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  • Article: EB-5 Regional Center Compliance Practices for 2016. By Jessica A. DeNisi

    EB-5 Regional Center Compliance Practices for 2016

    by


    This month, the House and Senate Judiciary Committees held hearings on the future of the EB-5 Regional Center program. At these hearings, members of Congress voiced concerns and suggested reforms reminiscent of those discussed throughout 2015, when Congress introduced, and the EB-5 community feverishly analyzed, a number of legislative proposals for the extension of the EB-5 program. These proposals were noted for their proposed changes to the rules surrounding TEAs and increase in the minimum investment amount, but were just as notable for the heightened compliance or “integrity measures” included to address perceived security and fraud concerns within the program.
     
    S.1501 – American Job Creation and Investment Promotion Reform Act of 2015, the draft legislation based on S. 1501, S.2415 – EB-5 Integrity Act of 2015, and H.R. 4530 – EB-5 Integrity Act of 2016, referred to collectively as the “draft legislation”, contain mostly the same integrity and compliance provisions. As such, the draft legislation provides a window to the changes in the EB-5 program we will very likely have to adapt to and accept, particularly in reference to new or enhanced compliance or integrity requirements for regional centers and their associated projects and companies. These enhanced integrity provisions include site visits, extensive annual reporting requirements and certifications, monitoring of agents, and potential background checks for regional center principals and owners, among other requirements.
     
    The need for additional compliance measures was an ever-present theme in the House Judiciary Committee’s February 2nd hearing on the future of the EB-5 program and in the written testimony submitted for the hearing by Director Colucci. Director Colucci’s initiatives include creating a Regional Center Compliance Unit to increase regulatory compliance, establishing an audit program to increase oversight of its regional centers, initiating site visits by the Fraud Protection and National Security unit, enabling security checks for regional center businesses and executives, and increased interviews for I-829 applicants.
     
    Rather than adopting haphazard procedures when these measures become mandatory, regional centers should start developing new compliance procedures as soon as possible, including:

    1. Prepare for Site Visits?

      The draft legislation contemplated at least one site visit to each regional center. In addition, in order to review evidence of job creation, the legislation would require at least one site visit to each new commercial enterprise and job-creating entity at any time between the filing of an application for approval and a petition to remove conditions on permanent residence.


      For such site visits, regional centers should maintain accessible records including evidence of job creation, amount and use of foreign capital invested, agreements or contracts with promoters, and evidence of policies and procedures in place to ensure compliance with securities laws.


    2. Undertake any transfers of ownership this year

      The draft legislation would require regional centers to provide notice of any significant changes to the organizational structure, ownership, and administration as well as any sale or other arrangements where individuals not previously subject to the requirements of the program become involved with the regional center. These changes would not take effect until after they were publicly advertised and approved.


      In order to avoid public advertising and the chance that USCIS could delay or deny proposed ownership or administrative changes, regional centers should consider finalizing these transactions before any new requirements take effect.


    1. Develop due diligence procedures concerning individuals involved with the regional center

      The draft legislation would bar anyone convicted of criminal or civil fraud within the last ten years, violated securities or banking law, or committed other criminal or civil offenses from participation in the regional center. In order to enforce these requirements, the draft legislation provides authority for fingerprinting, biometrics, and background checks for persons involved with the regional center. In addition, under the draft legislation, only US nationals or lawful permanent residents would be eligible for involvement with regional centers.


      In order to ensure compliance, regional center principals will need to conduct a diligent review of potential business partners or managers. The regional center should maintain records of such reviews and their results.


    2. Develop due diligence procedures to ensure securities compliance

      Under the draft legislation, the regional center would be required to issue annual certifications, after due diligence, that the regional center is in compliance with federal and state securities laws. The regional center will be required to monitor and approve all offerings made by parties associated with the regional center and maintain records of the offerings.


      Regional centers will need to institute a procedure for continual monitoring and diligent record-keeping and review. Regional centers that operate under the “rental” model, will need to be particularly diligent in monitoring the projects offered under its sponsorship. These measures must be timely and continual in order to identify and remedy potential issues to avoid having the regional center’s status put in jeopardy.


    3.  Develop procedures for monitoring agents

      The draft legislation would also seek to monitor direct and third party promoters of regional centers and their businesses. Under the draft legislation, the regional center would be required to maintain written agreements between the regional center and direct or third party promoters operating on behalf of the regional center. In addition, the regional center would have to provide an annual certification ensuring that all parties associated with the regional center remain in compliance with the securities laws of the US and any state in which the regional center operates.


      In order to provide this certification, regional centers will need a procedure for monitoring and documenting these activities.


    4.  Prepare for Enhanced Annual Reporting

      One the most significant compliance features of the draft legislation is the extensive annual reporting obligations that would be imposed on regional centers. Currently, regional centers are required to submit a fairly innocuous and straight forward annual I-924A filing detailing the foreign capital flowing through the regional center’s projects and the jobs said capital has created. Under the draft legislation, the regional center would still be required to report the details of foreign capital infusion and use for job creation. In addition, they would be required to provide annual certifications, after a due diligence review, that no one involved with the regional center or its associated companies has been convicted of criminal or civil fraud or violated securities or banking laws or various other civil or criminal offenses.


      Further, the regional center would certify that each person involved with the regional center is a US national or lawful permanent resident; no foreign government entity provided capital to or was directly involved with the ownership or administration of the regional center; neither the regional center nor anyone associated with it is barred from offering securities; and all parties associated with the regional center remain in compliance with securities laws, among other annual certification requirements.


      Needless to say, preparation for such reporting will need to be begin well before the end of the fiscal year. Regional centers will need procedures in place for collecting information across multiple areas of operation in order to ensure accurate reporting. Further, regional centers should institute procedures for continual monitoring of its securities offerings, promoters, and associated businesses to enable them to timely fulfill their annual reporting requirements. Regional centers will no longer be able to fulfill their compliance requirements with a burst of activities at the end of December.


    While these additional obligations will surely require time and energy on the part of regional center managers, adopting a well-planned and fully executed compliance regime will greatly reduce the headaches these provisions might otherwise create.

    This post originally appeared on klaskolaw.com. © 2016 Klasko Law. All Rights Reserved. Reprinted with permission.


    About The Author

    Jessica A. DeNisi Jessica A. DeNisi is an Associate in the firm’s Philadelphia office and a member of the EB-5 practice. Jessica works with developers and investors who seek to use foreign investment capital under the EB-5 program to fund job creating projects either through the creation of a Regional Center or under an existing Regional Center. In preparing and filing I-924 and I-526 petitions, Jessica works with economists, business plan writers, corporate attorneys and market analysts to structure regional centers and their projects. Prior to practicing immigration law, Jessica worked as a tax and business attorney. Jessica completed her undergraduate studies at Wake Forest University and earned an M.A. in Near Eastern Studies from the University of Arizona. Jessica received her J.D. from Tulane University Law School and an LL.M. in taxation from the University of Washington School of Law. Jessica is admitted to practice in California and Louisiana.


    The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.

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