Washington updates, RC termination appeal, SEC (WA), Petition processing

Washington Updates

The comment period for proposed EB-5 regulations closes on April 11, and the regional center program’s current authorization expires on April 28. Either of those immanent deadlines could be associated with significant EB-5 program changes, but I’m not hearing any confident predictions for what will happen exactly. Last week Senators Grassley and Leahy wrote a letter reacting against news that a couple lobbyists for large real estate developers may have recently agreed to “secret backroom deals to thwart reforms.” The senators promised to oppose any such deal, which would presumably protect investment amounts and TEA definitions from significant change, but have yet to  reintroduce substantial EB-5 reform legislation of their own.  And Congress has so much to do in the next month that one wonders whether our representatives can even agree on a plan to fund the government beyond April 28, much less figure out EB-5 changes. For other commentary on state of play in Washington, see for example posts from IIUSA and Wolfsdorf Law. (This is probably too unserious to even mention, but Representative Steve King of “other people’s babies” fame has introduced another bill, H.R.1502, proposing to repeal the EB-5 program entirely. I don’t see this particular bill going anywhere, not least because terrorist threats may be the one problem EB-5 does not have.)

Appealing Regional Center Termination

Matter of S-D-R-C-, ID# 13768 (AAO Mar. 15, 2017) considers the question of whether or how USCIS would be justified in terminating South Dakota International Business Institute  — a regional center that on the one hand has had many successful projects and contributed significantly to economic growth over the years, and on the other hand was – for a number of years, though not currently – in the hands of management charged with various improper activities. The AAO concludes, after interesting discussion deserving industry attention and response: “Evidence of a regional center’s improper or unlawful activities is relevant to the question of whether that center is continuing to promote economic growth, but derogatory evidence must be weighed against countervailing equities on a case-by-case basis. This case contains evidence of the diversion of funds away from job-creating activities, as well as evidence of substantial economic activity that created thousands of jobs. USCIS must consider all relevant factors in determining whether the Applicant’s regional center designation should be terminated or maintained.” AAO withdrew USCIS’s termination decision and remands the matter for further proceedings.

Challenging Capricious Decision-making

Mr. Whalen also posted a decision on the Quartzburg Gold case that I discussed last summer. The court denies part of the plaintiffs’ motion, but grants the plaintiffs’ charge that USCIS was arbitrary and capricious in its decision-making. “First, the reasoning underlying USCIS’s denial of an initial set of Plaintiffs’ petitions was arbitrary and capricious and counter to the evidence before USCIS. Second, USCIS’s decision to treat the petitions of certain Plaintiffs differently than others, despite the fact that all of the Plaintiffs presented effectively equivalent petitions, without providing any explanation for doing so, was also arbitrary and capricious.”

Litigation

The SEC has announced fraud charges against Washington-based businessman Andy Shin Fong Chen and his company Aero Space Port International Group, Inc. The complaint has the usual allegations regarding misappropriation of EB-5 investor funds, and is distinctive in targeting just one of the regional center’s several offerings. The RC response argues that the EB-5 investments are not securities (SEC begs to differ), and points out that the investors involved still support the project and its management (unsurprisingly, considering that they have I-526 petitions pending). I haven’t had time to fill out details in my log of SEC EB-5 cases, but hope someone else will publish an exercise like this to highlight common themes.  In an article published today in The Hill, Catherine DeBono Holmes discusses reforms that could help reduce or eliminate the factors that keep repeating in the scattered cases of alleged fraud in EB-5.

I-526 Petition Processing

The EB-5 Insights blog reports that that IPO seems to be implementing an undeclared policy of holding I-526 petitions in abeyance when an Exemplar I-924 Petition associated with the same new commercial enterprise has been filed. For reference, here is my running log of communications from USCIS regarding EB-5 petition processing practices and times. My EB-5 discussion forum is still open for investors to discuss their experience and progress of the cases they are tracking.

Washington updates

The article Will EB-5 Survive? (February 23, 2017) in National Real Estate Investor reviews the current status of EB-5 politics.

[See also my more recent post on the 3/8 House Judiciary Committee hearing.]

Washington updates

2/6/2017 UPDATE: The news in this post is now all outdated.
–Original Post–
This week Washington has been busy making good on campaign promises and also throwing babies out with the bathwater. Of most significance for EB-5, the President has frozen federal hiring (halting USCIS plans to deal with petition backlogs and improve processing by bringing on more staff) and created two hurdles for new regulations (a regulatory freeze and a make-one-delete two requirement), deferring hopes and fears for the long-awaited modernization of EB-5 regulations. A horrifying new order suddenly suspends whole countries of people from US visas and even entry based on nationality. Senator Dianne Feinstein decided the time was right put her long-running opposition to EB-5 in the form of a bill (S.232) that proposes eliminating EB-5 entirely, both direct investment and the regional center program. I’ll write more about this bill if anything comes of it, but I expect that that the significant legislation will be a forth-coming update to the Goodlatte EB-5 reform bill (last released 12/2/2016). I am going forward with my work as usual under the assumption that reason will prevail eventually and that immigrant investment and the country generally are not, after all, doomed.  But if anyone would like to offer me a chance to move from the immigration business to the walls-and-bunkers business, I’m listening.

Regulations freeze, SEC action (San Francisco), RC List Changes

Progress of Proposed Regulations
As EB-5 stakeholders process proposed new EB-5 regulations, they are thinking (1) how can I dissuade USCIS from the changes that would be most harmful for me personally; (2) how can I take best advantage of this golden opportunity to explain to USCIS how EB-5 works in the real world; and (3) how early could the proposed regulations become final, effective regulations? We know at least that regulations can’t proceed to the next step until after the public comment period closes on April 11, 2017, and now the new administration has put another hurdle in the road.

President Trump’s first Presidential Memorandum is addressed to the Heads of Executive Departments and Agencies with the subject Regulatory Freeze Pending Review (January 20, 2017). It does not put a moratorium on new federal regulations, but does require that any new or pending regulations be presented for review and approval of a Trump-appointed agency head before proceeding any further. This means that proposed new EB-5 regulations will need to go before General John Kelley, the newly-confirmed Secretary of Homeland Security. Would General Kelley allow new EB-5 regulations to move forward? The tireless Senator Grassley met with General Kelley on January 13, and reported that “In addition, we talked about new proposed regulations published by the Department today that would go a long way to restoring the EB-5 immigrant visa program to the way Congress intended it to be used: to help bring much-needed jobs and capital to rural and economically distressed areas. I [Grassley] expressed my strong desire that these rules be kept in place and allowed to go forward to ensure that this program fulfills its original intent.” I don’t know what input General Kelley may get from other directions, or whether the flood of lobbying dollars out of New York will have an impact. IIUSA indicates that its official comment submission to DHS will seek to demonstrate the negative effects that proposed changes would have on the industry.

