By Eric Yao
Who Is an EB-5 Investment Adviser?
A Registered Investment Adviser (“RIA”) specializing in EB-5 makes investment recommendations or conducts due diligence for an EB-5 investor in return for a fee. The RIA works directly with and for the investor, and is a third-party outside of the EB-5 distribution channel that is compensated by the issuer. An RIA registers with SEC or state securities authorities and is subject to various ongoing compliance obligations.
The Investment Adviser Model
In connection with most EB-5 investments, an EB-5 investor completes the investment process with the help of an EB-5 capital intermediary such as an overseas migration agency or a domestic broker-dealer. These intermediaries sign finder’s fee agreements with the regional center or EB-5 fund (NCE).
Some investors are, however, more concerned about recent EB-5 fraud cases and are looking for advice from a more independent source. Many investors first approached immigration attorneys, whom they view as a more independent source of information. Unfortunately, most immigration attorneys are not trained as investment experts. Also importantly, an attorney would have to be registered as an Investment Adviser in order to give investment advice for a fee.
The service that an independent Registered Investment Adviser (“RIA”) provides can serve the cautious EB-5 investor’s need for objective advice. Ideally the RIA should not be affiliated with a Broker-Dealer or a Regional Center. Otherwise, the RIA will need to disclose any conflicts of interest, because such interests may lead an RIA to steer the clients to his or her own deals.
To formally begin advising an investor, a RIA would sign a fee agreement with the client which specifies the amount of fees and scope of services. Ideally a RIA offers “one-stop” services that walk the investor through the process. The primary service – and the main draw for investors – is a detailed due-diligence report that evaluates immigration and investment risks.
The Due Diligence Report
Usually, a due diligence analyst who has industry experience in commercial real estate development and investment banking manages the due diligence process. The report should not just summarize the business plan, but it should also provide in-depth analysis and verification of key facts such as feasibility of capital sources (including EB-5 capital itself), a developer’s true “cash” equity contribution prior to and after EB-5 raise, site control, entitlement risk, job creation, TEA compliance, and the “at-risk” and sustained investment requirements of USCIS regulation. Project completion risk is closely examined because it is a major factor in investors’ potential loss of both green card and invested capital.
The due diligence report elaborates on disclosures about ownership structure and asset valuation to ensure a good alignment of interest and to mitigate investment risks (loss of capital) for the investor. The analysis reviews assumptions, methodologies, and conclusions of the appraisal report, and it provides a second opinion on market feasibility and property valuation. In the end, the report highlights the strengths and weaknesses and lists out major risk factors such as a lack of other capital sources or insufficient capacity of the associated regional center.
Benefits to EB-5 Investor
The main advantage to an investor of working with a RIA is independence and accountability. Given language barriers, complexity, and the long investment cycle, EB-5 investors are subject to escalated investment and immigration risks.1 As regulated by federal and state securities laws, an RIA stands for the interest of an investor and owes the following fiduciary duties:
- to put clients’ interests first;
- to act with utmost good faith;
- to provide full and fair disclosure of all material facts;
- not to mislead clients;
- to expose any conflicts of interest to clients.
How to Choose a RIA?
Because of an RIA’s role in the investment process, an investor has to be very careful when choosing an RIA. Before an investor makes a decision, he or she should do the following:
- Check the status of the RIA on SEC/NASAA website;
- Read brochure (ADV Form) and make sure EB-5 is listed as a specialty;
- Make sure in company brochure (ADF Form) and advisory contract that the RIA is not allowed to receive compensation from the issuer, to confirm independency;
- Be aware of potential conflicts of interest, i.e. the RIA firm is affiliated with any EB-5 deal sponsors (Regional Centers etc.) or Broker- Dealers;
- Ask for a sample due diligence report; make sure the person who prepares due diligence report has specific industry experience as well as knowledge in EB-5.
Benefits to Regional Centers
There is no agreement between an investment adviser and a Regional Center. The RIA simply introduces a project to investor and conducts due diligence on behalf of the investor. As the transaction does not incur commission expense for the issuer, the EB-5 investor typically requests a waiver or discount of the administrative fee. From an economic, not securities law perspective, the investor, regional center, and investment adviser share the commission/finder fee savings. The RIA is not considered an unregistered Broker-Dealer because an RIA’s compensation is predetermined and not transaction-based.2
If an investor develops a serious interest in the deal, they will ask the RIA to conduct a complete due diligence. An RIA should be reasonable about document requests, honor a high standard of confidentiality duties, and give respect to the Regional Center and other players of the EB-5 community.
