Just How Scary are EB-5 Investments?

16-Jun-2016

A client of EB-5 Analytics recently sent me an email expressing grave concern about fraud being common in EB-5 investments, which was making him very hesitant about investing. I share my reply to the client below, in the hope that others will be able to see the larger picture that has been obscured lately by the Jay Peak scandal.

I can well understand how the EB-5 project universe looks to you like a “dark forest” with wolves and snakes and dragons lurking behind every tree.  But it’s really not nearly so bad considering that we are helping you. Let me make a few points.

First, we have never reviewed a project that turned out to be fraudulent (with one possible exception; see below). This is in part due to self-selection by the regional centers. We periodically send questionnaires to all active regional centers and only about 50% of them reply.  It’s odd, because we could potentially provide them with the most valuable commodity in the EB-5 field – a new investor. But I think these projects don’t want us asking a lot of probing questions about their project. This is not to say that the non-responding 50% are all fraudulent.  Maybe they are uncompetitive, and they don’t see the point of trying to fit into our business model which is designed to show investors only the Top Five lowest-risk projects.  In any event, this helps us avoid projects that might be fraudulent.

Second, the vast, vast majority of defrauded investors have been Chinese. This is because the Chinese do not have a tradition of reaching out to independent experts. They strongly prefer to obtain advice from within their circle of friends and acquaintances, or at least talk to someone local so they can complain in person if the investment doesn’t work out.  Thus, the Chinese market is monopolized by local emigration agents who recruit investors by the barrelful while under no regulatory regime that would check their honesty, and then they sell the investors to the highest bidding regional center. We’ve been over there trying to sell our independent due diligence to emigration agents and we had no takers. Not one emigration agent was willing to pay as little as $5000 for us to do work due diligence report.

Third, we are doing extensive due diligence analysis of the project to evaluate all potential risks.  This analysis often takes three weeks or more to conclude. I want to suggest that you have a conversation with my main financial analyst.  Let me know if you want to do this and I’ll connect you two guys and arrange for a discussion.

Of course, the Jay Peak scandal is spooking everyone. There were a lot of non-Chinese investors in Jay Peak projects. How did they get there? Immigration attorneys were sending Jay Peak most of its investors and illegally receiving finder fees from Jay Peak. Of course, these attorneys did not have the training to undertake a due diligence investigation. They were acting like the Chinese emigration agents – selling investors to Jay Peak.

I’ve known about Jay Peak since early 2008 when I started in EB-5. We only put one investor in a Jay Peak project since EB5 Analytics started. This occurred in 2011 when a very wealthy Taiwanese investor told us that he didn’t care about getting his money back (we were discouraging investors from investing in Jay Peak because of the uncertainty about getting one’s principal out), he just wanted us to evaluate projects based on likelihood of obtaining the green card (he obtained his permanent green card last year).

Thereafter, Bill Stenger of Jay Peak tried for many months to convince us that the AnC Bio project was a worthwhile investment, but we could see multiple glaring flaws in the business plan and its execution (or, more accurately, its non-execution), so we never showed it to our clients. Nor did we ever again even consider showing a Jay Peak project to one of our clients. Jay Peak had plainly gone “off the rails.”

I would be happy to have a conversation with you with our main financial analyst also on the line. Let me know what day and time might be good for you.

 

Best regards,

John

EB-5 Analytics

 

 

How Important is A History of I-829 Approvals?

The Regional Center, though vital to enabling foreign investors to obtain a green card, has less significance in deciding where to invest than most EB-5 investors believe. For one thing, many veteran EB-5 project management firms own multiple regional centers, and the one they use for any given project is usually dictated by geography more than by the individual regional center’s experience or track record. At the other end of the spectrum, there are several very fine EB-5 project management firms that do not own or operate a regional center at all. These management companies and developers search for good EB-5 projects in multiple geographic areas then “rent” a regional center in the geographic area where they wish to undertake the project, paying a fee or a share of profits to the regional center to use its structure to give green card benefits to its foreign investors. So, what matters is – who is the management company running the project the investor is considering, and how should that management company’s experience, or lack thereof, affect the investor’s decision to invest or not invest.

