From the Desk of an EB-5 Lawyer
by David Hirson
In each issue of EB5 Investors Magazine, editorial board member David Hirson addresses developments in the EB-5 arena. With a mix of observation and analysis, attorney Hirson keeps readers up-to-date with all things EB-5. Here are some winter updates for the third and fourth quarters of 2013.
As the year came to an end, changes continued without any real reform in the EB-5 world; comprehensive immigration reform stalled in the House after the Senate passed a bill, and a meeting between legislators and USCIS fell through. A certain level of dishonesty has crept into a small number of cases, and unfortunately, these unscrupulous people have cast aspersions on the rest of a magnificent program (and will be further discussed later). Nonetheless, there have been many important developments in the field, and the EB-5 program remains a win-win-win: investors receive green cards; projects get necessary funding; and the U.S. economy is stimulated through job creation and increased spending, at no cost to the taxpayer. What follows are some of the highlights of the second half of 2013.
USCIS I-526 project denials
The SEC files second action centered on the EB-5 program
In September 2013, the Securities and Exchange Commission brought its second enforcement action (SEC v. Ramirez) this year against a husband and wife in Texas for stealing funds from foreign investors under the guise of the EB-5 program. In 2010, the defendants, Marco and Bebe Ramirez sought USCIS regional center designation for their company USA Now. The SEC alleged that the defendants began soliciting and accepting EB-5 investors prior to filing the application for regional center designation. The defendants falsely promised investors a 5 percent return on their investment and an opportunity to obtain an EB-5 visa. Investors were further told that their funds would be held in escrow until each investor received Form I-526 approval. To date, none of the at least 10 investors identified by the SEC have received a return of their investment or Form I-526 approval.
It is also worth mentioning that, in February 2013, the SEC filed its first action of the year against an individual living in Illinois, and his two companies, for utilizing the EB-5 program to defraud foreign investors. In this seminal case (SEC v. A Chicago Convention Center, et al.), the SEC and USCIS coordinated to halt an alleged $156 million fraudulent investment scheme. The SEC alleged that Anshoo R. Sethi created A Chicago Convention Center (“ACCC”) and Intercontinental Regional Center Trust of Chicago to fraudulently sell more than $145 million in securities. The investors were led to believe that, by purchasing interests in ACCC, they would be financing construction of the “world’s first zero carbon emission platinum LEED certified” hotel and conference center near Chicago’s O’Hare Airport. The defendants—Sethi and two companies he created—collected $11 million in administrative fees from more that 250 investors.
The SEC’s complaint alleges that Sethi and his companies made a number of misrepresentations about the project to cajole investors, including misrepresenting franchise agreements in their offering materials, misrepresenting the construction and occupancy timelines of the project; and misrepresenting the amount of experience held by the owner and developer of the project.
An important outcome of this case was that the U.S. federal court affirmed that the SEC has jurisdiction over the sale of EB-5 securities in foreign countries.
In light of these two cases filed by the SEC, some investors have become more wary of utilizing the EB-5 program to obtain their green cards. These cases illustrate the need for thorough due diligence of each project on the part of the regional center and EB-5 investor, as well as an understanding of why some projects fail.
Interagency monitoring of the EB-5 program
Since the recent SEC cases, there has been strong interagency cooperation amongst USCIS, the FBI and U.S. intelligence agencies in addressing issues facing the EB-5 program:
- Beginning in July 2013, U.S. Senator Charles Grassley, ranking member of the Senate Judiciary Committee, circulated several letters on the EB-5 Regional Center program. These letters were addressed to the director of USCIS, the secretary of the Department of Homeland Security, the director of the FBI, the director of the SEC, and fellow legislators on the U.S. Senate Judiciary Committee, as well as members of the Select Senate Committee on Intelligence. These letters were made available to the public and addressed issues such as allegations of securities fraud, Ponzi schemes, money laundering, wire fraud, and interstate and foreign transportation of stolen property;
- In August 2013, the Financial Industry Regulatory Authority (FINRA) issued an interpretive letter for broker-dealers that market securities to foreign investors in relation to EB-5 projects. This letter provided guidance on the applicability of the suitability rule when placing foreign investors in EB-5 offerings; and
- In October 2013, federal authorities began investigating the financial dealings of South Dakota Regional Center, which steered EB-5 funds into the now bankrupt Northern Beef Packers processing plant.