New SEC Action
People drafting new EB-5 regulations and legislation are motivated, in part, to implement reforms that can help preempt the kind of situations that end in SEC action. When cases appear, we have a post-mortem opportunity to consider: what went wrong here, and how might problems have been prevented or at least detected earlier? Last week the SEC published a complaint against San Francisco Regional Center, Thomas Henderson, and related parties. This case has the usual allegations (commingling, misuse, and misappropriation of funds), but offers a relatively challenging “what-if” analysis. The regional center’s website and offering documents (as quoted in the suit) appear to make all the right representations about account transparency; it just happens that the RC apparently didn’t follow through on these representations, and a third-party co-owner with apparently every right and motivation to monitor proper use of funds had to resort to a lawsuit to claim his right to oversight and eventually apply the breaks. Retrospective armchair due diligence isn’t as easy for this case as for some others. I wonder – what different policy or different industry practices could have contributed to improved policing in this situation?

Regional Center List Changes
Additions to the USCIS Regional Center List, 11/29/2016 to 12/06/2016.

  • Advantage America Seattle Regional Center (Washington): www.aaeb5.com
  • CP Northern Regional Center (Michigan, Wisconsin)
  • California Agricultural Greenhouse Regional Center, LLC (California)
  • California Bond Finance Regional Center, LLC (California)
  • Greystone EB5 Northeast RC, LLC (Connecticut, Delaware, District of Columbia, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Virginia): www.greystoneeb5.com
  • QueensFort Capital Texas Regional Center, LLC (Texas): queensforteb5.com
  • Texas Crown Regional Center, LLC (Texas)

Renamed:

  • Civitas Pacific Northwest Regional Center, LLC (former name Civitas Northwest Regional Center) (Oregon, Washington)

New terminations:

  • American Development and Investment Regional Center (California) Terminated 1/5/2017
  • Bay Area Regional Center LLC (California) Terminated 12/22/2016
  • Path America Sonoco, LLC (Washington) Terminated 11/23/2016

Recap of Major Winter Developments (policy, regulations, legislation, statistics, fees, Commerce study, new AAO, SEC actions, litigation)

The past few months have been packed with important EB-5 news, and it’s hard to keep up with all that’s happening.  As a reminder, here is a summary list of the major developments to keep in focus. (The first five I’ve discussed in previous posts; the last five I haven’t had time to write about yet.)

  1. New Policy: Effective November 30, 2016, USCIS replaced all existing EB-5 policy with a new Policy Manual: USCIS Policy Manual, 6 USCIS-PM G (November 30, 2016). This major event puts the whole program on a new footing (though 6 USCIS-PM G is essentially similar to the policy it replaced, with a few adjustments, additions, omissions, and clarifications as I started to discuss here).
  2. Proposed New Regulations: As I announced this week, USCIS has published notices of proposed EB-5 rule-making in the Federal Register.  Advance Notice #0008 invites stakeholders to give input on possible changes to regional center designations and terminations and the I-924 and project approval process. Notice #0006 gives proposed new rules covering priority dates, investment amounts, and TEA designation, among other things. If the new rules are finalized as proposed, the EB-5 minimum investment amount will increase to $1.8 million (or $1.35 million within a TEA) as calculated from inflation, fewer projects will qualify for TEA status, investors with approved I-526 will have the option to invest in a different project without losing their original priority date, and regional centers may need to get project approval before offering investments. We can expect action toward finalizing regulations at some point after the public comment period closes on April 11, 2017 – maybe shortly or maybe long after, if the comments inspire redrafting and/or if the new administration chooses not to greenlight the regulations.
  3. Proposed New Legislation: Congress was (reportedly) actively working on EB-5 reform legislation before the continuing resolution that passed on December 10 provided the regional center program with a clean extension through April 28, 2017. We have a staff draft of an EB-5 bill dated December 2, 2016, and understand that staffers and lobbyists are still working with this document behind the scenes. If the staff draft were passed as-is, the EB-5 minimum investment amount would decrease to $700,000 (or $650,000 for a TEA investment), with incremental increases up to $1M/$800K, additional TEA categories and incentives (including rolling visa set-asides) would be introduced, and regional centers would  be given hefty new annual fees ($10,000 or $20,000) and relatively gentle new fund administration and reporting requirements. (My bill comparison chart gives a link to the bill text and summarizes the provisions.) We may see action toward passing reform legislation in the coming months before the next regional center sunset date on April 28 – or may not, with so many other matters demanding attention during Trump’s first 100 days in office, and the anti-change lobby.
  4. New Data and Statistics: We got updated numbers from USCIS and the Department of State on EB-5 petition and visa processing and backlogs as of the end of 2016. The numbers show a queue of current and prospective visa applicants about 75,000 people long, which implies an 8-year visa wait for new China-born investors. And unless USCIS improves processing volumes, it will take 2+ years just to process the currently-pending I-526 petitions and 3+ years to just process the currently-pending I-829 petitions. Proposed EB-5 reform legislation and regulations both plan to improve processing times/volumes, but do not offer to increase available visa numbers.
  5. Fee Increases: EB-5 petitions and applications have higher filing fees since December 23, 2016. The new I-924 fee (dramatically increased to $17,785) is likely to curb the burgeoning number of regional centers (perhaps especially new applications from serial operators, which have accounted for an increasing percentage of new RCs) and discourage voluntary filing of amendments.
  6. Department of Commerce EB-5 Impact Analysis: We finally have the long-promised Department of Commerce study commissioned by USCIS: Estimating the Investment and Job Creation Impact of the EB-5 Program (January 2017). The product is a slender report and based on old data from 2012-2013, so the numerical conclusions are of limited interest at this point, but the analysis is still significant and could have political impact. I can see EB-5-critic Senator Grassley seizing on this report and the barriers to good analysis that the authors describe. EB-5 economists should review the formerly common EIR problems identified on p. 9, and ensure that they’re not still repeating them.
  7. New AAO Decisions: In November and December, USCIS published 27 new decisions on I-526 cases and one new decision on a regional center termination appeal.  The termination decision (NOV022016_01K2610) and 15 nearly-identical I-526 decisions (for example DEC142016_07B7203) are related to Path America KingCo, LLC, which lost designation after an SEC action mainly targeting its principal. The regional center appealed its termination based on pursuing active, viable projects under reputable new management. Investors appealed with the argument that their petition denials were premature, coming while the regional center appeal and the SEC case were still unresolved. AAO found that the investor appeals were hopeless due to the issue of material change, and that the regional center appeal was not sufficiently compelling. (But the RC decision interestingly grants the possibility that mitigating, corrective, and restorative actions could potentially compensate for past problems with the regional center or related entities.) Among decisions not related to Path America, I hope to write more about three decisions with good discussion of material change issues (NOV012016_02B7203, NOV072016_01B7203, NOV292016_02B7203) and two that address the level of business activity necessary before filing I-526 (NOV092016_01B7203, NOV292016_01B7203). I’ll particularly highlight NOV292016_01B7203, which explicitly states what I’ve always said – that an investor must not file a TEA-based I-526 before securing a location for the business.
  8. New SEC Actions: On December 27, 2016, the SEC published a complaint brought against California-based attorney Emilio Francisco and associated companies who are charged with diverting and stealing EB-5 investor funds. On December 28, 2016, the SEC announced settlement on a case against AJN Investments LLC/Jason Adam Ogden, who was charged with diverting EB-5 investor funds and wrongly making midstream business model changes.  I’m interested to note that these SEC complaints do not implicate or even identify the regional centers that sponsored the EB-5 investments involved. The SEC holds the project companies and principals exclusively responsible for problems in the offerings, projects, and use of funds. I wonder whether USCIS will pursue the regional center sponsors, holding them responsible for oversight, or whether it will follow the SEC’s lead in considering the sponsors out of the picture. It appears that the regional centers in these cases did not control any NCE bank accounts and were not involved in offering documents or investor promotion. In other news, the SEC has just settled with Path America (a case that did implicate the regional center).
  9. Other litigation: On November 14, 2016, a long list of EB-5 investor plaintiffs brought a civil suit against a long list of defendants associated with the Palm House Hotel EB-5 project. The suit enumerates the lies that the investors believe they were told, calls out every party and service provider allegedly involved in making false representations, and traces alleged misuse of investor funds. The case appears complicated and ambiguous (not the kind of low-hanging fruit that the SEC seems to favor) but full of drama and makes for gripping reading. Another case that’s older now (filed August 2016), but also a colorful Florida story: USA v. Karamchand Doobay, who was charged with perpetrating fraud through his regional center and projects. I’m sure the investors in these cases would unite in one message for the future: do not neglect due diligence before investing! And the defendants would likely encourage care in partnerships and representations.
  10. Good news: Meanwhile, just to keep  perspective, 99% of the 865 regional centers are apparently doing well and good, or avoiding lawsuits and bad press at any rate. At least $10.4 billion dollars of EB-5 investment entered the U.S. economy in 2016, judging by the number of I-526 petitions filed during the year. I was privileged to write business plans last year for 32 new EB-5 deals that look promising for both local communities and foreign investors, and I continue to be encouraged by what I see on the ground on the bright side of EB-5.

