Jay Peak Allegations and EB-5 Fallout

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

IIUSA Annual Meeting in Washington, D.C.

April 20-22, 2016

Jay Peak Fallout Discussion

This post will address only the Jay Peak circumstances, subject matter which prevailed at the 2016 IIUSA EB-5 Advocacy Conference in Washington, D.C. Additionally, this post will serve as contemplation of several of my follow-up telephone calls with immigration counsel and their investors who are investors in the Jay Peak projects.

Needless to say, the Jay Peak situation was a major topic of conversation at the IIUSA conference both formally and informally. The concerns reflected the following:

  1. The need for integrity measures in EB-5 governance both legislatively and procedurally in order to better prevent situations such as Jay Peak or Chicago Convention case that have been injurious to the industry.
  2. Attempt to create a financial model that maintains a degree of independence between the new commercial enterprise [EB-5 investor entity] advancing funds to a developer/borrower and the borrowing party. For instance, it seems it would appear to be unacceptable and not best practices to have the same party oversee the funding of money from the NCE to the project company that is under the same control as the project company. In other words, there needs to be more independence in the financing portion of the transaction.
  3. Whether another loan model or equity model is in place, there needs to be more active administration of the funds in process on an ongoing basis.
  4. There needs to be regular financial reporting that is reviewed and verified by a qualified independent certified public accounting firm.
  5. Heightened due diligence standards before projects are undertaken for the benefit of regional centers, investors and marketing agents.
  6. At the IIUSA Conference, one of the panels involved securities regulators perspective on EB-5, and a rather significant degree of focus on the Jay Peak case and the repercussions related thereto. The representative of the SEC, Stephanie Avakaian, commented on the status of the SEC case which included the appointment of a receiver, the appointment of an administrator for the project and the appointment of a forensic accounting firm to update all of the financial information involved in the Jay Peak projects. It was also noted that a website for the receiver has already been established and is accessible to the public (http://www.jaypeakreceivership.com).

As part of the panel members’ presentations and the questions and answers that took place during the presentation, there was concern addressed about the status of the EB-5 investors in Jay Peak and not only the preservation of their financial interest in the project, but the preservation of their immigration rights. It was noted that the SEC and the applicable court should take into account the immigration needs of the investors and not just focus on maximizing the return of monies to investors since the nature of the EB-5 program substantially involves an immigration component as well as a financial component. The SEC representative acknowledged that although the interest of the SEC appointed receiver is to maximize the return of capital to investors, there was also an acknowledgment that the immigration concerns should likewise play a role in evaluating the process and the decisions to be made by the receiver in the transaction.

In reviewing the current situation with multiple immigration attorneys as well as a few of their investors, it has become apparent that the following different classifications of the respective investor positions should be noted:

  1. Those investors that have not received I-526 petition approval and whose money is pending in escrow. Most of these investors will ask for a return of their funds since they are in escrow and it could be argued that the closing conditions can never be satisfied given the status of the project in question and the receivership that is now in place.
  2. Those investors receiving I-526 petition approval who have not received their EB 5 visas. This poses a much more serious problem since the investors capital has supposedly been funded for the applicable project, yet from a visa standpoint and given the status of the receivership, there may be heightened concerns about whether the investor will now be eligible to receive a visa given the material change in circumstances as a result of the Jay Peak receivership.
  3. Those investors that have received I-526 petition approval and conditional residency status. The status with respect to projects that have not been completed and are in the process of being constructed. These investors have the unique concern of ensuring that the project be completed in order to support the job creation requirements of the program when the I-829 petitions will be potentially filed. If a project is stopped in midstream, then there is a serious risk that the I-829 petition will not be approvable. 
  4. Those investors involved in projects that have been completed and by whose I-829 petitions have yet to be filed.
  5. Those investors involved in project that have been completed and whose I-829 petitions have been filed.
  6. Those investors involved in projects have already received their I-829 approvals and only want a receiver return of their capital investments in accordance with the terms of their applicable corporate documents.

To complicate matters further, it is noteworthy that unlike a typical receivership case involving one project, the Jay Peak receivership involves multiple projects where there may have been the improper transfer and/or allocations of funds from one project to another project, thus resulting in a reconstitution of the balance sheets of the various projects entities in order to determine who the final funding will be reconstituted. Accordingly, in addition to the above-referenced categories of investors, each of the investors will have been involved in a different project that may have competing interest based upon the economics of the project and the potential diversion of funds from one project to another project.

As can be determined, the process is quite complicated and needs clear direction. Our firm has become actively involved in dealing with immigration attorneys and investors to assist in the process since there is an urgency in the matter.

Proposed Governmental Reforms to the EB-5 Program

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

Follow-up to EB-5 Coalition Meeting in Washington D.C. on April 13, 2016

I attended the EB-5 Coalition meeting in Washington, D.C. on April 13 and was a panel member along with several distinguished EB-5 experts. The purpose of the panel was to address the proposed governmental reforms to the EB-5 Program and what would be best for the EB-5 industry, as well as what is practical under the current climate of EB-5. It is noteworthy that the conference took place before the publication of the disastrous SEC enforcement action against Jay Peak in connection with all of their offerings.