One often hears the advice that it is best to select a regional center project from among those offered by firms with a history of I-829 approvals. This sounds sensible, since such firms are likely to have substantial experience with the many unique job creation and regulatory compliance issues associated with EB-5 projects. I thought so myself when I started analyzing EB-5 projects about nine years ago (when I was a “mere” immigration attorney), but the more I learned about the industry the less importance I placed on a history of I-829 or even I-526 approvals. There are several reasons for this.

 

It’s All About the Project

A new project offered by an EB5-experienced management company can just as easily fail as one offered by a relatively new firm. There have been a handful of failures from the big EB-5 firms over the last several years, and most were due to poor decisions (often born of arrogance, in the author’s opinion) made by the owners of the “experienced” management company. Bear in mind that the businessmen who were in the EB-5 world prior to 2009 were just scraping by running small businesses. After the explosive growth in EB-5 numbers starting in 2010, these same individuals now find themselves running businesses 10 times the size they were ten years ago. Some owners have adapted well to growth. Others have not.

 

Experience is Held by Immigration Counsel as Well

The EB-5 project management firms that have been around the longest like to say that their history of approved I-829 petitions shows that they understand immigration and EB-5 job creation. But their knowledge is held in equal measure, and with greater command of the legal subtleties, by the firm’s immigration counsel, whose experience and services are available to any regional center or project developer that wishes to hire this same attorney. Another issue here is that some of the veteran businessman think they understand the EB-5 legal issues better than they actually do, which can lead them to plow forward with their project ideas without discussing them first with their immigration counsel. In one sense, a newer EB-5 project developer is preferable to an older one if they both have the same immigration counsel, because the newer developer is more likely to stay in close contact with, and pay heed to, his or her immigration counsel.

 

Statistics Can Be Misleading

The experienced EB-5 management companies have become adept at keeping some project failures out of their statistics and out of the public eye. In some cases, a federal lawsuit can keep potential I-829 denials out of the failure column while the regional center seeks a settlement with the USCIS that is short of an outright denial, but still keeps the investors in limbo. In other cases, projects have collapsed prior to USCIS adjudication because the developer partner of the regional center can’t fulfill its obligations, or because the partner simply withdraws. The EB-5 firm then moves the investors to a new project. Delays can last a year or more for the investors’ progress to a green card, but the EB-5 firm still claims that there was no denial.

In truth, there haven’t been a lot of cases like this, but it’s wise to be a bit skeptical of statistics, particularly when they are self-reported.  Or, as Mark Twain famously quipped, “there are lies, damned lies, and statistics.”

 

Experienced Firms Don’t Have to Be Competitive

It’s almost a tautology that projects from the experienced firms will be less competitive simply because they don’t need to compete on the merits as strenuously as newer entrants. These firms know that they will attract large number of investors based simply on their statistics, so why take on more risk or give up more profit than necessary?  As a result, they will often invest less of their own money, and hold onto the investors’ longer, and charge large management fees, etc. The younger EB-5 management firms, on the other hand, must offer more attractive terms to investors because they don’t have the statistics or the overseas agent networks or the network of referring U.S. attorneys to rely on to pull investors into their projects. This problem is greatly exacerbated by the fact that all EB-5 projects are private placement offerings, with SEC prohibitions against public advertising, and thus investors often must choose among projects based on a more limited set of information and disclosures than one finds with public offerings such as stocks or bonds.

