The Need for More Checks and Balances in EB-5
Panelists: MICHAEL GIBSON, RUPY CHEEMA, OZZIE TORRES, DAN LUNDY, REID THOMASSomething Doug Hauer mentioned in his article on this topic was that EB-5 issuers should consider involving a securities litigator on the offering team early on to be involved in the offering and through until the end. Ozzie, do you have an opinion about that?
Ozzie Torres: That’s a very interesting suggestion. Of course, it can never hurt to have the experience of a securities litigator on the team. Sometimes these deals are budget driven and it's hard to even get a securities lawyer engaged. That aside, where the stakes are higher, and as these deals become bigger and more complex, I think there's going to be room for having counsel of that nature involved.
Rupy Cheema: It seems that some of the EB-5 deals are really budget driven and there’s this notion of, "If can just put together a business plan, economic study and hire an attorney to draft a PPM, then I can raise money.” I think there’s a lack of consideration of the fact that that’s just the beginning.
A budget is required for loan and security documents, review of marketing materials, professional advice on compliance requirements and administrative procedures, accountant and tax advisor not to mention a travel and marketing budget for China.
Any services that are not directly linked to procuring investors such as third party oversight or due diligence are often not perceived as a critical part of the process even if they can potentially help avoid RFEs or give more transparency to investors avoiding potential misunderstandings or litigation. Some of the new players to the EB-5 space tend to have an unrealistic view of the time and resources required to raise EB-5 capital.
Dan Lundy: Rupy, it's also, perhaps a seven or even eight year commitment. It's not just a raise and then you're done. You're with these investors through the 829s, which, if you're coming from China and given the visa backlog there, is a 7-8 year process.
Rupy Cheema: Right. Some of the newer RCs or newer developers that are one-off projects sometimes have that misunderstanding.
Kurt Reuss: One of the confusions for me is that we're dealing with investment banking, we're dealing with immigration, and we're dealing with agents that are demanding fairly excessive fees. Hey, I'm an agent who earns fees from bringing investors to deals. I certainly recognize that the fees, to some degree, are being focused more about, how are we going to be able to pay the agents what they're demanding? We're doing that by cutting short the expense on the securities attorneys, the expense on having fund administration, the expense of having a broker-dealer involved. Michael, do you have any thoughts about that?
Michael Gibson: I think changes in terms of structuring EB-5 projects so that there are more checks and balances in place and more monitoring going on are only going to occur if somebody demands them. I think that that somebody ultimately has to be the EB-5 investor, or because you're being regulated by a governmental authority which is requiring you to do something.
I don't want to be too pessimistic about human behavior, but nobody wants to spend money on something that they don't have to. I think those are the two parties that are going to have to demand some type of change in order for people to make these meaningful and important changes to how EB-5 projects are funded. That's my big-picture takeaway.
Kurt Reuss: Mike, how do we get the investor's voice? Do we rely on the agents? China could be the voice of the investors? Or do we rely on due diligence like EB-5 Diligence to be providing that? Where do you think that might develop?
Michael Gibson: It could be a lot of different places. Certainly the ones you mentioned. The agents are a possibility. I'm sure they're aware of what's going on with this litigation and thinking about it, for their own projects, how they can protect their investors and their reputation. Any professional involved in a project doesn't want to be associated with a project where something like this happens. I think at least raising it as an issue for everybody to discuss on a project-by-project basis, and then discussing how it's going to be protected against is something everybody should be considering. That’s whether you're involved with due diligence or whether you're working on just the loan or just the securities aspect or just the immigration component of a deal. I think the “voice” could come from a lot of different sources.
Kurt Reuss: Unfortunately, it's probably not going to be the investors, because generally they're foreign and they're not necessarily sophisticated and they may not even speak English proficiently. Dan, do you have any thoughts about it?
Dan Lundy: Actually I have been speaking to a number of investors, and I speak to a number of agents in China. They are very concerned about projects and fraud and making sure the projects are going forward. I think to some extent, the agents feel that they don't have the due diligence tools available to them, so it's very hard for them to vet a project. I think the investors are feeling worse, because some of them are fairly sophisticated. Perhaps not necessarily in terms of U.S.-based real estate transactions because real estate is a whole different ball game in China with the government essentially owning all the land and leasing it to you.
They are very much concerned. I think that there is going to be market pressure for investments that are backed by, for one thing, good professional players. Your more professional operations are going to have an edge, because having a track record, they're just going to want to know that somebody is there watching where the money goes, somebody's tracking the jobs, that somebody is there to make sure that things go the way they should. I think that there is going to be market pressure to up the game for issuers and for regional centers.
Reid Thomas: I think that's true. I think competition is a big driver for this. We've certainly seen a big, big shift towards issuers incorporating these types of solutions into their back office over the last couple of years, and it's made a difference. I think the various opportunities like this and this webinar that you're holding is another good way to do that.
Our company is focusing increasingly on trying to educate the market, specifically now in China and going forward in others, as to the types of things that they should be looking for when they do due diligence, and get this to be part of the conversation. After Chicago, it was all about site visits and making sure the person had the right permits, and so on. I think we need to move the conversation to include some of these other things that we've been talking more about today. We all have an opportunity to do that as we go forward in the various venues that we speak at.
Kurt Reuss: That's a really good point, that Chicago taught us that you’ve got to do a site visit, and this enforcement action may teach us that having a single person self-dealing has to be controlled at some level. Ozzie, what do you think about the SEC's next move?
Ozzie Torres: I don't know what their next move is, but when I started looking at this stuff four or five years ago, I said, "Something's got to give." I knew it was going to be more sophistication, more complexity, more oversight. Hopefully the SEC will get so busy with mega-mergers and other things that they might give us a little break. This is self-regulatory work, really. This is designed to make sure that we hear the sound of the SEC coming, and we make sure that we do things in the way that they are supposed to be done. I think it's all good, as far as I'm concerned.
Reid Thomas: I would just go one step further. Regardless of what the rules are that the SEC sets out, we know what the right things to do are, and we should push our respective clients in that direction. There's no law to escrow funds at all, but the vast majority of folks do it, as an example. I think we know there are other things, like third-party administrators and third-party controls, and some of these things should be fundamental to the way we do business, regardless of whether the SEC weighs in on it or not.
Ozzie Torres: That's totally true, but that's exactly why these laws came about, because there was abuse of investors. The SEC's position really is, "We're not going to give you any more guidance than we've given you. You should how know it is that you need to behave." I think that I agree with you.
Kurt Reuss: The other side is that the SEC is only one element. When investors don't get their money back, as they're expecting to, and they begin civil litigation, well we're certainly leaving a lot of threads for people to be pulling at. Rupy, do you have any last thoughts?
Rupy Cheema: No, except get due diligence done before you invest. That's what I would say.
Kurt Reuss: Get due diligence done. And get fund administration done, and get a good lawyer.
Reprinted with permission.
Ozzie Torres, Securities Attorney at Torres Law.
Rupy Cheema, EB-5 Analyst at EB-5 Diligence.
Michael Gibson, Finance Attorney at Sheppard Mullin.
Dan Lundy, Immigration Attorney at Klasko.
Reid Thomas, Exec VP at NES Financial.
Kurt Reusss, Broker Dealer at Primary Capital.