The major takeaways are the following:

  1. An acknowledgment that the EB-5 Program does need certain reforms and integrity measures to assist in promoting the credibility of the Program given the political climate and the fact that it is very important to try to minimize the amount of bad actors in the industry, the transactions that are undertaken without proper diligence and supervision, and the elimination of projects that do not satisfy reasonable feasibility standards.
  2. Focus on solutions to the various immigration issues involving TEA designations, visa quotas and the like. It was acknowledged that there will need to be a compromise solution that will not otherwise have a serious impact on the viability of the Program, yet provide more guidance from an immigration standpoint. Many solutions were suggested that included methods of effectively increasing the visa quotas by creating special classifications of projects and/or borrowing from unused visas in other immigration categories.
  3. From an integrity standpoint, the EB-5 Securities Roundtable, for which I am a member, presented a position paper that among other things provided the following considerations:
    1. Establishing definitions for many of the generic terms that were not actually defined to provide clarity and consistency.
    2. Clarification that not every party, including the regional center, is an “issuer” if they are not actually involved in raising funds in connection with securities offering. Many regional centers do not undertake the fundraising process in connection with the Program.
    3. Regional Center Responsibilities. The Roundtable was very concerned about imposing unnecessary and burdensome obligations on the regional center that would be either expensive or even potentially impossible to comply with. It was recommended that the regional center certification should be based upon reasonable diligence and reasonable reliance on other professionals to provide guidance and assistance in the entire process. Surely the regional center should be able to rely upon professionals such as immigration counsel, corporate securities counsel, the economist, the business plan writer and the escrow administrator with respect to the various components of the offering in order to insure compliance with SEC rules and regulations. Otherwise, as currently stated, there could potentially be strict liability on the regional center for any deficiency even if the regional center acted in good faith.
    4. Promoter Registration. Confirmation that only those parties involved with the active solicitation of investors would be required to register.
    5. Registration Process of Foreign Agents. The concern here is that the new legislation would require foreign agents who are classified as Promoters would need to register with the Department of Homeland Security. It is unclear whether this registration would automatically subject foreign agents to U.S. jurisdiction. Certain of the members of the Roundtable have raised the issue that expanding the jurisdictional reach through registration that could result in foreign agents being automatically sent to service of process could have a very chilling effect on the industry, in particular in China. This is an open issue that will need to be addressed in the future.
    6. Modifications of the “bad actor” exclusion to delete from the bad actor definition:
      1. Attorneys that have been suspended and then reinstated by the applicable bar; and
      2. The provision that entering into a consent order with a government agency that provides for an order that “prohibits fraudulent, manipulative or deceptive conduct” should not be a factor since virtually every consent decree has that language. Most fraud cases involving SEC action have in part resulted from the lack of independence between the regional center/manager/general partner who controls the NCE and the funding of monies to the developer. This concept also applies to the equity model as well as witnessed by the Jay Peak situation.
    7. An addition to the proposed legislation to create a definition of “at risk” so that the industry will have guidelines to redeploy funds in a manner that is not subject to the current ambiguity given the fact that USCIS has yet to provide guidelines. The proposed definition is as follows:

“AT RISK.  The term ‘at risk’ means exposure of Capital to a chance of loss and opportunity for gain, however great or modest (so long as not nominal or sham).  A guarantee of repayment or redemption of Capital or of a return on Capital by a New Commercial Enterprise or Issuer to its EB-5 Investors shall render that Capital not At Risk.  For purposes of clarity, Capital shall still be deemed At Risk if there exists a contractual commitment, security, collateral, guarantee, or other undertaking intended to be used to fund the repayment or redemption of that Capital or a return on that Capital to the New Commercial Enterprise by a Job Creating Entity, affiliate of a Job Creating Entity or of a New Commercial Enterprise, or unaffiliated third party.” 

The day after this conference the Jay Peak bomb shell hit with the SEC action taken against the principals and their affiliated entities. This case has had an immediate impact on both Congress and the EB-5 industry as a whole, including the foreign migration agents. It is difficult at this time to predict the fall-out from this pending action.

The Jay Peak matter further supports the need for enhanced integrity measures as well as the need to have independence between the developer and the borrower and/or agent that distributes or loans investor funds to the developer.

2016 Invest in America Summit Series Part 2 – Issues and Results

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

6th Annual Invest in America Summit

Beijing, China

March 17, 2016

Details and response from the Wailian sponsored conference.

(Second post in the series)

On March 17, I attended the 6th Annual Invest in America Summit held in Beijing. As a follow-up to my post last week, I will address the following issues that resulted from the conference.