(Also note, adding to the festival of updates and feedback opportunities, an in-person EB-5 stakeholder meeting just announced for March 3 in DC.)

RC Sanctioned $1M for Agent Payments

Last December, the Securities and Exchange Commission made examples of several parties (mostly immigration lawyers) found to have violated Section 15(a)(1) of the Exchange Act by acting as unregistered broker-dealers: helping to effect securities purchases in an EB-5 Regional Center, and receiving a commission for each investment they facilitated. Each respondent was ordered to disgorge the fees and interest plus pay a $25,000 fine. (If you’d like to be reminded of the circumstances, you can read the Cease and Desist orders for Bernstein, Wang, Manesh, Khorrami, Kaye, Bander, and Azarmehr). These actions reiterate the message that it’s wrong to act as an unregistered broker dealer. It’s equally impermissible to to pay an unregistered broker-dealer, and the SEC has picked a high-profile target to drive this point home: American Life, which must now pay a civil penalty of one million dollars for transaction-based compensation paid to certain EB-5 agents from 2011 to 2014. American Life has brought in more EB-5 investment and completed more good EB-5 projects than almost any other regional center in history, but the SEC found that it also wrongly “paid or caused to be paid transaction-based compensation to certain domestic EB-5 agents in connection with EB-5 securities, which caused those EB-5 agents’ violations of Section 15(a)(1) of the Exchange Act.” Pay attention, Regional Centers, to this warning shot! To avoid million dollar penalties of your own, be extremely careful about who acts as a finder for your investors, and how. If an immigration lawyer offers to help introduce investors, and expects be compensated accordingly, just say no! You may want to review IIUSA’s Best Practices for Engaging With Intermediaries.

4/13 Senate Hearing Notes, RC Research, SEC Case (VT), RC List Changes

Senate TEA Hearing
You can now review video of the 4/13 hearing on EB-5 targeted employment areas on the Senate Judiciary Committee website (be patient, the video does start eventually), or download my audio recording. My main take-away from the hearing is that Senate leaders are on a long-term path to EB-5 reform and Regional Center reauthorization. They discussed very substantive potential changes in a very preliminary manner and sounded no-where near ready to sit down and agree on legislation. This is worrisome, considering that only a handful of Congress workdays remain before the 9/30/2016 Regional Center sunset date (what with conventions and vacation and holidays) – hardly enough time to hammer out the issues and questions that this hearing raised as important. The TEA issue is a thorny one because it comes down to a question of what kind of projects Congress wants to see incentivized, and our representatives don’t agree about that, much less on the question of what type and method of incentive would effectively focus on such projects.

