Another meeting reaction

On Tuesday we heard EB-5 stakeholders eloquently express grievances to the CIS Ombudsman. Yesterday I imagined a USCIS representative taking his complaints, in lieu of real-life forum, to St. Thomas More. Today my imagination takes up another voice that tends to be underrepresented — that of the US business person trying to use EB-5. Let’s designate Mr. Jarndyce as patron saint of the red-tape oppressed, and let our hypothetical business person appeal to him.

St. Jarndyce hear the prayer of the afflicted, this honest American businessman struggling with a funding program that looks great but seems to get more complicated and cumbersome  the more I get involved in it.

Let me get one thing straight: I do business. I’m passionate about my industry, and have put my own life and resources into developing my business and creating new opportunities, but here’s the bottom line: I do projects when the value exceeds the cost of capital. That’s it. I don’t exist as a goose to lay golden eggs for agents and consultants and Tulkinghorns, and I sure as hell am not in the business of selling green cards.

EB-5 looks attractive to me because the current capital crunch encourages me to consider alternative financing for my business opportunities, and because the immigration benefits offered by USCIS effectively lower the return that the EB-5 investors would require from me, thus promising a relatively low-cost piece for the capital stack to fund my great new project. One would think that I could contract some professionals  to do the paperwork and deal with the foreign investors and the government, collect and present the kind of detail about my business that’s required by industry standards for loan underwriting or a private equity raise, and then I can go ahead and do my business and break even in the end with some profit for the shareholders. Meanwhile investors get green cards, the economy gets money, and Americans get jobs. What a deal.

But what happens in real life? I hired professionals at costs that made my CFO faint to prepare the paperwork for USCIS, and found out why they’re so expensive when USCIS responded a year later with a Request for Evidence that would – if we fully responded to every point – require about a thousand pages of exhibits. I don’t know if those people over at USCIS take me for a fraud or for The Bill and Melinda Gates Foundation, but anyway they ask me for the kind of minute economic analysis that would presumably be water-tight but at a cost of several months and a tens of thousands of dollars, tell me that the market study I commissioned from a preeminent consultant in my industry doesn’t match up to their mysterious understanding of reasonableness and verifiable detail, inform me that my real quotes and bids are insufficient support for cost claims, request records that they don’t realize would fill file boxes, criticize me for not being “average” as compared to some median for US firms (as if I have to be 37.2 years old just cause that’s the median age for Americans), inform me that the prospective jobs that won my project all those support letters copied in my application are not actually attributable to me thanks to some proprietary USCIS theory of job creation, and so on. I don’t know who’s laughing here, unless it’s the crowd of consultants I have to pay to figure all this out, or the guy who’ll be able to sell me a replacement Xerox machine by the time this is over. I consider whether my firm should keep pursuing this path, as the unforeseen complexity of the paperwork results in mounting costs and as potential projects rise and change and fade and die with the pace of the market while USCIS reviews my documents with the pace of Baltoro Glacier.

I decide to persevere, since the firm has already sunk over a hundred thousand in pursing the EB-5 option, and I finally get my prized approval letter, only to realize that the fun fair is just getting started.  Now that I finally got approved by convincing the government that I am really a business person ready to sponsor real investment in real projects, agents get their hands on my business and parade it before foreign investors telling them the opposite – that this is not real investment in a real business with realistic risk and return, but rather some kind of government-produced vending machine where you put in money and eventually “poof!” out comes that same money plus a green card, risk-free and guaranteed. Not only do agents make investors believe such nonsense but they ask me for fees and cuts and promises to match some other rogue – not characteristic of US businessmen – who can afford to pay huge fees and make big promises because he doesn’t need to conserve money for a real business venture but only for his disappearance to Tahiti. In my application process with USCIS, I found my detailed and sophisticated proposal at the back of the line behind proposals that were small, bland, and relatively easy to digest. When it came to finding investors, I found my genuine offering at the back of the line behind any business of any quality who would pay the agents and promise the investors more than I considered realistically or ethically possible for me.