  1. Too many deals available. The market, especially in China, has been bombarded with an enormous number of credible projects. Therefore, good deals that more readily got done are now actively competing with each other to obtain funding.
  2. Costs increases – As the result of the competition stated above, the overall marketing costs could potentially be increasing as a function of supply and demand.
  3. There is some concern over the new potential legislation, but that is not a driving factor.
  4. There was inquiry as to the increased SEC involvement in the EB-5 process, although there are some misconceptions as to the role of the SEC. My goal was to explain that the SEC provided significant protection to the program and the investor interests.

Based upon these concerns, solutions include the following:

  1. The sooner the better as to investment in order to get in to the visa queue line as soon as possible, since the visa wait at this time will only get longer.
  2. Seek EB-5 capital from markets other than China in other to mitigate the retrogression risk.
  3. Seek other visas to enter the country on an extended basis in order to offset the retrogression time delay.
  4. There is now much more of a need to differentiate a project by emphasizing the location, the developer equity, developer guarantees, as well as potential governmental sponsorships.
  5. There needs to be a heightened focus on escrow arrangements early releases and the developer guaranty. This will be addressed in a future post.
  6. If one is marketing in China, no substitute for boots on the ground there, with detailed participation in the marketing process.

2016 Invest in America Summit Series – Issues and Results

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

6th Annual Invest in America Summit

Shanghai, China

March 12-13, 2016

Details and response from the Wailian sponsored conference.

(First post in the series)

On March 12-13, I attended the excellent 6th Annual Invest in America Summit held in Shanghai. It was extremely well attended with many outstanding panel speakers.

Related to the focus of the issues at the event, I will do a series of detailed posts explaining them. Participating as a conference panelist, as well as my active involvement in the discussions of the issues after the various panels, I would like to share my knowledge of the topics and some of the details that resulted from the dialogues of participants and attendees.

The topics from Shanghai (the first of three summit city locations) included the following:

  1. Major concern over visa cap and market effect of retrogression.
  2. Currency restrictions in China and time delays in having funds transferred to bank accounts offshore.
  3. How to cope with the fact that there are so many projects being offered in the marketplace today.
  4. Increase in migration costs due to extreme competition and demand from sub-agents for more funding due to the oversupply of projects compared to the availability of funding.
  5. General concern about the new legislation concerning timing and ultimate effect on the market.
  6. Focus on SEC involvement and enhanced investigations. Concept of increased due diligence and heightened concern over safety of projects.
  7. The fact that the investors seem to be more educated and sophisticated in EB-5 matters and seem to be taking a more active role in the process.

Now, I will tackle a few of the above-referenced issues to give you some takeaways from the Shanghai event.

  1. Concern over visa cap and retrogression. Clearly one of the major priorities in the Chinese market due to the uncertainty as to the potential delay in receiving visa appointments and ultimate availability, combined with the aging out of children who may now face serious risk joining in on a parent’s application and that otherwise having the visa issued at the time the child turns 21 (otherwise referred to as “aging out”). I just found out from one of the major agents in China that 25% of their applicants are actually F1 students and/or minor children who are filing under an account to avoid the retrogression/aging out issue since the child becomes a petitioner and therefore is protected from aging out in the process.
  2. Currency restrictions in China. As a result of these currency restrictions, I have been informed by agents that the funding process to complete the aggregation of funds to transfer monies to the escrow agent is taking from 4-5 months compared to 2-3 months before.
  3. Too many deals in the marketplace. It is quite obvious that due to the popularity of the EB-5 program in the United States there is a substantial increase in the availability of projects in the Chinese market thus resulting in substantial competition for EB-5 funding. Agents are aware of the issue and so are the investors. Therefore, given the multiple choices available, agents and investors can become choosier, thus resulting in only the superior projects having ease of funding at this time. That is not to say that other projects will not get funded but given the competition, the choice projects will receive priority in funding and the potentially less desirable projects will have to work harder and potentially pay more money to agents to get their projects funded on a timely basis.

Continued explanation of conference issues will follow in the next post in the series after I attend the Invest in America Summit in Beijing on March 17.

The summit is sponsored by Wailian Overseas Consulting Group who had organized the forum for overseas asset allocation with Forbes in many Chinese cities.

For Chinese translation, please click here.

EB-5 Innovation Summit Delivers Substantive Insight Into Current Issues and Emerging Trends

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

2016 EB-5 Innovation Summit Presented by NES Financial

Julian Montero, Jay Rosen, and I recently attended and lectured at the NES Financial EB-5 Innovation Summit, which was held in Los Angeles, San Francisco, New York and Miami. At the summit, we discussed market information and topics, including EB-5 reform legislation; SEC update; the evolution of EB-5 best practices; raising EB-5 capital; and the emergence of EB-5 as a mainstream investment.

The takeaways from the conference include the following:

1. Recent Proposed Legislation. The panel discussed what recently proposed legislation would entail and the potential likelihood of passage by September 30, 2016. It was the general consensus that new legislation will eventually be passed – it is only a question of when.

