Tag: EB-5 investors

Sunlight is the best disinfectant: SEC charges oil company for fraud on EB-5 investors

In a recent action, SEC v. Luca International Group, LLC et al. (“SEC v. Luca“), the Securities and Exchange Commission (SEC) has charged a California-based oil and gas company and its CEO with violations of securities laws in connection with a $68 million Ponzi scheme and affinity fraud. The target of the fraud was the Chinese American community. Additionally, a portion of the funds raised by the defendants came from EB-5 investors seeking green cards through the EB-5 Program. The SEC issued both a press release and cease and desist order this week in connection with this most recent action. We think that this case highlights two important and relevant points for our readership, and that the SEC exposing the defendant schemers/fraudsters in SEC v. Luca is good for the EB-5 industry and integrity of the EB-5 program.

Prosecution efforts are going global– government agencies in Hong Kong and China assisted the SEC’s efforts 

Now more than ever before, the SEC is on the path to closing down actors in the EB-5 context that engage in deception and fraud. We are in a new era of enforcement, with the SEC becoming more familiar with the EB-5 Program. We think that this enforcement trend will move at an even faster clip as the SEC and United States Citizenship and Immigration Services (USCIS) become more agile in cooperating and responding to credible allegations of fraud.

EB-5 regional centers and issuers need to put into place sound and workable policies to ensure that marketing practices are in line with securities laws. Note that in SEC v. Luca, there was cooperation with the SEC and two foreign agencies, namely the Hong Kong Securities and Futures Commission and the China Securities and Regulatory Commission. Enforcement and prosecution efforts in this context are going global. Regional centers and issuers should ensure that any offshore sales efforts are in compliance with the laws of the countries in which sales activities are performed.

Overlooked federal and state investment adviser registration requirements  

SEC v. Luca is a reminder that investment adviser requirements may apply broadly in EB-5 transactions and require federal or state registration by regional centers, issuers and/or EB-5 deal facilitators. In SEC v. Luca, the SEC asserted that the defendants acted as “investment advisers” within the meaning of Section 202(a)(11) of the U.S. Investment Advisers Act of 1940 (“Advisors Act”) [15 U.S.C. Section 80(b)-2(a)(11), but had no registrations with the Commission. Confusion over investment adviser registration requirements is a commonplace problem in the EB-5 space. In SEC v. Luca, the defendants were in the business of providing investment advice concerning securities for compensation. According to the SEC, these key facts triggered registration requirements under the Advisers Act.

We will soon be providing an extensive alert with regulatory advice to EB-5 regional centers and issuers on the applicability of both federal and state investment adviser registration requirements. The applicability of such requirements should be made on a case-by-case with qualified securities counsel. There is no “one size fits all” advice. States have their own considerations in interpreting investment adviser registration requirements. And the SEC has its own interpretive guidance on the parameters of the registration requirements of the Advisers Act apply.

Conclusion

The egregious pattern of unlawful behavior by the defendants in SEC v. Luca included deceit in the marketing process, fraud in offering materials, comingling and misappropriation of funds, and violation of registration requirements. These are issues not just in the EB-5 context, but with private placements generally. Affinity fraud is also common in private placements.

EB-5 stakeholders should be aware that we are seeing a visible uptick in securities related prosecutions. No issuer, regional center or deal facilitator is immune from scrutiny. The SEC and USCIS are also working together more nimbly with foreign securities agencies. Sound policies, securities compliance and meaningful due diligence by experts are important in EB-5 offerings.

Sunlight is the best disinfectant. This adage is true for the EB-5 program. Stakeholders who promote a transparent and strong EB-5 program should applaud the SEC’s efforts.

ARTICLE BY Douglas Hauer of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
©1994-2015 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

Retrogression for EB-5 Predicted at IIUSA Conference; July 2013 Cut-Off Discussed

Greenberg Traurig Law firm

The Chief of the Visa Control and Reporting Division of the U.S. Department of State, Charles Oppenheim, reported that the EB-5 immigrant visa category would likely retrogress in July 2015. However, this does contradict his prediction provided to AILA earlier last week of retrogression occurring in May 2015. What is striking about Oppenheim’s announcement was that retrogression of the EB-5 immigrant visa category would cause him to establish a cut-off date of July 2013. A cut-off date has the effect of establishing an orderly line for the issuance of EB-5 immigrant visas. The cut-off date is determined based on the date an I-526 Petition was filed and is the date included on each I-526 Petition approval notice in the “Priority Date” box. For example, if a cut-off date of July 2013 is established in July 2015, during the month of July 2015, only those EB-5 investors (and their derivative beneficiaries) with a Priority Date in July 2013 or earlier (i.e. June 2013, May 2013, etc.) may apply for an EB-5 immigrant visa.

