Fraud on Investors in EB-5 Investments: Caveat Emptor! Part 1

Each industry faces issues with fraud.  Where there is an opportunity to obtain money with minimal effort, someone will inevitably take that chance.  The EB-5 industry is no different.  Several high-profile fraud cases have been taking up the lion’s share of EB-5 press for the past couple of years.  While these instances are attractive for news outlets due to their sensational nature, they are quite rare, and the perpetrators have routinely been caught, and either been brought to justice, or are in the process of being brought to justice.  This means that in the case of EB-5 Fraud, the rules are working to catch the bad actors.

However, investors are not aware of the fraud in many instances until it is too late.  This is at least in part due to systemic problems, which cannot be resolved legislatively.  It is certainly not accurate or appropriate to lay the blame for fraud at the feet of those who have been defrauded.  With that said, because EB-5 fraud exists the industry must do a better job of informing investors on appropriate protective measures and better approaches for the efficient and effective use of professionals.  Until the industry and investors begin to focus appropriately on protecting themselves, the opportunity will remain for continued fraud.

This post examines EB-5 Fraud, describes it and provides examples of what it is and what it is not.  It then turns to systemic factors within the industry that provide opportunity for a bad actor to take advantage of a fraudulent scheme.  The post then discusses why no legislative remedy is possible, and finally proposes a better approach for investors.

What Is EB-5 Fraud?

EB-5 Visa Fraud is at its root very simple.  While elaborate and expensive groundwork must be laid in order to take advantage of investors, at its base, EB-5 fraud is just offering fraud.  The sale of a membership unit or a limited partnership interest is the sale of a security.  Sales of securities are governed by Federal Law and those laws are enforced by the Securities and Exchange Commission.  EB-5 enforcement has been high on the SEC’s priorities list for the past few years, and during the period, the SEC has uncovered multiple bad actors, and worked tirelessly to recover investor’s funds to the greatest degree possible.

In order to obtain a Green Card through an EB-5 Visa, an investor must invest $500,000.00 or $1,000,000.00 (as of this writing) in a new commercial enterprise that will create at least ten jobs per investor, for lawfully authorized U.S. workers.  Whether the investment is $500,000.00 or $1,000,000.00 is dependent upon the location of the project, but as of this writing nearly all opportunities offered through Regional Centers qualify for the lower investment amount.  It is expected that the minimum investment amounts will increase in the near future.

Documentation of Selling Securities

Pooling these investors’ money is the province of Regional Centers, which are authorized to pool investments by the United States Citizenship and Immigration Services, which is a branch of the Department of Homeland Security.  In order to obtain investors, a number of documents must be produced.  Each of the documents that must be produced is directed toward selling securities.  The securities do not need to be registered, normally, because they usually fit within one exemption from registration or another, but documentation is key.  Among other project documents, developers and their affiliated regional center produce private placement memoranda, business plan, economic analysis, marketing documents and collateral, as well as exemplar applications and accompanying documentation.  

The utility of each of these documents is selling the security to a purchaser.  That means that any material misstatement in any of these documents is a violation of section 10(b) of the 1934 Act and rules promulgated thereunder, namely Rule 10b-5.  Further, in multiple places throughout the documentation, there are descriptions of the anticipated use of funds.  Beyond that, the EB-5 Investors’ funds used to meet the minimum investment amount must all be used for job creation purposes.  Therefore, within the use of funds sections in the PPM, Business Plan and Economic Analysis, it must be clear that each investor’s $500,000.00 will be used by the new commercial enterprise or NCE to create jobs either within the NCE, or more likely within a job creating enterprise or JCE, which receives a loan from the NCE.  If any of these funds are diverted into impermissible uses, there is a violation of securities law, and of immigration law.  

Violation of Securities Law and Offering Fraud

This violation can result in loss of status for the investors, or outright denial of a pending Green Card Application (referred to by its form number: I-526), if processing is not yet complete.  If the I-526 was approved, but the money is not properly used, the investor’s application for removal of conditions (form I-829) may be denied, which would inherently begin the threat of removal proceedings.  The investor’s investment is then also at a much greater risk of loss.

Offering Fraud is when there is an intentional or reckless misstatement of material fact, upon a person in connection with the purchase or sale of any security.  It makes no difference whether the security sold is registered or exempt from registration.  There are no excepted securities.  Further, it is also possible to violate securities law by using the funds in a way that does not square with the documents provided to investors.  

EB-5 Fraud, like other frauds in relation to sales of securities result in private rights of action for the investor, where the investor may assert a right of rescission or allege damages.  Punitive damages are also available.  Beyond the claim for damages, there are whistleblower protections, and payments based on the amount of investments recovered by the SEC.  Therefore, if there is a fraud, report it on the correct SEC form, and the reporting investor may receive a large payday.  For example, the individual who reported the Chicago Convention Center fraud received $14.7 million dollars for filling out a short form.

Misuse of the funds after the fact is much more likely than a fraud from the start type scheme, though both occur.  

For investors who are generally not well versed in United States law and legal systems, differentiating between fraud and a bad investment may be difficult.  Additionally, sometimes communications are lacking, and what may seem like actionable neglect is fraud, or that neglect that may not have caused damages is actionable.  These distinctions can be difficult to convey due to the same systemic problems that must be addressed in relation to actual EB-5 Fraud.

 

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