The integrity measures as a whole seem the least controversial. The pending integrity bill ___ in the House and the other in the Senate attempt to tighten reporting and transparency in the EB-5 program in order to reduce the risk of fraud, as well as enable a more clear and transparent presentation of the entire project and compensation paid to various participants in the food chain. Some of the controversial integrity issues include the following:

a. The role and responsibility of the regional center to certify legal compliance, including with securities laws.

b. The potential cost of compliance with the due diligence requirements of the new legislation.

c. The potential requirement that all agents and other partners receiving compensation for marketing an EB-5 project must register with the Secretary of Homeland Security. What jurisdictional issues will apply to foreign agents as to U.S. jurisdictional claims if this registration actually passes?

d. One of the proposed bills provides for the potential approval of compensation to be charged, as is the case for licensed FINRA broker-dealers whose commissions are regulated.

e. Increased fees to fund compliance measures.

We discussed, to some degree, potential changes to the immigration component of the EB-5 Program and lobbying efforts currently being undertaken, which are related to making sure the final bill is properly drafted to not unduly burden the Program.

2. It was noted that, given the fact that this is an election year, there is a reasonable possibility that no new legislation will be passed and the bill will just be extended again. However, the group all agreed that it is very important from an industry-wide standpoint that the professionals be ready to comment and advise on pending legislation, in case it is proposed at an earlier time.

3. It has always been noted that the visa cap of 10,000 is a critical component, and the industry as a whole is trying to have the visa cap increased one way or another – either excluding family members in the numbers counted, increasing the actual cap, or borrowing unused visas from other programs.

4. Industry Trends. NES published some very valuable information showing industry-wide trends concerning concentration of project, size of the project, geographic preferences and regional center location. Those charts are included at the end of the post.

5. SEC Policies and Procedures. The panel members noted heightened SEC enforcement activities, including the fact that the SEC included EB-5 in its 2016 priority list for investigation and enforcement actions. Therefore, it is more important that regional centers, developers and professionals take proper measures to ensure appropriate actions; that all marketing activities are regulated to prevent fraud; and that potential broker-dealer registration matters and investment adviser registration matters comply with securities regulations. Parties participating in marketing activities must be conscientious of the heightened SEC enforcement actions and the need to ensure compliance with the registration filing to the extent that any marketing activities are conducted within the United States.

All in all, the panel members noted that EB-5 has become mainstream and has therefore gained much heightened publicity and attention from regulators.

Results of the 2016 EB-5 Investors Conference

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

I attended the 2016 EB-5 Investors Magazine Conference in Las Vegas held on January 15-16, 2016. The conference had about 800 attendees, which is the largest EB-5 conference I have attended. Seventy Chinese marketing agents were invited to attend and network with the crowd. Many of the top EB-5 professionals were at the conference.

The following are the key takeaways:

  1. Visa Count. Number one priority seems to be the visa count and retrogression in China, which right now is projected to result in up to a 5-6 year delay on current filings. It was the general consensus of the group that the visa account should be increased in one of two ways. One would be eliminating the ancillary family members in the 10,000 limitation as derivative applicants, which will result in almost a tripling of the size of the EB-5 Program from a visa availability standpoint. The second option is the visa count should be increased to accommodate the significant demand of the EB-5 program, as well as taking into account the significant backlog in China.
  2. SEC Matters. The SEC has recently indicated that the EB-5 Program has now been listed in its priority investigation list for 2016. The SEC has also announced various settlements and cases involving broker-dealer violations, which are based upon the payments of commissions to third parties doing business in the United States who are not licensed broker-dealers.
  3. Offshore Marketing Activities. As part of my lecture panel on SEC diligence and compliance, I noted to the agents that it is critical that all offshore activities are totally conducted offshore without the use of the “instrumentality of U.S. Commerce.” This is in order to avoid the tie-in with domestic sales activities, which would otherwise result in broker-dealer utilization if a commission is otherwise paid, with certain minor exceptions.
  4. Other Immigration Alternatives. Focus on the immigration process and the various avenues to supplement the EB-5 program and utilize other visas to have investors gain legal entry to the United States prior to the EB-5 petitions being filed, such as an E-2 treaty visa. This also includes a subsequent filing of the EB-5 petition so that a family can gain legal access to the United States while the EB-5 visa retrogression process is pending.
  5. Current Market in China. Discussions took place with several Chinese migration agents as to the status of the EB-5 Program and the effect of the recent collapse of the Chinese stock market, retrogression, and general slowdown of the Chinese economy. It was my overall impression that those items were factors in the equation, but the biggest issue will be retrogression. However, notwithstanding the above, there still seems to be a very active EB-5 market in China in order to meet the anticipated deadline of September 30, 2016 with respect to anticipated new legislation that will increase the investment amount.
  6. Other Markets. There were more detailed discussions concerning marketing in jurisdictions other than China, in particular, Latin America, India, Vietnam, Taiwan, Middle East and even potentially Europe, resulting in no longer being completely dependent on China for investor funds.
  7. Equity Potential. That agents also be in a position to fund equity as well as EB-5 capital for projects in a blended manner where the agents would, through the equity funding, take a more active role in the project in order to protect the EB-5 investors.
  8. TEA and Job Counts. Review of the proposed new legislation concerning TEA qualifications and the potential effect this will have on the job count and the TEA determination, including the issue of the census tract limitation.
  9. Supply of Projects. It was apparent that the supply of EB-5 projects is as large as ever. Results may well exceed the availability of funds, especially given the fact of retrogression in China and the limitation of Chinese nationals investing in the program. Therefore, the quality of the Project and the background of the developer, as well as the developer equity commitment, have become even more critical in the process. I perceive that it is important to go to the market with a flexibility in structuring projects if certain changes need to be made to satisfy the marketing requirements of the agents.
  10. Reactions of Developer Attendees. A focus on the blending of higher rates for EB-5 mezzanine financing with lower rates for senior financing.
  11. Legislation Concerns. Significant coordination concerning there being a concerted industry-wide collaborative effort to take the lead in making appropriate recommendations from both an integrity and immigration standpoint, as well as establishing a collaborative lobbying effort to insure that any new legislation creates a positive result for the Program.