Benefits to Immigration Attorneys
An immigration attorney can enter into an alliance with an investment adviser to provide combined legal and investment advisory services to their clients, subject to the limitations of professional regulation. Through the collaboration, such a team provides independent, professional, and consolidated services that neither could provide alone. Clients enjoy a strong sense of security because of the enhanced service. Through the alliance, immigration attorney and investment adviser can both achieve higher conversion rates, while they help their clients to make a more informed decision.
In many foreign countries, an EB-5 investor often expects a “super” immigration attorney to know everything about EB-5, including technical issues such as the possibility of project completion, project evaluation and etc. With the alliance in place, an immigration attorney no longer faces the pressure to practice beyond the limits of professional expertise.
Benefits to EB-5 Industry
The much anticipated permanent reauthorization of the Regional Center Program did not happen last year. A major concern is fraud, as evidenced by recent lawsuits filed by the SEC. If RIAs had represented the investors in these cases, they would have checked the issues “under the hood;” the fraud would have been avoided. Consequently, there would have been less criticism and the program might have a better chance of becoming permanent.
To investors, the RIA model can give them a sense of security and a desirable situation that everybody is looking for: happier customers, fewer complaints, better social image, and more stability throughout the EB-5 industry.
The RIA model may also boost investor confidence by making the process more transparent and efficient. Investors would spend less time making the investment decision, which could in turn reduce friction and marketing costs.
To Regional Centers who are promoting safer deals, the RIA model could potentially starve out the riskier competitors and help bring supply and demand back into balance. Hence, lower finder fees become possible.3
Challenges and Opportunities to RIA Model
As good as it may sound; the RIA model is yet to be tested. The investors are not accustomed to commit to a relationship with someone whom he or she just met a few days ago. However, it appears that more and more investors are becoming both more risk averse and more investment savvy, and they are starting to look for independent advice. Given the likelihood of an increased minimum investment amount, the benefits of safety and convenience seem to well-compensate the inflexibility created by an advisory fee agreement.
1 Contradictory to common belief that an investment adviser should not step into immigration risk evaluation territory, the idea that an RIA can more effectively mitigate immigration risks is strong. The reasons are following: 1) An RIA who understands real estate development process can evaluate the readiness of a project from the perspectives of entitlement, site control, financing, construction contract, and market feasibility. If a project cannot complete, job creation cannot complete either. 2) An RIA typically has a stronger economics and investment knowledge base, which can be more helpful to evaluate the assumptions, methodologies, and conclusions of an economic study report. 3) An RIA has more knowledge in projecting revenue generation which directly impacts operational job creation. 4) An RIA usually has more experience in the business world, and he or she can quickly grasp the concept of sustained investment or at-risk requirement. As such, an RIA can be a great support to immigration attorneys who have much more comprehensive knowledge and experience in immigration laws and who receive direct feedbacks from USCIS.
2 As explained in prior section, to formally begin advising an investor, a RIA would sign a fee agreement with the client which specifies the amount of fees and scope of services. Before a fee agreement is signed, an RIA can answer general questions about EB-5 such as retrogression, but does not give investment advice about a specific project. The fees come from the investors only and it is predetermined.
3 My observation is that in China, EB-5 is mainly a “relationship market”, not a “due-diligence market”, i.e. many investors make decisions based on trust to their friends and relatives who are associated with intermediaries, attorneys, or regional centers, not based on advice given by investment professionals. Because of the complexity and lengthy investment period, the friends and relatives could be giving out sincere but “bad” advice. Because the market lacks to some extent ability to evaluate investment, a “good” EB-5 project may have a hard time to differentiate itself from competitors that are indeed riskier. In many cases, the “good” EB-5 deal is forced to offer higher finder’s fee to motivate migration agencies who in turn mobilize more “amateur advisers” – friends and relatives of potential investors. The adoption of RIA model can help differentiate “good” deals from the crowd. The market would identify the “good” deal, either through an RIA, or through RIA’s clients who leak out the “insider information”. The more RIAs in the system, the faster the “differentiating” process will complete.
About the Author
Eric Yao is the founder of Pacific ProPartners, a California Registered Investment Adviser specializing in EB-5. With over 20-years of professional experience and having worked at a real estate development firm, a regional center and an immigration agency, Eric has a thorough understanding of the entire EB-5 process. Eric earned his MBA in Real Estate from the University of Wisconsin Madison, an MA in Economics from Renmin University of China, and an MS in Real Estate from the University of Reading.
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