EB-5 Project Research
Listening to Gary Friedland testify at the Senate Hearing reminded me that I’ve been remiss in reporting on the latest EB-5 research that Mr. Friedland and Professor Calderon have posted at the NYU Center for Real Estate Finance Research. Their paper EB-5 Mezzanine Financing: A Real World Example (3/23/2016) presents and analyzes an actual term sheet for a large EB-5 regional center deal, and will be very interesting for people seeking examples of EB-5 documents and deal terms. EB-5 Capital Project Database: Revisited and Expanded (3/29/16) follows up on last year’s paper A Roadmap to the Use of EB-5 Capital: An Alternative Financing Tool for Commercial Real Estate Projects (5/24/2015) by adding details of 27 additional EB-5 projects. The number 27 is small – representing a minority of EB-5 projects – and yet these few projects alone involve over $5.6 billion in EB-5 capital, which means over 11,000 EB-5 investors and almost three years of the total EB-5 visas available. I have to hope that Senators and journalists don’t examine the NYU database, because these few projects claiming so many dollars and visas could provide ammunition for criticism that EB-5 TEA investments have become a subsidy for luxury developments in tier one cities, a benefit for mega-developers and Chinese developers, an opportunity to replace existing financing rather than a source of needed capital, and a minor contribution to job creation. As a business plan writer I work with EB-5 projects that could be attractive poster children for the regional center program, but such modest projects usually don’t make the research papers or the news and their fate may depend on how the big players are seen to use EB-5.

New SEC Case (VT)
Also in the category of the last thing we need when facing a fight for Regional Center reauthorization: a venerable figure in the RC program is now subject of fraud charges and an asset freeze. According to today’s press release: SEC Case Freezes Assets of Ski Resort Steeped in Fraudulent EB-5 Offerings. The State of Vermont has filed a concurrent suit. The SEC Complaint does not name Vermont Regional Center, but it does call out Ariel Quiros, William Stenger, and a whole list of Jay Peak companies. I read the SEC complaint ready to make allowances, since I know that in real life it’s extremely difficult to produce documents that are completely free from omissions and misleading statements or that perfectly anticipate what subsequently happens, and I think one should be very hesitant to cry fraud. Sadly the SEC complaint leaves little room for charitable interpretation, and this situation looks like a mess likely to pass beyond Jay Peak and their investors to leaders who have been regional center program champions. Senator Leahy concluded his comments on the enforcement action by saying: “Given the significant problems plaguing this program, I will continue to push for meaningful reform. Without reform, I believe the time has come for the program to end.” Hurry up, reformers!

Additions to the USCIS Regional Center List, 04/05/2016 to 04/13/2016

  • America FX Regional Center, LLC (California)
  • EB5 International II, LLC (California)
  • Hawaiian Ohana Regional Center (Hawaii)
  • Luichi, Inc. (Nevada)
  • Manhattan Metropolitan Regional Center (Connecticut, New Jersey, New York)
  • Watercrest Florida Regional Center, LLC (Florida)

Removed from the list

  • Deictic Investment Group LLC (California)

Legislative Update, Due Diligence, New I-485, New RCs

Legislative Update
We are now less than a month from December 12, when the Regional Center program will sunset if it doesn’t get another reauthorization. It’s possible that the program could get temporarily extended as part of the appropriations bill that also needs to get passed by December 11 (which would mean extension with no change through 9/30/2016), or there might be stand-alone legislation with some significant changes and reform as well as reauthorization, or our representatives might let the program lapse for a while because they haven’t worked out appropriate legislation in time but don’t want to see simple extension. Grassley, Corker, and Johnson sent a letter on 11/6 to Senate leadership saying that they oppose a straight reauthorization of the EB-5 Regional Center program in the anticipated appropriations bill that will cover fiscal year 2016, and advocate instead to continue the program together with measures to increase accountability and better guard against fraud and abuse. We wish they would hustle to formulate such measures. Grassley and Leahy have been quietly circulating a revised draft of S. 1501 (IIUSA has a copy, as do select real estate industry executives according to the Wall Street Journal Washington Wire blog). I’ve read the draft but decided not to comment here until it gets officially proposed. The new draft is significantly clarified and toned down from the original bill, though still a game-changer. But will passable legislation be proposed in time to make any difference? If only Washington worked more efficiently!

Due Diligence
I appreciated the article “EB-5 Due Diligence Matters” (November 3, 2015) by Douglas Hauer, John Nucci, and Peter Saparoff of Mintz Levin. The authors discuss the legal requirements for due diligence investigations and give practice pointers.

Form I-485 Update
USCIS has published new editions of the Form I-485, Application to Register Permanent Residence or Adjust Status and Supplements

New Regional Centers
Additions to the USCIS Regional Center List, 11/02/2015 to 11/12/2015

  • EB5 Capital Oregon Regional Center (Oregon, Washington): www.eb5capital.com
  • Empire Regional Center, LLC (New Jersey, New York)
  • Great Southern Regional Center (Georgia, South Carolina)
  • North Valley Regional Center (California)
  • Proficiency Regional Center LLC (California)

Congress passes RC extension to 12/11/2015

Today Congress passed a short-term spending bill that keeps the government running through December 11, 2015, and, among other incidentals, the EB-5 Regional Center program running without changes for the same period. The President is expected to sign later tonight, so I trust that this post is not premature. IIUSA has already made a statement.

So what’s likely to happen between now and December 11, the deferred sunset date for the Regional Center program? Not counting today, the Regional Center program has been reauthorized six times since 1992 (in 1997, 2000, 2002, 2003, 2009, 2012), and almost every time the authorization happened the way it did today, as part of the appropriations process. 2012 was the only time the Regional Center program has had stand-alone legislation instead of being packaged with a spending bill. (The 2012 legislation passed unanimously in the Senate and by a vote of 412-3 in the House, and made a few tweaks to the Regional Center statute and no changes to direct EB-5.) But lobbyists who spoke in IIUSA’s legislative update webinar last Friday opined that we shouldn’t expect another simple extension of the Regional Center program from December 11; we should anticipate legislation with substantive changes. Reportedly a collection of Congressional representatives interested in EB-5 have actually gotten together and formed a working group that has been meeting to discuss the Regional Center program and hammer out legislation fit to garner the bipartisan, bicameral, and urban-rural support that it will need to pass. The group is expected to go public with a work product soon, now that the short-term extension is in place. The lobbyists mentioned that the two most contentious issues for this group are the Targeted Employment Area definition and effective dates. I suppose that these are sticking points because both issues will create new “haves” and “have nots,” and interested parties each hope to be on the side of the “haves” when it comes to enjoying the TEA incentive and taking advantage of grandfathering if any. The lobbyists didn’t mention argument over new integrity measures or an increase to the minimum EB-5 investment amount; I take it those are givens. I don’t hear any serious rumors that the EB-5 Regional Center program will be dropped — $14.38 billion in foreign direct investment is a pretty big golden egg, and that’s what EB-5 has brought in since the beginning, according to IIUSA numbers, with $1.4 billion in the last quarter alone – but I also don’t hear anyone optimistic that the next three months will be easy. Congress reportedly still has a low appetite for immigration issues since the Executive Actions on immigration, and it has so much to fight about between now and December besides EB-5. (See also Ron Klasko’s 10/6 blog on this topic.)