As we have stated previously, EB-5 investors should continue to file I-526 Petitions in the regular course of business because retrogression will have no effect on the adjudication of I-526 Petitions by the U.S. Citizenship & Immigration Services. By filing an I-526 Petition, an EB-5 investor is reserving his or her place in line by establishing his or her Priority Date, which has the effect of determining when he or she may apply for an EB-5 immigrant visa after receiving approval of his or her I-526 Petition. However, there are other effects of retrogression which should be evaluated when making a decision to pursue an EB-5 immigrant visa.

Oppenheim attributed the establishment of a July 2013 cut-off date to the increasing volume of I-526 Petition approvals by the U.S. Citizenship & Immigration Services (the USCIS) and his estimation of approximately three derivatives per I-526 Petition. According to his own calculations, this would indicate that there are roughly 3,333 principal investors under the EB-5 Program, with the remaining 6,667 EB-5 immigrant visa slots filled by family members of EB-5 investors. As retrogression of the EB-5 immigrant visa category may cause a drop in market demand for the EB-5 immigrant visa, it appears the inclusion of dependents against the 10,000 limit of EB-5 immigrant visas available for each U.S. government fiscal year (Oct. 1 to Sept. 30) would likely constrain the flow of foreign investor capital to the United States.

ARTICLE BY

Dillon R. Colucci
OF
Greenberg Traurig, LLP

Top Ten Trends in I-526 Requests for Evidence

The National Law Review recently published an article by Kate Kalmykov of Greenberg Traurig, LLP regarding I-526 Requests for Evidence:

GT Law

1. Lack of five years of tax returns.  In countries where tax returns are not readily available it is advisable for applicants to provide copies of the relevant sections of the law that explain the tax filing requirements, as well as corroborating evidence from independent third parties such as accountants.  In certain countries employers pay taxes directly on their employees.  In these cases it is advisable that EB-5 investors request this documentation directly from their employer or a corroborating letter attesting to their salary and compliance with the tax filing requirements of their home country.

2. Sale of Property.  USCIS seems to be requesting extensive documentation related to the sale of property if it was purchased less than 7 years ago.  Investors are advised to present sales contracts, deeds, and bank statements showing the sale and transfer of proceeds from the sale of property.  In cases where property was purchased over 7 years ago and evidence is not readily available, as long as a reasonable explanation for the lack of funds is given, USCIS seems to be showing more leniency.

3. Home Equity Loans as Source of Funds.  As the EB-5 program grows in popularity, many investors, particularly those from China have begun to obtain home equity loans for their EB-5 investments.  While investment through loan proceeds are permitted in EB-5, USCIS requires that the Investor prove that they have secured the loan with collateral as well as evidence that they are able to make payments on the loan from a lawful source.

4. Loans from a Petitioner’s Business, another popular source of EB-5 investment funds, particularly with Chinese nationals.  In these cases, USCIS often requests proof of approval from the company’s Board of Directors for issuance of the loan.  Likewise, USCIS requires proof that the investor has the ability to repay the loan.

5. Petitioner’s Salary.  USCIS often requests evidence to show that the investor has a level of income and savings that enables the investor to make the EB-5 investment.  To this end, USCIS may request proof of the investor’s yearly expenses as well as records of ongoing salary.

6. Retained Earnings from Investor’s Business.   Investors must demonstrate that they were allowed access to the funds that they ultimately used for their EB-5 investment and that they had authority to make distributions to themselves.

7. Gift Taxes.  More and more USCIS is requesting proof that the investor has complied with the home country’s gift tax requirements.  Likewise, the giftor must demonstrate their source of funds, as well as their understanding that the gift was made without an expectation of repayment.

8. Use of Intermediaries.  In some countries, like China individuals are restricted in the amount of foreign currency that they can exchange each year.  Where “friends and family” are used to assist in transferring money out of the country, bank statements or currency exchange receipts are often required to demonstrate:

  • Transfers from the investor to the friends and family members
  • Transfers from each friend and family member to the investor’s overseas account
  • Transfer from the Investor to the Regional Center

9. Proof of Common Country Specific Currency Practices.  Many countries operate on a “cash” economy and money is not often deposited in banks.  In these instances, it is important to provide independent, third-party evidence of these practices to account for any “gaps” in the trace of funds.

10. Proof of Source of Administrative Fee.  In addition to the required $500,000 (TEA investments) or $1,000,000 investment amount required by the EB-5 regulations, regional centers often charge a one-time administrative fee ranging from $30,000-60,000 to each investor. EB-5 investors that have been through the process know that the regulations only require that they  demonstrate the source of their EB-5 investment.  Not their entire net worth or earnings over time.  However, USCIS has begun to impose an additional requirement as of late by requesting that investors demonstrate the source and trace of their administrative fee.

©2012 Greenberg Traurig, LLP