All in all, it was a very productive conference with a lot of valuable input from the participants.

New Proposed Integrity Measures EB-5 Legislation

Ronald R. Fieldstone

Arnstein & Lehr Attorney Ronald Fieldstone

As promised, after the existing EB5 legislation was renewed without change until September 30, 2015, Senators Flake, Cornyn and Schumer presented S. 2415 as “A bill to implement integrity measures to strengthen the EB-5 Regional Center Program in order to promote and reform foreign capital investment and job creation in American communities; to the Committee on the Judiciary.”

I have analyzed the new legislation and compared it to the prior bill introduced on or about December 9. These are my observations and comments:

  1. Much of the new proposed legislation mirrors the prior version which reflects a consensus in many integrity issues. 

  2. Section (F)(1) addresses business plans for the investment. Clarification comments include the ability to update the required information with the business plan, since marketing materials, the information on fees and commissions may not be available   The same applies to names and contact information of all marketing-related parties. Many times packages are filed with USCIS before that information is available. 

    It is noteworthy that the required disclosures seem to not apply to agents or parties paid by a developer that is not affiliated with the regional center or the new commercial enterprise. 

  3. There is a required regional center certification that would not include an NCE not under common control with the regional center. Therefore, where there is an independent manager, the NCE would not need to certify compliance with securities laws. A potential problem with it is the obligation to undertake “a due diligence investigation.” There is no definition of what this means and creates a need for guidance in order to limit liability. This requirement clearly increases the burden on regional centers to comply with these new requirements and increases the cost of compliance.   The rent-a-center concept will change dramatically as a result of the added responsibilities. The intended result of the legislation is clearly to negate the ability of a regional center to absolve itself from securities liability related to the offering. In many situations, this will change the way the regional centers can operate on a go-forward basis. They will need independent diligence and comfort letters to meet the due diligence requirement. 

    The requirement of an investor acknowledgement of all compensation paid and to whom it is paid has been eliminated, which correctly avoids the extension of FINRA Rule 2040 to foreign agents not working through domestic broker-dealers. 

  4. The regional center is required to file annual reports providing extensive information on a project-by-project basis. It is noteworthy that only NCEs associated with the regional center need to provide more detailed information as to the application of the invested funds in a project and an accounting of the aggregate direct jobs created or preserved. It is also noteworthy in subsection (G)(i)(VI) that the fee disclosures are only required if the NCE is associated with the regional center. Many are not. I am uncertain if this exception was intended, since this disclosure has been promoted as a big factor in proposed integrity measures. 


  5. The proposed bill confirms prior language that a person cannot be involved in a regional center if:
    • the person has a criminal or civil violation involving fraud or receipt for the prior 10 years.
    • the person has a civil violation involving fraud or receipt in excess of $1,000,000. No time limit. This restriction is permanent. 
    • the person has a crime involving imprisonment of more than one year. Again – a permanent bar. 
    • a person is permanently barred if involved in various governmental actions that are based on a violation that prohibits “fraudulent, manipulative, or deceptive conduct.”
    • a person has received, for a period of 10 years “a reprimand or otherwise been publicly disciplined for conduct related to fraud or deceit by a State bar association.” This provision seems overly broad given the fact that the bar may have reinstated the attorney to practice law, and why would federal legislation supplant the determination of the State bar? This provision seems to be too anti-lawyer. There are no monetary standards or other criteria. It makes sense for a disbarred attorney who is not reinstated to be excluded. But when a bar determines that the attorney is fit to practice, should that not be sufficient?


  6. The legislation goes on to describe what it means to be “involved.” The concept is of substantive authority. The presumption is that certain titles automatically grant that authority. Makes sense.


  7. I-526 Petition fee – only a $1,000 increase. A lot less than the $12,000 additional amount proposed before. The regional center maximum annual fee has been reduced from $25,000 to $20,000. 