White House Report, SEC Oil&Gas, I-829

EB-5 Program Changes To Be Initiated by USCIS and DOS
The White House released a report Modernizing & Streamlining our Legal Immigration System for the 21st Century (July 2015) that summarizes recommendations from various agencies for how to streamline and modernize the immigration system, as directed in the President’s executive actions of November 2014. “The recommendations in this report reflect actions that agencies will take to modernize our system for efficiency and applicant accessibility, streamline legal immigration avenues, and strengthen our humanitarian system.” The lack of buzz around this report makes me think that the public doesn’t expect the recommendations to turn into action any time soon, but nevertheless keep in mind two recommendations that reflect commitments by USCIS and the Department of State to make changes that affect the EB-5 program:

Recommendation 1: Update standards for the EB-5 Program. By enhancing program integrity and updating eligibility requirements, this program can better serve our nation. DHS intends to pursue rulemaking to achieve those goals, including by requiring conflict-of-interest disclosures by Regional Center principals, enhancing background checks and public disclosure requirements, and increasing the minimum qualifying level of investment. DHS will also take steps to improve the adjudication and approval of Regional Center applications.
Recommendation 2: Clarify options for potential EB-5 investors to obtain visitor visas. State will amend its guidance in the Foreign Affairs Manual to clarify that potential EB-5 investors can obtain visitor visas to examine or monitor potential qualifying investments if they otherwise qualify for the visitor visa.

SEC Charges Oil Company and CEO
SEC Charges Oil Company and CEO in Scheme Targeting Chinese-Americans and EB-5 Investors, reads the SEC’s press release. The SEC charged a Bay Area oil and gas company and its CEO with running a $68 million Ponzi-like scheme and affinity fraud that targeted the Chinese-American community in California and investors in Asia, including some solicited as part of the EB-5 Program. The scheme was conducted primarily outside the EB-5 program (EB-5 investor funds accounted for a just $8 million of the $68 million involved), and it’s hardly surprising when a new company promising 20-30% returns for oil and gas exploration gets charged with fraud, but the case is still interesting from an EB-5 perspective because it involves technical selling and registration issues. Seyfarth Shaw LLP has a good article on this topic: SEC charges EB-5 fund operators and finders. As the article points out: “The SEC’s actions against various participants in EB-5 transactions make it clear that, whether or not an offering involves alleged fraud, offerors of EB-5 project securities and other persons participating in the promotion of such projects must be careful to comply with all aspects of the applicable securities laws, including either registering or securing exemptions for the offering of the securities and complying with the broker-dealer and investment adviser rules.”

New Form I-829
People preparing to file the Form I-829 should keep in mind that USCIS has posted a new version with significant updates that particularly affect Regional Center investors. An EB-5 Insights blog post summarizes the changes.

TEAs and Multipliers
The July 2015 Regional Center Business Journal includes some very good articles. I particularly appreciated two articles discussing the logic of TEAs and Scott Barnhart’s aptly titled article “Economic Multipliers in the EB-5 Arena: Voodoo Economics or Sound Economic Practice?”

I-526 Backlog
The CIS Ombudsman’s 2015 Annual Report to Congress, has a section on the EB-5 program, including this sobering chart.
I526volume

SEC Ireeco, State Dept, Economists, New & Removed RCs

I have a sleeve full of urgent articles on the nature of the Regional Center program, inspired by legislation debates, and also a desk full of yet more urgent business plans for clients worried about the legislation debates and eager to get their deals filed. So this blog is getting neglected, but here are a few updates.

SEC Action
The SEC has announced charges against a firm for acting as an unregistered broker for EB-5 investors. See the SEC’s press release SEC Charges Unregistered Brokers in EB-5 Immigrant Investor Program. Michael Homeier emailed some helpful commentary on this case and Cathy Holmes has written a helpful article. This kind of action is not a surprise. The rules are clear and the SEC has repeatedly stated that it has its eye out for unlicensed persons receiving placement fees for introducing investors to investment offerors. EB-5 is a good place to hunt for this kind of offender, since the field includes many players who know more about immigration than about investment and are thus vulnerable to tripping up on securities issues. This case does not involve fraud, just failure to register, but the consequences are still serious and a good wake-up call for everyone. Ignorance of the law is no excuse! Talk to your counsel and make sure that nothing you’re doing could put you afoul of registration requirements. And recall that paying an improper fee can be just as wrong as receiving it. People who allege that EB-5 is a free-for-all should also take note of this SEC announcement, which reflects the fact that EB-5 investments are indeed regulated just like any other security.

State Department Update
The cut-off date for mainland China-born EB-5 visa applicants moved from May 1, 2013 to September 1, 2013, as of the July Visa Bulletin. This is good news, and means more Chinese investors who’ve passed I-526 can get in the queue to receive visas.

USCIS Updates
USCIS has posted notes from the June 4 stakeholder engagement with economists. The most recent update to IPO processing times (posted July 15) shows a fractional dip in I-526 times (to 13.4 months) and slight increase to I-829 and I-924 times (to 13.1 and 12.2 months respectively). USCIS has officially suspended its Electronic Immigration System (ELIS) for Form I-526, and the Regional Center Document Library is now inactive — not a surprise, considering feedback from the people who struggled to use these tools. Also note that there’s a new and significantly expanded edition of the Form I-829 (dated 5/7/2015).

