What are the ramifications and implications of a SEC investigation on a regional center EB-5 project?

Most EB-5 projects are making a securities offering to potential investors. As a result, the SEC wants to make sure the EB-5 projects in their securities offerings through the PPM and subscription agreements to the EB-5 investors are in compliance with the securities laws. For instance, all investments are at-risk, no redemption, and all representations are true and correct. An SEC investigation may only be a review for compliance and is considered as part of the EB-5 process.

There are many reasons for the SEC investigation(s) but they all have to do with possible violations of securities law, particularly federal securities law. In some cases, what may appear to be a violation may eventually be found to be not a violation. Summarily, an investigation will either prove there is a violation or not. In cases where violations of the law were found, the implications for the investors can result in dire consequences. For instance, in the most outrageous violations where fraud activities were detected, regional centers have been shut down. This extreme result had been devastating to investors as they end losing substantial investment and received (if any at all) a paltry sum compared to their investments. Advisably, prior to making investments, investors should conduct a good due diligence, including but not limited to looking at the litigation history of the regional centers they are considering before proceeding with their investments.

This may affect the project if the SEC is investigating for fraud, which will have ramifications on the immigration processing (i.e., the project may be shut down, assets frozen, etc., which means the EB-5 investors'' petitions cannot go forward).

The ramifications of an SEC investigation of a particular Regional Center EB-5 project would be both direct and indirect. Indirectly, it could certainly diminish the ability of that particular Regional Center project to be marketed to other investors, which could have an overall effect on the viability of the project. It would be speculative to say what would happen to a particular EB-5 project if was subject to an SEC investigation; it would depend upon the detailed nature of the charges and the ultimate outcome. Again, it would be speculative as to what the reasons would be, but one would surmise that the SEC would be investigating the project because of some perceived or real violation of U.S. securities laws.

SEC investigations and subsequent actions, if any, usually are instituted to protect investors. Sometimes, there are irregularities in the way the funds were raised by the developer but, often, someone contacts the SEC if there is a concern about how the developer is spending the money, i.e., using funds for personal expenses or investments, commingling funds that are supposed to be dedicated to the project, using the funds on other projects or not properly acting in interests of the investors, failing to disclose material changes or information to the investor and not having proper documentation. A regional center project is not directly affected by an SEC investigation unless the SEC finds a violation has occurred. Ultimately, the USCIS has the authority to terminate a regional center if it is not in compliance with the immigration regulations. USCIS partners with SEC to determine if any action should be taken with respect to the regional center designation. The SEC has jurisdiction over its own investigation, but will often partner with USCIS in reviewing documents submitted in conjunction with the designation of the regional center or, subsequently, with the I-526 petitions to determine if securities laws have been violated.

The Enforcement Division of the United States Securities and Exchange Commission (SEC) will generally launch a formal investigation of an EB-5 project sponsor when it has reason to believe that investors have been defrauded or that the conduct of the EB-5 offering violated federal laws and regulations. It is important to remember that the mission of the SEC is to protect investors. Therefore, if your EB-5 project is legitimate, the SEC would not seek to punish the project sponsor in a way that jeopardizes your investment or your immigration prospects. Without knowing the precise nature of an investigation, one cannot tell whether your investment or your immigration status is in jeopardy. Of greatest concern are SEC investigations prompted by major fraud. In some cases, sponsors spent investor money on themselves rather than the project described in the EB-5 business plan. In other cases, sponsors lied about the likelihood of a success in a project. Some sponsors lie about owning the land or having proper permits for the project. Others have claimed to be building a name-brand hotel but had no agreement with any hotel company. When that happens, there is no hope of investors obtaining unconditional permanent U.S. residency because their funds will not create the required jobs. In such a case, the SEC will seek to punish the sponsors and make them return the money, if it is possible to do so. The SEC, which is limited to civil enforcement actions, may also refer the case to the U.S. Department of Justice for criminal prosecution. In other situations, the investigation may concern a peripheral issue that does not affect the success of the project. For example, in some recent investigations, the SEC has pursued individuals who received fees to promote EB-5 investments to investors without disclosing their fees and conflicts of interest to investors or following broker-dealer rules. You should request that the regional center provide all available information about the investigation and the progress of the EB-5 project. I would also encourage you to contact the SEC Division of Enforcement, either directly or through your attorney. You may learn more about the nature of the investigation and the investigators may also wish to communicate with you. As an investor, you should have nothing to fear from such contact.

The SEC may be investigating because of a complaint or a tip. The follow-up action varies and may lead to freezing assets or even criminal action. In some instances, that has been followed by USCIS revoking the regional center. However, there is no way of knowing until the investigation has revealed how serious the matter is.

As long as they find no wrongdoings, there is no problem. If they find wrongdoings, they will go after the perpetrators which could also affect the investors and the viability of the project.

It would depend on the nature of the investigation. Some reasons may be technical or administrative issues that could be resolved by changing their record keeping or revising disclosures and payment of fines. Some may be serious, such as fraud and misappropriation, that could close their operations, jeopardizing investments and immigration cases. Also, I note that not all the rumors/stories of various regional centers being investigated is true. Verify the source of your information.