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

EB-5 Fraud Buttressed by Systemic Problems in the Industry Continued…

5. Unclear Roles and Payment Systems for Intermediaries

There are so many individuals involved with the transaction, and compensation is often not disclosed.  By way of example, the investor may pay a nominal fee to the migration agent, and by virtue of having paid this fee (maybe $5,000.00) the investor believes that the migration agent is an agent for the investor.  The investor therefore assumes that a fiduciary duty is owed to the investor to seek out the best investment opportunity for the investor’s EB-5 Visa Investment, when in fact the developer or regional center is paying the migration agent ten or more times what the investor just paid in order to market a specific project.

While there is documentation setting forth the investor’s obligation for due diligence and suggesting that risks exist that the investor should take the time to investigate and understand, investors may be left to believe that the risk is minimal and that someone has checked into the risk for them.  On occasion a project has engaged a due diligence firm to conduct an overall review of the project.  This certainly provides strong evidence that the developer and the regional center are interested in doing things correctly, and that the project is likely substantially more credible than those projects without any due diligence review, it does not provide an investor with a personal advisor or advocate.

The confusion regarding how different individuals and companies that are involved in the process are paid leads to an added level of complexity that confuses the process and can mislead an investor.  This added complexity without transparency makes it easier to cloak fraud in complexity.

6. Lack of Guidance in Relation to Ongoing Operations

Investors are typically left to fend for themselves after receiving a conditional Green Card.  Many projects do not provide sufficient reporting to investors for the investors to adequately remain apprised of the investment’s performance.  This results in a false sense of security, because the natural inclination is to believe that no communication means that the project is moving forward as expected.  Therefore, in the Jay Peak situation, the investors were the last to realize that anything had gone wrong.  Many investors do not know or understand what reporting they are entitled to as members or limited partners of the NCE.  Industry practice leaves the investors with no ongoing contact with any professional who could assist them in respect to monitoring of the project, and provide advice with regard to removing the conditions on their Green Cards.  

Only once the investor reaches the date five or six months before the two-year anniversary of their approval are the investors reminded to retain an attorney and file their I-829.  It is only after the process of preparing the petition to remove the conditions that an investor can determine whether the project continued as expected.  How the project performs during the conditional period is the most important aspect of the immigrant investor’s process, yet he or she is typically left alone during this process.  Because no one is looking out for the investor and able to step in at the first sign of trouble, or to advocate for the investor’s rights during the process the investor is at the mercy of the developer and the regional center.

While most actors in the industry diligently work to ensure compliance and the desired result for the investors, one need look no further than Jay Peak, which was one of the largest and most successful (on its face) EB-5 related developments since program inception, to see what goes wrong when investors are not actively involved in reviewing the performance of the developer and the project financials, and ready with an attorney to pursue and protect the investors’ rights under the PPM, operating agreement or limited partnership agreement and other relevant documents.  Therefore, an investor should have an attorney who is well-versed in business law and EB-5 law on retainer through the entire process.  The value added by maintaining a relationship with an attorney is protection from the surprise that so many investors in Jay Peak woke up to one day.

7. Lack of Understanding of U.S. and State Law

Finally, the legal system of the United States is unique throughout the world, in that multiple layers of laws, regulations and ordinances work together to provide the framework for business functioning and to protect investors.  The system is complicated, and many different laws may apply to different aspects of the transaction.  Federal law (statutes and administrative regulations) governs the immigration rights and responsibilities as well as the sale of securities (though state law also governs certain aspects of securities issuance and it is possible for multiple states’ laws to govern depending upon effectuation of the transaction and the project’s domicile).  Federal law may also govern certain aspects of the obligations of a property owner depending upon where the property is, and the statutes and regulations may involve many things from environmental obligations to land use restrictions to certain housing regulations.  Generally speaking, state law governs real and personal property ownership, as well as all corporate or business law, and the rights of the membership or partnership interest owners.  State law also governs in many of the same areas that the Federal law covers, except immigration.  Local ordinances govern land use, permitting and inspection, and many other different areas.  Each state’s law is different, and each municipality within a specific state may have different ordinances.  Taxation adds an additional layer of complexity, and is different in each location.

Many investors come from countries where the government exerts more control over projects and developments, and understanding of the legal rights and remedies of an investor is less important.  Many others come from countries where the government is not reliable, and the judiciary is not reliable, so understanding of the legal system, rights and remedies that could be available is not important, but rather alternative protections and understanding the unwritten practices and policies is far more important.

This shields the value of maintaining a relationship with a trusted advisor who is capable of spotting potential issues, and addressing them is skewed by cultural differences and a lack of understanding related to how U.S. federal, state and local laws work together to protect those who actively protect themselves, but only provide potential redress to wrongs not identified early.  Like in medicine, it is true that an ounce of prevention is worth a pound of cure in the law.  

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