New and Removed RCs
Additions to the USCIS Regional Center List, 6/08/2015 to 6/23/2015

Additions to the USCIS Terminated Regional Center List 5/7/2015 to 6/9/2015

  • SZNW (California)
  • EB-5, MRC LLC (Michigan)

Suggested RC program changes (Jeh Johnson letter)

The EB-5 Regional Center program needs another reauthorization from Congress before September 30, 2015, and debate is heating up as to what program changes may be packaged with the reauthorization. The last couple program extensions included only minor tweaks (and were for a shorter period than hoped), but some significant changes are likely this time around. An important document in the debate is a April 27, 2015 letter from Secretary of Homeland Security Jeh Charles Johnson to Senator Grassley and Senator Leahy (click the link to read the letter). Here’s my summary of (and parenthetical comments on) Secretary Johnson’s proposals:

  • That Congress define additional bases for terminating regional centers and denying applications and petitions, with a particular focus on fraud risk and national security concerns. (This doesn’t look like a big change from current practice, as USCIS has already fit a wide variety of reasons for Regional Center termination under the official justification of “no longer promoting economic growth,” and petitions can already be denied and revoked for fraud and misrepresentation. And one hopes that broader authorization wouldn’t turn into excuse for decisions based on mere suspicion or without notification or due process.)
  • That Congress provide USCIS with the options of fining or temporarily suspending a regional center, in addition to the option of terminating it.
  • That Congress authorize USCIS to require that all regional center principals be U.S. citizens or lawful permanent residents. (This would be an important change from current practice.)
  • That Congress authorize USCIS to prohibit participation in regional centers and commercial enterprises by people with certain criminal and civil violations.
  • That Congress authorize USCIS to request reporting on and certification of regional center compliance with securities laws. (It’s not clear what exactly this would involve, and to what extent such a requirement would put a regional center in the position of having to certify compliance for activities by sellers or loan recipients that it doesn’t control.)
  • That USCIS be authorized to require and publish regional center annual reports that would include project progress reports, description of fund usage, and accounting of job creation. (It’s not clear how this would differ exactly from the current I-924A. With USCIS having omitted for years to follow up on promises to publish I-924A data, and hardly releasing any documents except as forced by FOIA, I’m skeptical of the promise/threat to publish.)
  • That USCIS be authorized to charge regional centers $20,000 per year to fund an “EB-5 Integrity Fund” that would underwrite audits and site visits.
  • That Congress refine the TEA definitions to limit them to a specified number of continuous census tracts and to include closed military bases by default. (Kudos, CMB lobbyists!)
  • That Congress increase the EB-5 investment amount for both TEA and non-TEA investments, and to link the investment amount to an inflation index from now on. (Mr. Johnson does not suggest an amount for the increase, but states that USCIS is separately writing an increased minimum investment into revised regulations.)
  • That Congress authorize USCIS to require regional centers to file business plans and offering documents in advance of individual investor filings. (Apparently, a sort of “dummy-I-526” process, which we’d like if processing times weren’t so long. Mr. Johnson also notes that this requirement is already being incorporated in regulations under revision.)
  • In the letter, Mr. Johnson also notes that he has approved a new protocol specifically defining and limiting how members of the public and Congress may communicate with USCIS, and limiting senior leadership intervention in case adjudications.

Secretary Johnson is not the only one who can write to senators and advocate for changes. Consider getting on board with advocacy efforts and contacting your Congressional representatives to express your views about Regional Center program reauthorization. IIUSA has drafted a letter with helpful comments on suggestions in the Johnson letter.

New & Removed RCs, Processing Times, Websites, Multifamily, NYT, Best Practices

New & Removed Regional Centers
Additions to the USCIS Regional Center List, 4/28/2015 to 5/11/2015

  • Golden State Economic Development Fund, LLC (California)
  • Encore Midwest Regional Center, LLC (Illinois and Missouri): encoreeb5.com
  • White Lotus Group Regional Center (Iowa and Nebraska)
  • Liberty Minnesota Regional Center (Minnesota and Wisconsin): libertyregionalcenters.com
  • American Regional Center Opportunity Fund, LLC (New Jersey, New York, and Pennsylvania)
  • Vistar’s EB-5 Business Alliance of Texas LLC (Texas)

Additions to the USCIS Terminated Regional Center List 4/22/2015 to 5/7/2015

  • LaSalle County Business Development Center (LCBDC) (Illinois)
  • US HITEC Regional Center (Illinois)
  • Tennessee Regional Center, LLC (Tennessee)

Other Items of Note

OIG and the Mayorkas legacy

After listening to an EB-5 stakeholder “Conversation with Director Mayorkas” teleconference on December 3, 2012, and hearing what seemed like just more idealistic talk about building greater expertise and professionalism and transparency into the EB-5 program, I wrote a depressed post titled “Promises for the future, not today.” I ended up deleting that post a couple months later when, to my surprise, Director Mayorkas’ Quixotic promises started coming true. He was a driving force behind hiring higher-grade subject matter experts onto the USCIS EB-5 adjudication team to improve the quality of adjudications; getting the EB-5 program office moved out of California to Washington D.C, where it gained more resources and more opportunity for oversight and collaboration with partners such as the SEC and FBI; hosting regular public stakeholder meetings to improve communication and transparency; and getting out a years-overdue EB-5 policy memo that helped make adjudication policies more standardized and transparent. Objectively, these moves were good for the integrity and health of the EB-5 program, though there were side effects. Presumably quite a few California adjudicators lost their jobs, and those who stayed with the program were reorganized and got more oversight and had to work harder (just as we who prepare paperwork had to step it up based on the rising review standards). I’m sorry but not surprised that Mr. Mayorkas has ended up with a nice big target on his back, especially since his next move after shaking up the EB-5 division and trying to whip it back into shape has involved helping President Obama with the Executive Actions on immigration. If you’d like to witness people aiming at that target, you can read the March 24, 2015 edition of the Office of Inspector General’s investigation into USCIS employee complaints. Have your gas mask ready to deal with the politics. Or if you just want the summary of the media’s take on this report: Mr. Mayorkas is a bad man who intervened in the decision-making of unimpeachable career civil servants out of favoritism for evil Democrats. My take is that a few disgruntled employee complaints about ambiguous cases cannot obscure how much Mr. Mayorkas improved the quality and predictability of EB-5 adjudications during his tenure by hiring business experts and economists and attorneys, getting more resources committed to EB-5, and pushing for published policy guidance. I personally blame his standards and staffing decisions for the fact that my business plans are about ten pages longer than they were pre-Mayorkas era and festooned with footnote citations to verifiable market and industry research. I also witness and appreciate the improved professionalism that he encouraged in preparation and review of EB-5 cases.
Update: See the comments for additional commentary and links to informed articles related to the OIG report.