 

Nobody’s Going to Get A Green Card if the Business Fails

The project you select could have an excellent legal structure and otherwise look great from a legal standpoint, but if the project encounters construction setbacks that put the project substantially behind schedule, enough jobs may not be created on time for the I-829 filings, resulting in denials. It is important to understand that legal compliance just establishes the theoretical basis for possible I-526 and I-829 approvals. Without faithful execution of the business plan, the legal superstructure will be worthless. Furthermore, the legal and financial issues are so closely intertwined when evaluating an EB-5 project that there are very few purely legal issues to evaluate. We find that the financial issues usually account for 90% or more of the project-critical variability between EB-5 projects when calculating likelihood of the project to produce the green card and to return investment principal.  A business plan that is flawed in conception or execution is going to leave investors stranded no matter how EB-5 savvy the management company. To illustrate the point, let’s consider the following hypothetical case. There are two EB-5 project management firms, both headquartered in a major U.S. city on the East Coast of the U.S. One is relatively new to the EB-5 world and so has no I-829 approvals to brag about. This newer EB-5 firm, however, is one of the biggest and most successful real estate developers in its home city and it proposes to build a major commercial structure, let’s call it Project A, in its home town with EB-5 money. The other firm, whose main office is located just a few blocks away in the same East Coast city, can claim hundreds of successful I-829 petitions, virtually all that were based on commercial real estate construction in East Coast cities. But now, spreading its wings, the firm with I-829 approvals decides to invest in an alternate energy project (“Project B”, we’ll call it), on the West Coast of the U.S., where it has never operated before. If you follow the Golden Rule (or Golden Shibboleth?) of investing only in projects offered by management firms with I-829 approvals, you would pick Project B, but you would be wrong. Project B will fail when the West Coast partner withdraws from the deal, whereas Project A will succeed (this hypothetical is in fact based on a real case, slightly altered).

 

Conclusion

I am not at all suggesting here that a history of I-829 approvals is insignificant. Of course, it is very significant, up to a point. Everything else being equal, I’d pick the EB5-experienced firm, too. But the point of this article is that there are many, many other factors that must be evaluated if an investor is going to make a wise choice for his or her EB-5 Pilot Program investment. Reviewing projects from firms with I-829 approvals may be a wise place to start, but if you use it as an analytical shortcut for selecting a “reliable” investment vehicle, rather than conducting an informed and probing investigation of the options available for your capital, you may be giving yourself a false sense of security while at the same removing from your inquiry many highly attractive projects that are competitive if not better than the ones offered by the ancients in the industry.

And remember always – Past Performance is No Guarantee of Future Results!

 

 

 

EB-5 Reform in 2017?

The EB-5 Pilot Program (also known as the “EB-5 Regional Center Program”) has always required periodic reauthorization by Congress to continue as U.S. law. The Program has faced reauthorization numerous times since its original enactment in 1992, and in every instance the Program has been renewed for a fixed period of time without changes.  Growing government concern about abuses in the Pilot Program, however, has led to an increasing impetus to updating and reforming the Program; although, as yet, U.S. Congress has failed to gather consensus to pass EB-5 reform bills into law. Will the industry see real EB-5 reform in 2017?  Let’s take a look at recent reauthorizations and currently proposed reforms to better understand the landscape of EB-5 reform in 2017 and what may lie ahead.

 

September 2015: On September 30, 2015, the EB-5 Pilot Program was due for reauthorization after having been extended by the U.S. Congress for three years without change in September 2012.  Absent reauthorization, the Pilot Program would have terminated on October 1, 2015.  Prior to the deadline for reauthorization, Congress failed to produce a draft bill for consideration in both the House and the Senate, leaving Congress with the choice of either extending the Program without change, or cancelling it entirely. On September 30, 2015, Congress passed a continuing resolution that contained an extension of the EB-5 Program (along with extensions for E-Verify, the Conrad-30 Waiver Program, and the Non-Minister Religious Worker Visa Program).  This short-term extension of the EB-5 Program through December 11, 2015 was a “straight reauthorization” – extending the Program without changes until December 11, 2015.

 

December 2015:  As the September 30, 2015 EB-5 program sunset date approached, Senators Chuck Grassley (R-Iowa) and Patrick Leahy (D-Vermont) introduced a bill to reform the EB-5 Program that would have increased the minimum investment amount to $800,000 for investments in a Targeted Employment Area (TEA) and to $1.2 million for investments not located within a TEA. The bill would have amended the statutory definition of a TEA to include only rural areas, closed military bases, or areas consisting of a single census tract that had 150 percent of the national unemployment rate – greatly reducing the number of areas in the U.S. that would qualify as targeted employment areas.  The proposed legislation would have also added major reporting and compliance requirements for both Regional Centers and enterprises associated with Regional Centers, including measures to address perceived abuses in the EB-5 program.

