working with projects and regional centers that have good track records, conservative investment approaches, and a history of I-829 approvals/repayment to investors is a good place to start.”

It is important for EB-5 investors to research the project’s track record, construction stage, and dependency level on EB-5 capital. This helps to ensure their EB-5 capital is safe.

In a recent webinar sponsored by EB-5 Investors Magazine, EB-5 professionals explained that projects that rely solely or heavily on EB-5 funds are risky. This is because they indicate that developers and sponsors are not contributing enough of their own money to the project.

“Carefully review all offering documents and pay close attention to the use of funds section and ensure it aligns with the project’s business plan,” Tristani adds.

Projects and regional centers prioritizing transparency and regular communication with investors are also green flags. “They should provide updates on the project’s progress, financial performance, and any significant developments. It can also help to verify information provided by the project developers or regional center by conducting site visits and obtaining third-party evaluations,” he concludes.

For immigration attorney Carolyn Lee, the founder of Carolyn Lee PLLC, since 2022, the RIA helps prevent situations like this for upcoming projects. “The RIA, for the first time in the history of the EB-5 program, sets about protecting investors from fraud and malfeasance. It says, ‘If you did everything right but put your faith in program players who are terminated or debarred, Congress will take steps to protect your immigration and give you avenues to correct course.’ This is amazing. Moreover, USCIS is signaling that it will honor the spirit of this new provision set out in section 203(b)(5)(M) of the Act as added by the RIA.”

As one of the authors of subparagraph (M) in partnership with the Invest in the USA (IIUSA) organization and Congressional staff, Lee adds: “I’m very proud to have had a role in getting these protections in the books. Full credit for the noble intentions behind subparagraph (M) go to the RIA’s sponsors, Senators [Chuck] Grassley and [Patrick] Leahy, particularly on this point, Senator Leahy.”

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