Was it all worthwhile? I can only say that my project better have fantastic cash flows to justify the investment in time and money that I had to put in to get that EB-5 piece into the capital stack. Not to mention the risk I accept entering a minefield of securities laws and having not only the money but also the families of foreign investors depending on the successful, timely, and predictable progress of my project. Before recommending this to someone else, I would want to see more guidelines on the table to give people like me a realistic sense of what they’re getting into, how much it will cost, and how to do it right. And when I say “do it right,” I’m not talking about standards for the perfectly accurate economic report, the ironclad business plan, the unquestionable verifiable evidence, the fool-proof offering documents, the guaranteed business opportunity – because such things simply do not exist in the real world, and if they did who could afford them. I’m talking about “good enough” – achieving a reasonable standard – something less than perfect but possible and reasonable. I’m here to do good business, and that doesn’t include paying more to get capital than I could possibly earn by deploying that capital. It doesn’t mean accepting risk and making concessions that can’t be balanced by potential benefits. It doesn’t mean raising funds that can’t be made available within the lifetime of the project that needs them. I’m here, champing at the bit to raise money and put it all into profitable job-creating activities because those activities are my business. USCIS defeats its mandate if its policies and lack thereof force me to invest in cumbersome processes and paperwork, diverting resources that I’d rather put into new business activities and job creation. Likewise, the market undermines itself by insisting on rosy promises that favor the desperate. Come on everyone. Let’s get real here. Otherwise people like me, honest American business people who are the engine for this system, are going to do the math and lose interest in EB-5.

This speaker is not real, and his experience is not characteristic. But I have evidence that everything that happened to him has happened to at least one real person in the past year.

Being in the paperwork profession myself, I did not have my hypothetical business person dwell on the headaches he encountered with the service providers who prepared his documents. However, this is an important factor to consider, and perhaps my kind are more guilty of creating problems than the government and the agents put together. I recommend an excellent article on “Lessons I Learned from My First EB-5 Capital Raise” by Ron Wilkinson, a developer with Vantage Pointe Investments.

About Suzanne (www.lucidtext.com)
Lucid Professional Writing provides writing and editing services for businesses and scholars, and specializes in assisting clients to prepare business plans for filing with U.S. Citizenship and Immigration Services.

8 Responses to Another meeting reaction

  1. PP Wang says:

    Suzanne, That’s a fantastic post—Kudos to you!

    One option that might help EB-5 project sponsors is for them to complain to the relevant Chinese Public Security Bureau and/or the relevant Chinese commerce regulator, the Administration for Industry and Commerce, about the practice of Chinese migration agents insisting that the EB-5 regional centers kickback the “administration fees” to the Chinese migration agents without informing the Chinese investors. Such kickbacks are illegal under the PRC Criminal Law. This would greatly benefit the EB-5 project sponsors and significantly cut down on corruption in marketing EB-5 projects in China since in many cases only the dodgy projects will agree to pay such kickbacks. Thanks.

    • Would you please reference for us the applicable sections of Chinese law, with web link (untranslated okay). That would be helpful, thanks.

      • The payment and receipt of kickbacks or other types of compensation not disclosed to both parties to a transaction is expressly prohibited by Article 8 of the Anti-Unfair Competition Law of the People’s Republic of China as adopted by the Third Session of the Standing Committee of the Eighth National People’s Congress on Sept 2, 1993.

        A marginally competent English language is available at http://www.lawinfochina.com/display.aspx?lib=law&id=648&CGid.

        The Chinese language original of the pertinent section reads:

        经营者销售或者购买商品,可以以明示方式给对方折扣,可以给中间人佣金。经营者给对方折扣、给中间人佣金的,必须如实入帐。接受折扣、佣金的经营者必须如实入帐。

        The emphasis in the statute is on transparency of the deal and the requirement to disclose the payment of commissions.