Immigrant investor program comparison; SEC action

To understand what the EB-5 program is and is not, it’s helpful to look at EB-5 in context of other immigrant investor programs. Last year the Migration Policy Institute published a very nice report that does just that: Selling Visas and Citizenship: Policy Questions from the Global Boom in Investor Immigration (October 2014). The report divides immigrant investor programs into two main categories and five types, as summarized (by me) in the following table.
comptable
Note that EB-5 falls within the category of private-sector business investment, and does not involve an investor-government transaction. You can give the Malta government cash in exchange for citizenship (program type #5); you can’t give the U.S. government cash for citizenship. Australia offers the option of a government investment product (government bonds) to buy in exchange for a visa (program type #3); the U.S. government does not offer EB-5 investments, leaving that to the private sector. Spain will grant a temporary visa if you purchase property (program type #2); the U.S. will not grant an EB-5 visa simply for asset acquisition. Agents trying to sell EB-5 have muddied the waters here, because potential immigrant investors like security and simplicity, and it’s not easy to sell private sector investment. Investing in a private business requires sophistication and involves risk, but that’s not such a comfortable story. So some agents try to imply that the U.S. government sponsors/underwrites EB-5 investments, and some try to peddle “secure investments” that are really only non-qualifying asset acquisitions. Do not listen to such stories. The fact is that the EB-5 and Regional Center programs fundamentally involve at-risk investment in job-creating business. You cannot buy a green card, the U.S. government does not offer or sponsor your investment (neither Regional Center approval nor project “pre-approval” constitute endorsement or underwriting by the government), and you can’t gain permanent residence simply by expending a certain amount of money. You can immigrate to the U.S. by making a qualifying investment that is spent to develop a new commercial enterprise that creates jobs. Or you can decide that the U.S. is too much trouble and go to St. Kitts & Nevis to buy citizenship.

A business investment-type program has advantages and disadvantages for governments. On the positive side (so far as domestic politics are concerned), the program can’t be criticized for simply selling green cards, and it may create jobs and spur economic growth. On the negative side, the government has a tough task in ensuring program integrity and maximizing economic impact when it doesn’t control the investment transaction. If you’re interested in this topic, I recommend reading the entire Migration Policy Institute report, which reflects thoughtfully on policy implications for each type of immigrant investor program.

On another note, there’s wind of a new EB-5-related SEC action, this time involving sanctions against immigration attorneys who’ve received what the SEC considers to be impermissible transaction fees. I haven’t seen the SEC announcement yet, but Bloomberg has an article on the topic. I expect to both cheer and cry when I eventually see the list of attorneys involved. I’m sure it will include shameless actors long overdue to be skewered for their conflicts of interest and inappropriate involvement in marketing investments (cheer!), and also conscientious immigration attorneys who were just trying to help clients and didn’t realize that a certain service could be classed as facilitating a private securities transaction and thus impermissible without broker registration (cry). No doubt the SEC’s purpose is to set an example, so immigration attorneys take note! If you take an EB-5 client, review your securities law and, for your own protection, very carefully and clearly define how you can and can’t help and what precisely the client is paying you for.

ABC News stories, New RCs, IIUSA Conference

ABC on EB-5 Investors
This has been a week of journalistic exposés of how unsavory high-net-worth people can be. The New York Times has published a series of articles unveiling shady characters who’ve been buying up prime New York real estate, the Guardian has a multi-part series on how HSBC’s Swiss private bank has facilitated financial malefactors, and ABC news has released a bunch of screamer articles and videos on EB-5 investors that ask the question “are suspected criminals, spies, terrorists buying their way into the US?”
There are a few lessons for businesspeople offering EB-5 investments. First, do be serious about vetting your investors, assuming you don’t want to end up some day with unsavory connections and cameras chasing you down a hallway. USCIS, the State Department, OFAC and their partners are much more serious and meticulous about vetting EB-5 petitioners than the ABC reports imply, but still you can’t be too careful with your own screening.
As you read the ABC stories yourself and field reactions from others, here are some points to keep in mind:

  • ABC’s key sources appear to be Senator Charles Grassley and a few disgruntled USCIS employee insiders who felt they were rushed and micromanaged;
  • Senator Grassley’s stand on immigration is to increase border security, beef up interior enforcement, oppose amnesty, scrutinize DHS, and find program abuse;
  • Each EB-5 investor’s petition currently takes an average 13.8 months to get reviewed by USCIS, which is not exactly a rush job; both the petition process and subsequent visa process involve stringent review and requirements;
  • In fact you can’t buy a green card in the US, not for $500,000 or for any other amount; some countries do have visa-for-sale programs but the US does not; the EB-5 program grants a visa in exchange for investor-funded business development resulting in job creation, not for money (to put the EB-5 program in context, see this Migration Policy Institute report on investor visa programs around the world);
  • The fact that an investigation exists is a cause for concern, but not sufficient basis for assuming that the investigation will close with a guilty verdict;
  • There are terrorists and spies and cheats in the world, but people are not terrorists because they’re Iranian and are not spies and cheats because they’re Chinese, despite ABC’s implications.

FYI: EB5info has posted a copy of the memo referenced in the story, and IIUSA and Klasko Law have issued reaction statements.

IIUSA Conference Registration
A reminder that this is the last week for early bird registration for IIUSA’s 8th Annual EB-5 Regional Economic Development Advocacy Conference on April 12-14 in Washington D.C. We’ll have a lot to advocate about this year.

New Regional Centers
Additions to the USCIS Regional Center List, 12/31/2014 to 2/3/2015

  • Dine’ Bi Keyah Regional Center, LLC (Arizona and New Mexico)
  • American Liberty Alliance (California)
  • Zhonghong Regional Center LLC (California)
  • Live in America – Colorado Regional Center LLC (Colorado): www.liveinamerica.us
  • EB5 Capital – New York Regional Center (Connecticut, New York, New Jersey, and Pennsylvania): www.eb5capital.com
  • Birch Miami Dade Regional Center (Florida): www.birchcapital.com
  • Mariana Stones Corporation Ltd. (Guam)
  • Live in America – Indiana, Michigan, Ohio Regional Center (Indiana, Michigan, and Ohio): www.liveinamerica.us
  • Live in America – South Regional Center LLC (Kentucky and Tennessee): www.liveinamerica.us
  • Diamond City Montana EB-5 Regional Center, LLC (Montana)
  • Lubert-Adler Northeast Regional Center, LLC (New Jersey and New York): lubertadler.com
  • Queens Fort New York Regional Center, LLC (New Jersey, New York, and Pennsylvania): queensforteb5.com
  • West Penn Regional Center (Pennsylvania)

Cautionary Tale (KS), Processing Times Update

I assume that immigration lawyers don’t have many would-be immigrants calling up to say “I want to get a CR1 visa. Please help me find a wife.” People understand that marriage and immigration are separate issues. Of course the lawyer who handles your paperwork doesn’t also help you fall in love. The CR1 relative visa grants you benefits based on a relationship that you have entered into, but the marriage decision is obviously separate from and prior to the immigration process.