  8. Direct and third party promoters – Section (K).  There are limited changes here. First, there is no definition of who is a “promoter”, but it seems like the industry would assume this includes marketing agents. They have the following obligations: 
    • Register with Secretary of Homeland Security (the “Secretary”). No requirement for approval. List is not made publicly available. Noteworthy.
    • Promoter must meet certain requirements as to civil and criminal activities – see standards in paragraphs above. 
    • The Secretary can establish guidelines for representing the EB-5 Program.
    • The Secretary can establish “permissible fee arrangements, if applicable.” Not sure what that actually means. For any US agency to establish fee structures for foreign agents conducting business in their jurisdictions with investors from their countries would seem to set a new precedent in securities regulations under the Securities Exchange Act of 1934. I have concerns about this involvement in regulating what is undertaken in foreign jurisdictions, although the basis is the issuance of a US security for justifying the oversight.
    • Requirement that a regional center maintain a written agreement that complies with the above. That means there will need to be at least a tri-party agreement among each agent, the regional center and the NCE. 


  9. Foreign Involvement in Regional Center. Section (H)(ii) confirms that only nationals and permanent residents can be involved in regional centers. The proposed bill now clarifies that the foreign governmental entities cannot supply capital to the regional center or be involved in the regional center. The prior language related to funding capital to or being “involved” in the NCE or job creating entity has been eliminated. This is a good result and resolves the unintended consequences of prior legislation. 

    The Commerce Secretary is designated to issue regulations concerning this issue within 180 days after the enactment. 

  10. Effective Date – As determined by the Secretary not to exceed 90 days of enactment. 

    All in all, the bill presents a good effort to provide integrity without disturbing the EB-5 Program, except for the potential regulation of foreign agents doing business in their jurisdictions. An “EB-5 Securities Roundtable” Committee, of which Jay Rosen and myself are members, has been established to provide detailed guidance on the proposed legislation and provide input in to the process. 

EB-5 Senate Bill News – No Agreement to Result in a No Change Extension

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

After much fanfare, stress and tremendous negotiations taking place within Congress and the lobbyists trying to influence the process, a compromise EB-5 bill could not be agreed upon. Therefore, the Senate and in house committees have approved a one year extension until September 30, 2016. Currently, the extension is anticipated to have no changes*. The extension is expected to be approved by Congress in the next few days.

Key issues of negotiation included among other matters the following:

  1. Retroactivity of the TEA classification and even the dollar invest for 526’s filed before the effective date.
  2. Issues related to a potential transition period with respect to projects in the middle of fundraising and development.
  3. The whole definition of TEA and the multiple categories that were designed to accommodate the lower TEA dollar investment amount of $800,000.
  4. The creations of three separate categories of reserved visas of 2,000 each – rural, urban/poverty, and the non-TEA $1,000,000 category. This left 4,000 visas for most of the applicants both approved without visas yet and the pending petitions. I have been told the pent up visa demand could exceed 20,000 petitions, which is somewhere around 50,000 visas. Under current limits of 10,000 that could be up to a 3-5 year retrogression for Chinese nationals. If you reduce the availability to 4,000 per year, the negative result is obvious. That was one of the major hurdles.
  5. Eliminate foreign government providing capital to JCE’s. Really? How many projects receive financing from government funded lenders or government funded developers. Several public Chinese public companies are using EB-5 capital. Some may be partially funded by the government. Do we really want to restrict their access to government funds? Should a public company that runs independent from the government be restricted because the government is an investor? How many developers get funding from foreign government pension plans or investment funds that have government agency capital? The unintended consequences are difficult to predict.
  6. Some of the compliance requirements may have gone too far, although there was general consensus that more controls and transparency over the process is a good thing.
  7. Dealings with foreign agents. Basically an extension of FINRA rule 2040 related to registration of foreign agents and an acknowledgement from investors exactly what they got paid. Even an approval by the Secretary of Homeland Security as to the compensation to be paid.
  8. The census tract aggregation provisions for TEA’s.
  9. The ability of the Secretary to override a TEA determination of a state agency.
  10. The increase in filing fees for each applicant by $12,000 over the current $1,500 amount.
  11. Regional center certification requirements, as proposed, were quite strenuous and somewhat ambiguous.
  12. The limit of indirect jobs to 90% without a clear unambiguous path of how to calculate direct construction jobs for projects less than 24 months.

It will be very interesting to see the market reaction, especially in China. Probably a great sigh of relief.

*I will keep you apprised of updates to any extension modifications, as well as Congressional approval issues.