  2. bob hayden says:

    Suzanne, great post. i am not involved in eb5 financing but could have been. i am involved in private equity, angel investing, business consulting, etc. i have owned and sold three businesses most recently in 2012. a business associate invited me to consider investing in the setting up of a RC in the DC area. i was intrigued and presented the program to my angel investor group as a way to raise money for startups. the board of directors liked the potential of eb5 financing and presented it to the angel group during one of our monthly meetings. i was interested – it seemed to be a good program that actually did good. ha ha! not so fast. i did my due diligence. i read everthing i could find about the pros and cons of eb5. what a mess. i have had dealings with the regulatory side of the federal government and i wanted no part of it. i sold my last business because of the heavy hand of federal government regulations with very stiff financial penalties for non-compliance. if i told you what constituted non-compliance your head would spin. i simply sold out and moved on. anyway, your post illustrates what happens when non-business people attempt to govern real world business entrepreneurs and risk takers. i applaud you for your steadfast, clear voice reporting on eb5 issues, no matter how depressing. there must be a pony in here somewhere, but i am not going to waste my time, money, expertise, experience and business relationships to find it.

  3. PP Wang says:

    Please see Article 164 of the PRC Criminal Law. Please see also Article 8 of the PRC Anti-Unfair Competition Law.

    http://www.oecd.org/site/adboecdanti-corruptioninitiative/46814270.pdf

    http://www.lawinfochina.com/display.aspx?lib=law&id=648&CGid=

    “返佣”俗称“回扣”,是指卖方从买方支付的商品款项中按一定比例返还给买方的价款(见《辞海》1999年9月第1版,第2054页)。按照是否采取账外暗中的方式,回扣可以简单分为两种,即“账内明示”的回扣、账外暗中的回扣。在《反不正当竞争法》中规定的回扣,是账外暗中的回扣,也就是商业贿赂的典型行为方式。“账内明示”的回扣是合法收入,账外暗中的回扣是违法收入,甚至是犯罪行为。

  4. R. Wong says:

    Suzanne: Thank you for your eloquent and insightful observations regarding the EB-5 program. I was personally involved in an EB-5 RC investment for a hotel development in a prominent US city and your hypothetical example closely mimicked my own frustrating experience in dealing with USCIS as well as the investor agents in China. I am a real estate professional who has over 30 years of experience investing on behalf of institutional investors such as major insurance companies and banks. I was introduced to the program by a colleague who strongly felt that the EB-5 program was an attractive source of investment capital. After examining the program, it was readily apparent that the program had potential, but was highly risky due to uncertainties associated with the USCIS approval process and the muddled foreign investor market. I also have deep experience working with a variety of Federal financing programs such as Federal investment tax credits. When viewed in comparison to the tax credit programs, I felt that the EB-5 program was inadequately administered by government officials ill-suited to review investments. Nonetheless, the opportunity to pursue below-market financing was attractive. The developers of the hotel were also interested and we proceeded to submit an Exemplar I-526 to USCIS via the local regional center. Pre-marketing efforts were also initiated in China. However, I also advised the developer to pursue conventional equity investment with the goal of raising the necessary capital within 12 months when construction was slated to begin. There would be a dual track for raising the capital. Conventional equity would be more “expensive” compared to the less “expensive”, but highly uncertain EB-5 capital. The hotel had secured a major hotel flag along with construction/permanent financing. Today, the city’s hotel market is one of the hottest markets in the US. After submitting the Exemplar I-526 for the development, USCIS did not respond for 10 months at which time a ream of RFE’s questioned the validity of the investment. Investor agents were also wrangling over their share of the transaction fees. By then, the developer had raised the necessary equity from private US investors. Today, the hotel is under construction and has attracted considerable interest from institutional investors seeking to acquire investment-grade hotels. It is a shame that a program with so much promise would be so poorly implemented such that strong attractive investments are not approved while marginal, even fraudulent, investments are approved by USCIS. It is this type of experience that has caused many in the US business community to shun the EB-5 program.

    • Jin Yong says:

      Too bad USCIS thinks real projects can afford to wait 1 year or longer for their decisions. The delay actually hurts potential bona-fide projects.

  5. PP Wang says:

    The alleged practice of some EB-5 regional centers of kicking back the “Administration Fees” (paid by the EB-5 investors to the regional centers) to the Chinese migration agents without the investor’s knowledge also violates numerous U.S. laws. Please see page 21, and pages 48 – 49 of http://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf

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