The Securities and Exchange Commission announced today the filing of fraud charges against a husband and wife team in Texas who raised capital from EB-5 investors and then failed to invest the capital in the promised job creating businesses. See:

Like the now famous Chicago case (SEC v. A Chicago Convention Center, et al.), the SEC chose to use their authority under the anti-fraud provisions of the securities laws. Also notable was the action given the size of the fraud, just $5 million. This action makes it clear that the SEC is closely monitoring activity in the EB-5 space and willing to invest its limited prosecutorial resources even to go after relatively small instances of fraud or other violations.
Concurrent with the charges, the SEC and USCIS issued a joint alert in which they “warn individual investors about fraudulent investment scams that exploit the Immigrant Investor Program…”

See for the full text.

Particularly notable is the interagency coordination. In this case, “the SEC and USCIS worked together to stop an alleged investment scam.…” The Joint Alert goes as far to recommend to investors suggestions for specific due diligence actions they should take to help avoid being victimized:

For investors in Regional Center sponsored investments:

- Confirm that the regional center has been designated by USCIS
- Obtain copies of documents provided to USCIS

Generally for both Regional Center and Non-Regional Center based investments:

- Request investment information in writing
- Ask if promoters are being paid
- Seek independent verification
- Examine structural risk
- Consider the developer's incentives
- Look for warning signs of fraud
  • Promises of a visa or becoming a lawful permanent resident
  • Guaranteed investment returns or no investment risk
  • Overly consistent high investment returns
  • Unregistered investments
  • Unlicensed sellers
  • Layers of companies run by the same individuals

These suggested activities, while directed at the individual investor, should be noted by Broker Dealers who are acting in the EB-5 arena, as areas in which to focus their due diligence activities. FINRA recently provided a letter of guidance to a member Broker Dealer indicating the heightened standards for due diligence requirements in the context of acting as a placement agent for EB-5 investment sponsors. Broker Dealers who fail to undertake the needed due diligence activities consistent with this alert, may find themselves subject to liability and/or sanction. For a recent article on the FINRA letter, see:

Many of the items are simple common sense. Two items, ‘Examine structural risk’ and ‘Consider the developer's incentives’ are typically less examined areas of EB-5 Investments. Examining structural risk is understanding how a transaction really works in terms of its legal mechanics. Many transactions and projects need to have layers of entities to function properly (while this is an area of examination as noted by the alert, by itself, it is not an area of concern). They key is to understand which entities do what for the overall organization. Which receives the investment capital? Which deploy it? Where are the jobs created, and what is the legal relationship between those entities? What are their respective rights and obligations? When an investor (or broker dealer) understands the structure, then they will understand the potential results – what happens to the money, assets and jobs in both good and bad scenarios.

Understanding the developers’ incentives is particularly important as a properly structured transaction can reinforce a self-policing environment. In transactions where sponsors/developers get all of the benefit of the investment out at the very beginning, then the investor must question what incentive there will be to ever repay the investor’s capital. Historically, most EB-5 investor’s capital has been orphaned in their investment vehicles (even where there is no fraud and even when the investor’s I-829 is positive adjudicated). Legally, at the onset of the relationship, transactions cannot be structured to give investor’s redemption rights. In this context, the only way an investor can have a hope of receiving its investment capital returned is if the sponsor is motivated by the incentive structures in the transaction. Look for transactions that are structured so that the investor gets out what they want, before the sponsor gets what it wants. Those are few and far between in the EB-5 program. If the sponsor can only accomplish its financial goals by delivering on the investor’s financial and immigration goals, then the investor will know the sponsor will be hard at work each and every day until their promises are fulfilled.

In all likelihood, this is far from the last action we will see from the SEC. The good news is that they and USCIS are watching and acting. This will help clean up the EB-5 community and result in greater investor confidence and a better program for all those looking to do things the right way.