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.