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EB-5 Program an “Examination Priority,” Say SEC and Others

EB-5 Program an “Examination Priority,” Say SEC and Others

The EB-5 Immigrant Investor Program was initially enacted in the 1990s as an economic stimulus effort in the United States. The primary objective of the program was to obtain foreign capital investment and utilize that money to create jobs and improve local economies across the country.

In exchange for a capital investment in a program-approved venture that creates at least 10 new, sustainable jobs for U.S. workers, foreign investors and their eligible family members become eligible for U.S. Green Cards. This immigration program is administered and overseen by United States Citizenship and Immigration Services (USCIS) under the Department of Homeland Security (DHS).

For nearly three decades, EB-5 investment activity was generally limited. However, due to financing issues for domestic real estate developers during the Great Recession, emerging wealth among Chinese EB-5 visa applicants became a driving force in the flourishment of the EB-5 program.

By now, the EB-5 industry is used to being in the spotlight, and not always for positive reasons. But how did this economy-building program land on the radars of the United States’ most prominent investigative agencies?

The EB-5 Industry Struggles with White-Collar Crimes

The EB-5 program has been responsible for creating more than one million jobs through the infusion of approximately $40 billion in EB-5 investments from 2008 to 2020. In tandem, however, it has developed a reputation for being associated with economic crimes like fraud and money laundering.

As a result, the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) named the program an “examination priority” in 2016. And Texas business investors seem to be particularly popular subjects in investigations like these. Despite the successful creation of more than 14,000 Texas jobs, there have also been a number of criminal investigations opened in that state.

Dallas Developer Faces Commissions Claim

One Dallas developer is facing a $1 million-plus claim that it owes finders’ commissions for its foreign investors in a downtown Dallas hotel redevelopment project. The SEC has partnered with the Internal Revenue Service (IRS) on an investigation into the financing of the hotel.

McAllen Couple Accused of EB-5 Fraud

In a 2013 case, SEC v. Marco A. Ramirez, a McAllen, Texas couple was charged with fraud in one of the very first significant federal enforcement actions concerning the EB-5 program. The defendants were accused of committing fraud crimes in order to obtain $5 million from Mexican, Egyptian, and Nigerian investors. They had promised these foreign investors to invest their capital into EB-5 projects but instead used the funds for personal gains—like their Texas-based Cajun restaurant.

The real take-away among these cases is that industry experts do not see EB-5-related enforcement actions by the SEC and other agencies slowing anytime soon. For this reason, as EB-5 Immigrant Investor Program participants, it is important to understand what types of enforcement actions are surfacing most frequently, and what they can do to help avoid becoming a party of interest in these types of investigations.

Common EB-5-Related Enforcement Actions

Unregistered broker-dealers are prohibited from earning commissions from security-based transactions in the United States. Because the majority of EB-5 financing scenarios are structured as securities offerings, these deals are highly susceptible to enforcement actions against EB-5 program participants. These cases are typically related to investor placement commissions paid to unregistered broker-dealers.

Why are these deals happening so often? The answer is simple: this structuring can be very lucrative for investment finders. Most EB-5 investment applicants prioritize their Green Cards over a monetary return on their investment. Typically, EB5 investment participants’ returns gross between 1% and 2% each year. Because of the lower expectation among investors on actual investment returns, the ultra-high placement commissions, which frequently exceed 20% of the total investment amount, become less of an issue for project developers.

Civil Litigation Also Spikes in the EB-5 Community

In addition to enforcement of regulation and criminal laws, the EB-5 community has also seen a spike in civil litigation. A pattern is emerging in which federal enforcement action is being taken directly following civil litigation as allegations surface from plaintiffs participating in the EB-5 investment program. A number of industry experts believe this is only the beginning of a trend we can expect in the wake of the completion of many projects that began during the EB-5 boom between 2012 and 2018.

EB5AN Keeps EB-5 Industry Members Informed

As industry advocates continue to lean on legislating bodies, EB5 Affiliate Network watches closely in order to keep its investors abreast of industry developments. Stay informed by frequenting our regularly updated blogs, and, for any specific questions regarding your own EB-5 investment, feel free to reach out!