EB-5 Senate Bill Controversy

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

The revised draft of EB-5 Senate Bill S 1501 (Leahy-Grassley) was released last week and is very controversial. Some organizations support passage and others do not. I see many flaws in the proposed bill that will be summarized below:

  1. The bill is generally effective upon enactment and there is no transition time allowed to enable investors to file their I-526 petitions for projects that are in active development, especially those who have received partial EB-5 funding. The securities and immigration issues are monumental. Offerings will need to be updated to in effect generate a new class of investors who will operate under different guidelines. Investors who have not filed their I-526 petitions and are therefore not grandfathered will need to invest a higher amount – either $800,000 or $1,000,000, depending on whether the project qualifies as a TEA. A lack of further EB-5 funding could jeopardize projects in development as well as those investors who have already filed the I-526 petitions. 
  2. There appears to be a limit on job creation whereby only 90% of the jobs can be indirect. That means at least 10% of the jobs must be direct. This would seem to eliminate those types of projects that rely heavily on construction jobs to satisfy the job requirements. In particular, those types of real estate projects such as multi-family, infrastructure, office buildings and other similar projects would not qualify since it would be virtually impossible to create enough jobs given the management nature of those projects. 
  3. There is a requirement that all marketing materials must be filed along with the application for approval. However, in many cases the marketing materials may not have been created at the time of filing and/or may be supplemented in the future. Furthermore, it is very difficult and maybe impossible for the regional center to monitor the marketing materials used, especially in foreign countries through agents or sub-agents. That is why most offering documents have a disclaimer on reliance on non-authorized materials.
  4. The regional center must disclose all fees and ongoing interest paid to the persons receiving the compensation. In many instances this is not known at the time of filing. Many times packages are created for filing before engaging marketing agents and finalizing an arrangement. Circumstances change over time, which dictates the need to modify the arrangements. The proposed legislation does not address these concerns.
  5. The regional center and the issuer must certify that all agents, employees, advisors and attorneys complied with all federal and state securities laws, to the best of their knowledge, after reasonable diligence being exercised. What does this mean? The provisions are very burdensome and somewhat unrealistic. How can the regional center actually investigate offshore activities of sub-agents working under agents? What diligence needs to be conducted? Why are attorneys even listed as a party the compliance? That in and of itself may be unprecedented. How does one protect itself under these broad guidelines? Doesn’t the pending SEC rules and regulations address many of these concerns? The concept of compliance and diligence is appropriate. Isn’t the hiring of the proper professional to prepare and review necessary documents the appropriate standard? I agree that many offering packages are inadequate and should never have gone to market. But the proposed legislation gas a reach that is very risky from a compliance standpoint.
  6. The new proposed legislation did distinguish the jurisdictional distinction between the 1933 Act and the 1934 Act and the applicability of the Regulation S exemption to market securities, which is a material correction from the prior bill.
  7. The I-526 petition fee increases by $1000.
  8. There are now annual regional center fees of either $10,000 or $25,000, depending upon the level of activity.
  9. Beginning on October 1, 2016, 2000 visas are reserved for rural areas, thus reducing the availability to most of the country to 8,000. The program needs an increase in the visa number to satisfy the existing demand. The backlog to obtain a visa is tremendous and continues to grow. This should have been addressed in the legislation.
  10. The Secretary of Homeland Security now determines TEA designations and can override state agencies. How does one know if the state designation can be relied upon if the determination can be overturned? What will this do to projects that require certainty when going to the market and raising funds?
  11. The TEA designation is now based upon only 12 census tracts, including the project location and all contiguous census tracks. This will now eliminate many projects from TEA designation No recognition is given to commuter patterns to determine where the likely source of employment will emanate.
  12. The non-TEA amount remains at $1,000,000 and the TEA amount increases to $800,000. This factor reduces to a large degree the difference between the two classifications.
  13. Direct and third party promoters – Now, they need to comply with rules established by the Secretary, including: a) registration with USCIS; b) minimum qualifications; c) guidelines for offering the securities; and d) permissible fee arrangements. These provisions therefore would provide significant power to the Secretary to actually regulate the activity of foreign agents with foreign citizens with respect to offerings made in the foreign jurisdiction. Isn’t it up to the foreign governments to regulate their marketing activities? We do not allow foreign governments to regulate U.S. activities. The implications of these provisions could totally upset the industry abroad, especially in China, and therefore create a significant setback to fundraising activities abroad. It is difficult to predict the potential impact of these provisions as well as the rules that would be promulgated by the Secretary.
  14. The new Bill would prohibit a foreign governmental entity from providing capital to, or be directly or indirectly involved with the ownership or administration of, a regional center, a new commercial enterprise, or a job-creating entity. This would seem to effectively eliminate any Projects from the EB-5 Program whose developers are owned by or involve a foreign governmental entity, of which there are many such existing EB-5 projects under way, especially projects with Chinese developers which are partly or fully owned by or involve the Chinese government.
  15. Additionally, the new bill prohibits any person to own, manage or otherwise be involved with a regional center unless the person is a U.S. national or has been lawfully admitted for permanent U.S. residence. 

The purpose of this post is to cover some of the provisions of the proposed legislation and is not meant to be a detailed review of the proposed bill. If you have any questions about this post and/or other EB-5 Investor Program matters, please contact me. My contact information is available by clicking here.