After much discussion, a compromise bill was on the very verge of passing when big developers in cities such as New York, Los Angeles, and Miami heavily lobbied Congress to kill the bill (which would have defined virtually all their areas of development as non-TEA, requiring their investors to participate at the higher $1.2 million investment threshold). The lobbyists succeeded in scuttling the bill. On learning that his compromise bill would not be adopted by Congress, Senator Grassley threatened to kill the entire EB-5 program (see https://www.c-span.org/video/?c4568895/sen-grassley-eb5).  Despite the controversy surrounding reauthorization, the EB-5 Program was extended without changes until December 9, 2016.

 

September 2016: The House Judiciary Committee Chairman Bob Goodlatte introduced a House draft bill for EB-5 reform that largely paralleled the preceding Senate bill.  Senator Grassley endorsed the bill –

Chairman Goodlatte and Ranking Member Conyers have put forth a strong bill that will bring the EB-5 immigrant investor program back to its original intent.  It will level the playing field for investment projects in states across the country while ensuring that the bad actors are held accountable, whether they are seeking a visa or managing a project.  We need strong measures to curb fraud, increase transparency, and make sure both U.S. regulators and foreign investors know where every dollar is coming from and going.  Without reforms to protect U.S. interests, national security, and areas that need investments most, the program should expire.

Grassley’s comments mirrored his earlier assertions in December 2015 that the EB-5 program should be allowed to expire if reforms could not be agreed upon.  Goodlatte’s House draft bill was scheduled for comment on September 14, 2016, but it never made it to the House floor for discussion.  As a result, no EB-5 reforms were enacted in September 2016, but instead the program was reauthorized without changes until December 10, 2016.

 

December 2016:  Following a tumultuous Presidential election, a draft of a bill that included sweeping EB-5 reforms circulated among staff members in U.S. Congress; however, an official draft bill was not published for comment.  At the critical hour before the EB-5 program was set to expire on December 9, 2016, the EB-5 program was extended without change until April 28, 2017.

 

January 2017:  The Department of Homeland Security (DHS) issued a notice of proposed rulemaking in which the U.S. Department of Homeland Security (DHS) proposed to amend its regulations governing the EB-5 immigrant investor classification and associated regional centers to reflect statutory changes and modernize the EB-5 program.  The proposed changes that are most relevant to EB-5 investors and practitioners are increases in the minimum investment amount for targeted employment areas (TEAs) and non-TEAs, and revisions to the TEA designation process.  In order to reflect the present-day dollar value of the investment amounts established by Congress in 1990, DHS proposes to increase the standard minimum investment amount to $1.8 million in non-TEA areas and to $1.35 million for TEA areas.  DHS also proposed to reform the TEA designation process to ensure consistency in TEA adjudications and ensure that designations “more closely adhere to Congressional intent.”  Under the current rules, authority for designating an area as TEA is given to state officials, who are under pressure from their state capitals to encourage business development in their own state. As a result, the state authorities have engaged in “census tract aggregation” and other forms of “gerrymandering” to expand the areas in their states that are designated as TEA far beyond the original intent that TEA areas should be the exception rather that the rule for minimum EB-5 investment. DHS now seeks to eliminate the ability of states to designate TEA areas and proposes instead to make such designations itself – a proposal that will likely make it harder for regional center projects to acquire TEA status for lower minimum investment amounts.

Comments on proposed reforms are due back to DHS by April 11, 2017. Discussion and implementation of the new regulations will likely take until June 2017 to be completed.

 

February 2017: Senators Diane Feinstein (D-Calif.) and Chuck Grassley (R- Iowa) introduced S. 232 to eliminate the EB-5 visa program.

