Comment: Attorney Risks

There are at least three distinct factors that go into the decision to make an EB-5 investment, and there are three distinct kinds of licensed experts that can advise investors about them.

1) Structured Finance:
To evaluate an EB-5 investment one needs to be proficient in the field of Structured Finance. One needs to evaluate the overall financial structure for the project, and see where the EB-5 portion fits in. For example, consider the following three aspects of Structured Finance.
• Inter-creditor Agreement(s), especially Subordination Clauses: An EB-5 investment has multiple sources of capital: typically banks in a senior position, EB-5 sharing the mezzanine position with other mezzanine investments, such as preferred equity, bridge loans etc. Subordination clauses govern the relative place and priorities of various investments. These clauses can be very simple or very complicated or something in between - and are usually part of an "Inter-creditor Agreement" which could run into dozens of pages.
• Underlying Asset in the deal terms/structure: EB-5 investments have a complex structure. One needs to determine the value of the NCE's agreement with the JCE, especially as regards to what assets are pledged toward the NCE's loan. Sometimes the loan is secured by a hard asset such as land/buildings, sometimes the equity of the JCE, which may or may not have any value in liquidation proceedings and sometimes debt possessed by the JCE, which could also be of questionable value in a work-out.
• Various entities affecting the investor: We understand that large projects in New York/Los Angeles/etc, have structures which involve more than a dozen interacting entities, intimately affecting the NCE and JCE, --and deal structures which require a combination of a mining engineer, cartographer and a mini-Einstein to grasp.
Structured Finance is a distinct area of law that takes many years to master. Expertise in that field is needed to understand EB-5 investments qua investments--and that should be left to those who have the expertise to untangle the agreements, the clauses, the terms, the structures and the assets and their relationship to an EB-5 investor to be able to suggest an EB-5 security to an investor.

2) Financial Evaluation:
Professionals giving financial advice are regulated by SEC. They are trained to evaluate investments on several criteria such as:
• Suitability: Evaluating suitability of the investment for an investor is exactly what a FINRA registered financial advisor is trained and registered to do. It is a complex skill obligating the advisor to adhere to certain professional standards, which are set by SEC and FINRA.
• Location: Simply looking at a record or reputation of a developer, or the nature or location of the project is entirely inadequate to evaluate a real estate investment. A developer with an illustrious record with a great location and a successful project can still have a lousy investment opportunity depending on the price.
• Real Estate Expertise: Buying and selling homes is not a qualification for evaluating the real estate value of a hotel in Los Angeles, a residential tower in Manhattan or an assisted living facility in Florida. There are distinct sectors and sub-sectors in the real estate market, each with their own expertise.
Giving financial advice without a FINRA license is a violation of SEC rules, and is not covered by typical legal malpractice insurance that immigration attorneys carry and leads to personal liability

3) Immigration Risks:
Immigration attorneys can certainly evaluate the job cushions for the project, calculate how many jobs have been created based on the models used etc. They can distinguish projects based on whether the job cushion is 400% or 4% etc.

Probably the optimal structure is the financial adviser quarterbacking the advice--bringing in experts in Structured Finance and Immigration law as needed. By unwittingly usurping all three functions, and making suggestions to clients on the choice of EB-5 investments, or giving clients a short list of “good’ or "reputable" projects or Regional Centers, immigration attorneys risk their law licenses, expensive litigation, and their personal assets by violating the SEC laws against investment advice. Advising investors on financial viability of an investment without having a FINRA license is a violation of SEC laws, and such violations are not covered by standard malpractice insurance policies most attorneys carry, even EB-5 specific insurance, which is for legal advice and not for financial advice. Though Chinese investors have not been litigious, that is not the case the Indian or other nationalities that dominate today's EB-5 market. Taking this large a risk for a relatively small legal fee such as $25,000 makes no economic sense, since the risks are more than 10 times to 30 times larger than that. Don’t be sorry, be safe.

Please let us know your thoughts by writing to us at editor@ilw.com

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