When all this is clear for an immigrant spouse, why do immigrant investors get confused? Immigration lawyers do often hear the request “I want to get an EB-5 visa. Please help me find an investment.” Apparently many people do not understand that, in the US, the investment decision and the immigration decision are separate. The lawyer who handles your immigration paperwork is not placed or qualified to select a good investment for you. Neither is USCIS. The EB-5 visa grants you benefits based on an investment decision that you have made, and that decision involves factors that are separate from immigration considerations. Potential immigrant investors, take note! Investing half a million or a million dollars is a serious matter in itself, just as getting married is a serious matter in itself. These are not fundamentally immigration matters, even when they provide a basis for a visa later. Get advice from people who know about investing or who know about marriage. Go on lots of dates, talk about everything, meet the family, see a marriage counselor. Research the investment opportunity and the principals and get qualified investment advice. If you skip all that and just focus on immigration, you’re missing the point and are very vulnerable to getting hurt by your marriage or by your investment decision.

The news this week reminds us of what can happen. See the SEC’s notice “SEC Charges L.A.-Based Immigration Attorneys With Defrauding Investors Seeking U.S. Residency” and a more detailed article in the local news “Three charged by SEC in western Kan. ethanol scheme.” It’s hard to tell whether this started out a fraud or just as incompetence/bad luck that spiraled into fraud, but either way I don’t think this could have happened if the victims involved had recognized that EB-5 investment decisions require serious attention and diligence, and that one should not depend on immigration consultants to advise on much less to manage investments.  At the same time, the perpetrators might not have dared so much had they taken the investment angle of EB-5 seriously. Maybe the perpetrators thought that EB-5 is just an immigration program and they were free to do what they wanted so long as not caught by USCIS review. Now the heavy hand of the Securities and Exchange Commission is on them, reminding them that EB-5 investments are  investments and regulated and policed as such, regardless of the immigration angle. 

In other news, IPO processing times have been updated on the USCIS Processing Time Information page, with little change since last update.

IPO731

China visa availability

IIUSA VP Robert C. Divine on Saturday’s Announcement of EB-5 Visa Unavailability for China for Remainder of FY-2014

by Robert C. Divine, Vice President, IIUSA; Shareholder, Immigration Group Chairman Baker Donelson Bearman Caldwell & Berkowitz, P.C.

Saturday’s dramatic announcement of EB-5 visa unavailability for China for the remainder the fiscal year provides a low impact “dry run” for a process that will have more “bite” next fiscal year. (For the record, Saturday was August 23, 2014).First, let’s remember what Saturday’s announcement does NOT do: It does not affect any I-526 or I-829 processing at all, does not delay immigrant processing for people not born in mainland China, and does not even affect mainland Chinese after next month. But let’s think about what it portends.

– Read the rest of this article at: http://iiusa.org/blog/#sthash.OZjUfbxV.dpuf

Coburn letter

The buzz this week has been over a letter sent by U.S. Senator Tom A. Coburn (R. Oklahoma) to all Regional Centers with content as follows:

As Ranking member of the US Senate Homeland Security and Governmental Affairs Committee, which has oversight over the Department of Homeland Security, I am writing to learn more about ___ Regional Center’s participation in the EB-5 immigrant investor program. Every Regional Center approved by USCIS will receive a similar request to help the Committee better understand the EB-5 program. To understand more about ___ Regional Center, please provide the following information by March 13, 2014 in an electronic format:

  • Any approval from USCIS to participate in the EB-5 program regarding the regional center and its business plan, including any subsequent recertification;
  • The total annual amount of investment and the number of individuals by country of origin making investments through the regional center since it has been in operation;
  • The name, address, and a description of each business in which the regional center has made an investment of funds and the number of jobs created by each investment;
  • Any fees charged to EB-5 applicants or received by the regional center, including amount and description;
  • A list of any current or former corporate officers of the regional center, including title, position, and dates of employment, and
  • The name and address of any individual or entity- either foreign or domestic- that the regional center has an agreement with to provide legal, accounting, recruiting or consulting services, as well as a description of the service provided.

Feelings are mixed about this. It’s nice to see Congressional concern and attention, and I’m a long-time advocate of transparency about Regional Center backers. But one wonders why Senator Coburn decided to circumvent USCIS, which implemented the I-924a annual reporting process to collect similar information from Regional Centers to report to stakeholders such as Congress. Also, what Senator Coburn, not being a well-known friend of immigration, intends to do with the responses he receives. IIUSA has referred its members to two relevant articles: “MINORITY RULES: WHY COMPANIES SHOULD TAKE SERIOUSLY THE INCREASING TREND OF MINORITY PARTY-LED CONGRESSIONAL INVESTIGATIONS” by Steven R. Ross, Raphael A. Prober, and Megan L. Greer, Akin Gump Strauss Hauer & Feld LLP, and A Client’s Guide to Congressional Investigations Akin Gump Strauss Hauer & Feld LLP. Also see Ron Klasko’s post on this topic.

New RCs (CA, CNMI, DC, FL, MD, NJ, NY, PA, OR, VA, WA), Brookings Report

New entries to the USCIS Regional Center List 1/22 to 2/6/2014:

The Brookings Institution has released a report on “Improving the EB-5 Investor Visa Program: International Financing for U.S. Regional Economic Development.” The report was carefully researched (and even cites me), provides a very nice overview of the EB-5 program’s history and current status, and has awesome graphics. To me its conclusions and recommendations seem theoretically reasonable but practically innocent, making the report not as significant as it might have been. But it’s still a worthwhile reference.