Proposed EB-5 Senate Bill Draft – Securities and Corporate Matters

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

Response to Proposed EB-5 Draft Bill

After reviewing the proposed Senate legislation EB-5 draft bill prepared by counsel to the Senate, here are my thoughts regarding corporate and securities matters which have been changed or omitted altogether from the bill as drafted in its current form. This post will not address detailed immigration issues.

  1. Business Plans for Regional Center Investments. Contained in subparagraph (F), there are various proposals that contain many inconsistencies and problems. a. In subsection (IV)(cc), there is disclosure concerning material litigation or bankruptcy or adverse judgments. For some reason the criminal background is not included in that disclosure which seems like an omission. b. In subsection (IV)(dd), there is an obligation to disclose ongoing interest, compensation and any amounts paid to agents, finders, broker dealers and the like. The problem here is that when an offering is prepared for distribution, many of these items will not be known at the time the offering documents are prepared and only ranges of compensation could be provided since in many situations, the actual compensation to be paid is not finalized at that time. It is typical in an EB-5 offering that the interest to the investor is disclosed and that there is a range of compensation paid to marketing agents that is disclosed which includes the regional center and the marketing agents, since in many cases the amount being paid is variable and the breakdown of the payments is not established in advance. Furthermore, contained in subsection (CC) is a requirement to provide the names and contact information of such persons, which again is not necessarily known at the time that the offering is completed. c. Concerning subsection (VI), there is a required certification from a regional center, new commercial enterprise (“NCE”) and the job creation entity (“JCE”). In many cases all three parties may not be actively involved in the securities offering process and therefore may have a difficult time providing the certification. This is especially true in the case where a regional center is not involved at all in the offering process, but merely sponsors the project. The new legislation put the burden on the regional center to be completely responsible for the content of the offering documents, which is currently not market practice. Accordingly, this would increase the cost of utilizing regional centers, increase the cost of regional center compliance, and require regional centers to in effect have their own securities and immigration counsel for review and verification of all information provided for the ability to comply with the certification. Furthermore, it should be clarified that the certification initially relates to 1933 Securities Act compliance with respect to disclosure since it is impossible to certify 1934 Act marketing issues where the marketing activities has not even begun to take place.
  2. In Section (G)(i)(V), there is an accounting of all foreign investor capital in the regional center, NCE and job-creating entity. This is somewhat of a misnomer. There is no foreign capital invested in a regional center pursuant to an EB-5 program. The money is almost always invested in the NCE, with the invested capital loaned to the JCE. In a direct program where an NCE does not exist, the investors can invest directly in the JCE, but this needs to be clarified since the investors would never invest in both an NCE and a JCE.
  3. In Section (G)(i)(VI)(ff), there is an accounting of all fees collected from alien investors. The investor only pays administration fees and they are typically paid directly to the regional center or agent. Typically, the JCE would pay the loan monitoring fees or related fees on an ongoing basis. The language itself is confusing and should be clarified.
  4. With respect to subsection (H)(i)(I), there are restrictions on who can be involved with a regional center. There is exclusions for persons having criminal or civil violations involving fraud or deceit within the previous 10 years. What does a violation mean? There really needs to be an adjudication or finding in a judiciary tribunal that is final and not appealable. In addition, a criminal offense could include, a minor traffic violation or some other type of criminal activity that is not relevant to EB 5 program or the person’s involvement in a regional center.
  5. Subsection (ii)(aa) provides a further restriction where the person has committed fraudulent, manipulative or deceptive conduct. I question whether there should be a materiality standard in connection with this standard, maybe a dollar amount should be stated to result in exclusion.
  6. Section (IV), subsection (bb), provides a person during the prior 10 years that received a reprimand or has otherwise been publicly disciplined by a state bar association is also excluded. It singles out attorneys compared to any other professional. Furthermore, a reprimand by nature is not nearly as relevant as a disbarment. In addition, a disciplinary proceeding which is no longer active where the party disciplined has been reinstated should not serve as a standard for barring an attorney from being involved in a regional center. The purpose of reinstatement by a state bar association confirms the fact that the attorney meets the standard necessary to practice law. It is not up to the Legislature to countermand the standards imposed by a state bar association.
  7. Concerning subsection (ii), Foreign Involvement in Regional Center, there is a complete bar for any involvement by a foreigner. There could be distinction between management and possibly a majority ownership. It seems highly irregular to impose restriction on foreigners investing in United States entities that are not involved in national security matters.
  8. In Section (I), Compliance with Securities Laws, concerning subparagraph (i) – In general – I think there should be clarification that this compliance relates to the 1933 Act with respect to United States jurisdiction since the law should imply that the SEC is trying to regulate broker-dealer transactions abroad that are clearly exempt under existing law. Subsection (ii) specifies that the Regulation S exemption still applies, but that does not otherwise address the broker-dealer issues with respect to foreign agents that are actively involved in the sale of EB-5 securities, should be clarified as well.

In addition to the above, there are numerous immigration problems with the proposed legislation including:

  1. Retroactivity to June 1, 2015
  2. TEA definition – almost eliminates urban projects
  3. Retroactive increase in investment amounts.