 

Conclusion:

With the mounting pressure over the last two years to reform the EB-5 Program, it is very likely that reform will happen this year. We do not believe, however, that the USCIS will be able to reform EB-5 law through the introduction of new regulations. The current administration is well known to be hostile to U.S. government agencies changing the law through regulatory reform in areas where Congress should assume the lawmaking authority. Indeed, one of the first acts of the new administration was to issue a memorandum to all executive departments and agencies to freeze new or pending regulations for 60 days so that the new administration will have time to review them.

We also do not believe that Senate bill S.232, proposing a termination of the EB-5 visa, will pass, or even advance to markup, due to the widespread support in Congress for the job-creating EB-5 program. Senator Feinstein is one of the rare members of Congress who seems to genuinely favor a termination of the Program in its entirety. Senator Grassley, in our opinion, is merely backing up his threat to terminate the program if the EB-5 industry, including big-city developers and their lobbyists, fail to adopt a unified stand and back proposed EB-5 reform.

We do, however, expect Congress to pass reform this April. The September 2015 and September 2016 reform efforts failed despite broad bipartisan support because Congress was distracted by the effort to pass a budget at the end of the fiscal year. Congress simply failed to find time to complete the lawmaking process. This past December the problem was a reluctance to change any law with a new Administration about to take over the White House. This April, however, the country will be approaching the end of the “First 100 Days” of the new administration, and we expect that both chambers of Congress, with fewer distractions, will finally find time to pass a reform bill for EB-5 along the lines of the previously proposed Senate and House bills.

EB-5 investors are cautioned to be aware of potential changes in the program and to be prepared for increases in the minimum investment amount and in the methodology behind TEA designations.  Submitting your I-526 application prior to the adoption of any reforms gives investors a chance to meet USCIS requirements with an investment of $500,000, assuming that “retroactivity” (the subject of our next blog post) will not be a part of any final bill.  EB-5 Analytics is closely monitoring the EB-5 reform process and will provide our clients and industry partners with updates as information becomes available.  Please feel free to contact us directly to discuss the impact of proposed reforms and any other EB-5 related questions you might have.

 

 

 

 

 

 

 

 

Just How Scary are EB-5 Investments?

A client of EB-5 Analytics recently sent me an email expressing grave concern about fraud being common in EB-5 investments, which was making him very hesitant about investing. I share my reply to the client below, in the hope that others will be able to see the larger picture that has been obscured lately by the Jay Peak scandal. 

I can well understand how the EB-5 project universe looks to you like a “dark forest” with wolves and snakes and dragons lurking behind every tree.  But it’s really not nearly so bad considering that we are helping you. Let me make a few points.

First, we have never reviewed a project that turned out to be fraudulent (with one possible exception; see below). This is in part due to self-selection by the regional centers. We periodically send questionnaires to all active regional centers and only about 50% of them reply.  It’s odd, because we could potentially provide them with the most valuable commodity in the EB-5 field – a new investor. But I think these projects don’t want us asking a lot of probing questions about their project. This is not to say that the non-responding 50% are all fraudulent.  Maybe they are uncompetitive, and they don’t see the point of trying to fit into our business model which is designed to show investors only the Top Five lowest-risk projects.  In any event, this helps us avoid projects that might be fraudulent.

Second, the vast vast majority of defrauded investors have been Chinese. This is because the Chinese do not have a tradition of reaching out to independent experts. They strongly prefer to obtain advice from within their circle of friends and acquaintances, or at least talk to someone local so they can complain in person if the investment doesn’t work out.  Thus the Chinese market is monopolized by local emigration agents who recruit investors by the barrelful while under no regulatory regime that would check their honesty, and then they sell the investors to the highest bidding regional center. We’ve been over there trying to sell our independent due diligence to emigration agents and we had no takers. Not one emigration agent was willing to pay as little as $5000 for us to do work due diligence report.

Third, we are doing extensive due diligence analysis of the project to evaluate all potential risks.  This analysis often takes three weeks or more to conclude. I want to suggest that you have a conversation with my main financial analyst.  Let me know if you want to do this and I’ll connect you two guys and arrange for a discussion.

