H.R. 5992 Account Transparency Requirement
October 14, 2016 1 Comment
The Account Transparency Requirement proposed in Goodlatte and Conyers’ H.R. 5992 American Job Creation and Investment Promotion Reform Act of 2016 (see pages 64-72) is probably the most important new idea in the bill. Commentary on the bill has focused on suggestions that people don’t like (retrogression, set-asides), but we should also be discussing account transparency because it’s genuinely relevant to program integrity. I don’t see national security threats in EB-5, but misappropriation of funds shielded by lack of transparency is a live problem — the major factor in most SEC enforcement actions so far on EB-5 offerings. H.R. 5992 may not become law, but any EB-5 bill that does get passed will certainly have the words “reform” or “integrity” in the title, and we should be working to refine relevant and effective integrity provisions. Let’s consider H.R. 5992’s account transparency proposal, the impact it would have if enacted, and how it might be improved.
Summary of the Account Transparency Requirement Proposed by H.R. 5992
- A new commercial enterprise (NCE) must place each EB-5 investor’s funds in a “separate account” with the following characteristics:
- The account contains only pooled investment funds of EB-5 investors for a single project
- The account is at an insured US financial institution
- At least one signatory on the account is an independent third party with a position such as a bank officer, broker-dealer, attorney, or CPA
A job-creating enterprise that’s affiliated with the NCE must likewise hold investor funds in a separate account satisfying the above requirements. The proposal does not place requirements on accounts for an unaffiliated JCE.
- Funds may only be transferred out of the NCE account for one of the following purposes:
- Refund an investor’s investment
- Transfer to another account that also meets the above qualifications for a separate account
- Transfer to a job-creating entity
- Deploy funds in the project for which they were intended
- The following oversight and reporting is required:
- Whenever the NCE accepts investor funds into its account, it must immediately send a notice to the investor, the regional center, and USCIS that contains this account information: contact info for the financial institution, the name of the independent signatory, and access to view the account balance online on an on-going basis.
- Whenever the NCE transfers funds out of the NCE account, the transfer must have prior written approval from the independent signatory, and the NCE must immediately send a notice to the investor, the regional center, and USCIS that specifies the amount and destination of the transfer.
- When an affiliated JCE deploys funds into a project, the independent signatory or another attorney, broker-dealer, or CPA has 30 days to “verify that the funds were deployed in the project for which they were intended,” and notify the investor, regional center, and USCIS accordingly.
Analysis and Links
I wrote up some thoughts on the AT proposal, but I’m demoting them to a comment on this post because I’m more interested in what other people think. What’s the perspective from lawyers who specialize in securities law issues? How would H.R. 5992’s Account Transparency Requirement work for large NCEs that already implement fund administration and independent fiduciaries? How would it work for small businesses using EB-5, and direct EB-5 cases? Do investors and their advisors see effective protections in this proposal? What’s the perspective from regulators and receivers working to sort out past misappropriation cases? How could the AT proposal be better directed toward the ultimate account transparency goals of deterrence, detection, and discovery and recovery? What are the best protections we can afford, for investors and for the healthy future of the program?
Articles on H.R. 5992 Account Transparency Requirement
- Gary Friedland and Jeanne Calderon of NYU have started the conversation with a detailed analysis of the H.R. 5992 Account Transparency Requirement in “EB-5 2.0: Can Account Transparency Save the Program?” (October 6, 2016 draft). They describe the background that underlies the need for an AT requirement, unpack the H.R. 5992 proposal point by point and discuss its goals and implications, and suggest areas for further discussion and improvement. A few of my takeaways from the article and subsequent emails with Dr. Friedland: For improved effectiveness, the AT proposal might further define the role and duties of the third party signatory and verifier, bolster account transparency by adding account balance reconciliation to the Regional Center’s Form I-924A annual report, consider expanding the scope of reports to be provided to investors in an NCE (e.g. quarterly account statements, notice of transfer of funds from other investors in the NCE, a copy of the Regional Center’s Form I-924A filing), and craft AT requirements for the special cases of small EB-5 projects and direct EB-5.
- I hope to link to other topical articles here soon.
Other relevant content
- Assuming that the people drafting the H.R. 5992 Account Transparency Requirement were primarily motivated to avoid another Jay Peak situation, I made a chart (as best I could, based on detail in the legal complaints and news reports) that illustrates how and where exactly money got misappropriated in a Jay Peake project. Here is my simplified chart of where the money went (or see Vermont DFR for the complete, complicated picture). In my chart, related party transactions, single signatories, and multiple layers in the flow of funds stand out as fault lines. The chart also shows why it’s necessary to do more than watch funds safely out the door of the NCE account.
- Angelo Paparelli’s article All Checks but No Balances — The Systemic Failure to Protect EB-5 Investors (June 24, 2016) diagnoses a lack of meaningful oversight in EB-5 and defines a role for independent fiduciaries representing investors.
- Ron Klasko’s article Attention Receivers and Litigators: EB-5 Investors Are Not Your Typical Clients (July 11, 2016) addresses the unique position and interests of EB-5 investors when problems arise in an investment project.
- The EB5 Diligence webinar on Structural Weaknesses in Path America’s Offering (September 12, 2015) considers controls and procedures that might have averted the self-dealing and misappropriation that happened in the Path America case. The discussion is important because it could apply as well to other SEC EB-5 actions, most of which similarly involve related-party scenarios.