Reasons for project denials
The cases and events mentioned above are important illustrations of reasons for EB-5 project denial. Some of the primary reasons for project denial, which played a role in the above cases, include:
- Tenant-occupancy: In the February 2012 RFEs, USCIS raised issues related to the “tenant-occupancy” methodology for establishing job creation in EB-5 cases. USCIS sought evidence that the projected jobs attributable to prospective tenants would represent newly created jobs, and not jobs that the tenant had merely relocated from another location;
- Petitioner’s failure to place capital “at risk:” The immigrant investor cannot be guaranteed a return of a portion of his or her capital investment;
- Failure to obtain independent verification of the offering documents; and
Because of the threat of fraud and the willingness of USCIS to deny applications and petitions, it is important that both the regional center and the individual investor conduct the appropriate due diligence. The regional center must conduct due diligence on the project it will be sponsoring, which includes research on the project’s principals, independent verification of the project documents, background checks, Dunn & Bradstreet reports, and other available avenues to ensure the overall viability of the project.
The investor must exercise due diligence as well, including conducting research on the individuals behind the regional center and project, the economic methodology used to predict jobs, the site of the project itself, and ensuring that the capital is placed at risk. For a more complete list of due diligence considerations, please visit EB5Investors.com.
The joint investor alert
In October 2013, the SEC and USCIS issued a joint investor alert to warn individual investors about fraudulent investment scams that exploit the EB-5 program. The investor alert identified warning signs of fraud, which include:
- Promises of immigration results;
- Guaranteed investment returns or no investment risk;
- Overly consistent high investment returns;
- Unregistered investments;
- Unlicensed sellers; and
- Layers of companies run by the same individuals
Proposed meeting between USCIS and Congressman Goodlatte
Congressman Bob Goodlatte, Chairman of the House Judiciary Committee on Immigration, had a scheduled meeting with USCIS on Nov. 15, 2013 to discuss the EB-5 program. Chairman Goodlatte was prepared with detailed inquiries regarding the state of current EB-5 applications and USCIS adjudication policies. Unfortunately, USCIS postponed the meeting the day before it was slated to take place, with no explanation or make-up date. We hope to have an update for readers in our next article in this series.
Current I-526 and I-924 processing times
To date, USCIS’s published processing time for the I-526 petition is 19.8 months. This is significantly beyond USCIS’s national goal of eight months. In our practice, the actual I-526 processing times for our recent cases range from 7-12+ months for regional center investor cases, and around 8-12 months for direct investor cases. We are optimistic that processing times will improve.
As late as January 2014, USCIS has showing published processing times for the I-924 application online. According to this information, the published processing time is nine months for the initial I-924 regional center designation application and 10 months for a regional center amendment application. This, again, is significantly beyond USCIS’s national goal of four months set forth for both types of applications. In our practice, actual processing times for I-924 applications are generally around 12 months.
With the creation of the new office in Washington, D.C. to oversee the administration of the EB-5 program, we are hopeful that processing times will speed up. USCIS plans to first transition I-924 regional center applications to Washington, D.C. and then follow with I-526 individual investor and I-829 petitions. To date, we have experienced I-924 applications and I-526 RFE responses being adjudicated in the Washington, D.C. office.
Comprehensive immigration reform
Revamping the EB-5 program has been an integral part of general immigration reform efforts. Some notable changes in the comprehensive immigration reform bill include:
- Permanent establishment of the EB-5 program;
- Premium processing options;
- Concurrent filing of I-526 petition with adjustment of status application;
- Automatic adjustment of the investment amount in January 2016 by the percent change in the Consumer Price Index (CPI) during the 2015 fiscal year and on every fifth year by the cumulative percent change in the CPI during the previous five years; and
- Exemption of dependents from the visa quota.
To date, it is uncertain whether the CIR bill will be passed, as House Speaker John Boehner stated in November 2013 that the House will not approve the CIR bill. However, if it does, it will probably make the program even more investor-friendly and have far-reaching effects.
Confirmation of Alejandro Mayorkas as DHS Deputy Secretary
On Dec. 20, 2013, the U.S. Senate confirmed the nomination of Alejandro Mayorkas for DHS Deputy Secretary with a 54- 41 vote. Mayorkas previously served as the director of USCIS. Nominated to step into Mayorkas’s position is Leon Rodriguez.
The third and fourth quarters of 2013 have witnessed many new events and developments in the EB-5 program. With investors now more cautious than ever before, it is important to take a step back and consider how the EB-5 program has benefited the U.S. economy. In a recent op-ed piece authored by IIUSA vice president, Robert C. Divine, it was cited that EB-5 investments contributed $2.2 billion to U.S. GDP and supported over 28,000 jobs, at no cost to taxpayers. Preliminary data shows continued growth, with the amount invested topping $2.5 billion and over 33,000 jobs created. These figures show that, even with the need for more due diligence, the EB-5 program is a mainstay in stimulating and improving our economy.