Of course, the Jay Peak scandal is spooking everyone. There were a lot of non-Chinese investors in Jay Peak projects. How did they get there? Immigration attorneys were sending Jay Peak most of its investors and illegally receiving finder fees from Jay Peak. Of course, these attorneys did not have the training to undertake a due diligence investigation. They were acting like the Chinese emigration agents – selling investors to Jay Peak.

I’ve known about Jay Peak since early 2008 when I started in EB-5. We only put one investor in a Jay Peak project since EB5 Analytics started. This occurred in 2011 when a very wealthy Taiwanese investor told us that he didn’t care about getting his money back (we were discouraging investors from investing in Jay Peak because of the uncertainty about getting one’s principal out), he just wanted us to evaluate projects based on likelihood of obtaining the green card (he obtained his permanent green card last year).

Thereafter, Bill Stenger of Jay Peak tried for many months to convince us that the AnC Bio project was a worthwhile investment, but we could see multiple glaring flaws in the business plan and its execution (or, more accurately, its non-execution), so we never showed it to our clients. Nor did we ever again even consider showing a Jay Peak project to one of our clients. Jay Peak had plainly gone “off the rails.”

I would be happy to have a conversation with you with our main financial analyst also on the line. Let me know what day and time might be good for you.

 

Best regards,

John

EB-5 Analytics

 

Will the EB-5 Minimum Investment Amount Be Raised This Summer?

When the U.S. Congress introduced regional center-based investments into the EB-5 mix in 1991, the new program was a “Pilot Program,” which is to say that it was something of an experiment. Congress was required to periodically review the program and renew it, if they saw fit. Because the Congress never marshaled enough energy to reform the program in years past, the minimum investment amount has remained as it was when created in 1992 – a bargain at $500,000.Also left unchanged is the authority to decide what is and is not a “targeted employment area” (TEA). This power remains with state officials, who naturally want the development in their state, so they have greatly stretched TEA designation – originally meant to help rural and high-unemployment areas in the U.S. – to cover 80% or more of the USA, including many wealthy big-city geographic areas.

The program has come under increasing criticism in recent years, and Congress was expected to change the program by September 30, 2015 (the end of the 2015 USCIS fiscal year). But, once again, Congress had too much else on its plate, and decided to “kick the can down the road” by passing a reauthorization that extended the Program without change until December 11, 2015. As the new deadline approached, however, the Congress was better organized. In late November 2015 Congress was able to release detailed draft legislation with bipartisan support that would have raised the minimum investment amount to $800,000 and the non-TEA amount to $1,200,000. It would also have greatly reduced the number of geographical areas to qualify as TEA, and would’ve implemented numerous other reforms to try to eliminate abuse in the industry. The legislation was almost universally expected to be implemented by December 11, but in the end the legislation was sunk by big-city developers and their Congressional lobbyists who didn’t want to see TEA designations changed.

Will Congress act this September 30? Many observers expect that they will not because Congress tends to avoid passing substantive changes to the law during presidential election years. I don’t think we should exclude the possibility of Congress-initiated reform of the EB-5 Program, however. There is an unprecedented amount of momentum behind reform this year – with Congress having held three hearings on abuses in the EB-5 program so far this year – and the Jay Peak scandal has just added high-octane fuel to the fire.

But Congress doesn’t have to act in order for the minimum amount to be increased or TEA designation reformed. The USCIS has stated that it has the power to change the minimum amount and reform TEA designation without Congressional involvement through issuance of new EB-5 regulations. I have looked at the statues in question, and my view is that the USCIS does in fact have this power. The USCIS can’t make these changes overnight, however. It will have to publish the new regulations and allow for at least a 30-day comment period before implementing the new regulations.

So, investors who want to invest at $500,000 and/or want to invest in a big-city project should keep an eye on both the USCIS and the U.S. Congress as they consider when to start preparing for their EB-5 investment.

John Roth | 29 May 2016