US immigration with EB-5 visa program – risks and critical steps to avoid falling victim
by Eric Sustad, Exiger Diligence
The EB-5 program was designed to facilitate qualified immigration into the US and job growth. Would-be immigrants place $500,000  in US ventures with the intention of creating US jobs. In exchange for this investment and resulting job creation, the EB-5 investor receives lawful permanent resident status (“green cards”) for themselves, their spouses, and their children. The focus on the path to immigration is often at the expense of taking adequate precaution with the investment. Personal wealth is placed in jeopardy, tied up in illiquid investments such as hotels or real estate developments, with no guarantees or safeguards.
It’s a trap that many high net worth individuals looking to immigrate to the US, from China and other countries, have fallen into when using the program as a means to “buying a green card”. The EB-5 program is fraught with risk as an investment strategy, prone to fraudsters, and gives the hopeful immigrant-investor little recourse if anything goes wrong. In 2016, 700 EB-5 investors in the bankrupt Jay Peak Report in Vermont lost their chances at green cards, in what was characterized as a Ponzi scheme. A green card is not guaranteed after an EB-5 investment, and a project that fails may result in loss of investment funds, and no green card. According to the Small Business Administration, about one-third of total businesses will fail during the first two years in the US (SBA, Sep 9, 2015). Investors, particularly from China, need to understand their risk, how they can fall victim, and what they can do to protect themselves.
No Government Protection for EB-5 Investors
As of December 6, 2016, United States Citizenship and Immigration Services (“USCIS”) had approved 865 Regional Centers, which are typically privately-held investment vehicles designed to manage job-creating projects to qualify EB-5 petitions. Many EB-5 investors opt to use approved Regional Centers to direct their investment funds toward appropriate projects. However, USCIS approval means little in terms of investor protection. USCIS expressly denies that its approval of a Regional Center a) constitutes endorsement of its activities; b) guarantees compliance with securities laws; or c) in any way mitigates risk to the EB-5 investor. With these disclaimers, USCIS effectively places the onus for due diligence of Regional Centers and their projects on the investor.
Risk of using a bad Regional Center
The responsibility of vetting a Regional Center and its owners and management lie entirely with the EB-5 investor. There are a few key risks involved in choosing a Regional Center that investors should understand.
- Understanding solvency and ownership of Regional Centers
Regional Centers often charge fees of up to $50,000, on top of the minimum $500,000 investment to qualify for an EB-5 visa. It is often not clear who the ultimate beneficial owners of a Regional Center are, much less their solvency or track records in managing investments. If a Regional Center project fails within the first two years after a conditional green card is issued, an investor will be unable to remove the conditions, and subsequently lose the green card.
- Risk of revoked certification of Regional Centers
There’s a possibility that USCIS might revoke the certification of a Regional Center, usually in cases of failure to generate economic activity, or outright fraud. If this occurs, the investor is left without recourse, losing their progress in the queue towards green-card consideration. As of March 6, 2017, USCIS published a list of 78 Regional Centers whose approvals had been terminated.
- No fiduciary duty for Regional Centers
Existing law on whether a Regional Center has a fiduciary duty to EB-5 investors is unclear. While it seems that there is some imputed fiduciary duty toward investors, the lack of a clear standard leaves investors highly vulnerable to financially-shaky or fraudulent Regional Centers.
Risk of being targeted by fraudsters
While law firms specializing in EB-5 immigration are best placed to represent an EB-5 investor, the EB-5 immigration industry is full of fraudsters. High net-worth individuals, particularly from China, are frequently targeted by firms and individuals billing themselves as ‘migration brokers’ and ‘immigration consultants.’ Typically, migration brokers work on behalf of Regional Centers to market to EB-5 investors, while immigration consultants assist Regional Centers to connect with migration brokers. Migration brokers marketing to the mainland Chinese EB-5 market have been known to charge fees of up to $200,000, exclusive of the minimum threshold investment to qualify for an EB-5. Neither of these industries, which operate largely in mainland China, is well regulated, and there have been many instances of fraud involving these players.
Where lawyers might leave an investor exposed
Investor protection is often secondary in the EB-5 process. The primary focus of Immigration lawyers’ is to demonstrate a clean source of investment funds, necessary for USCIS approval, and to guide the investor through the labyrinthine EB-5 process. Money laundering and official corruption are major concerns that the lawyers are focused on addressing. However, immigration lawyers often lack the resources to engage in a thorough due diligence investigation of the Regional Centers themselves. Furthermore, barring a written agreement, an immigration lawyer’s ethical duty to an EB-5 client is limited to effective representation before USCIS, exclusive of due diligence and financial risk assessment of investment targets such as Regional Centers.
Fraud, investigations and law suits into pooled EB-5 investments
On February 2, 2016, Stephen Cohen of the SEC  testified before the U.S. Senate Judiciary Committee regarding increased scrutiny of securities offerings connected to pooled EB-5 investments. Cohen described the growing number of investigations the SEC was conducting into EB-5 investments, including several cases of unregistered broker conduct. In January 2017, the SEC issued a press release in which it described a specific example of Regional Center fraud involving the misuse of over $17 million in investment funds, in which it “jeopardized investors’ residency prospects.” In one high-profile case that emerged involving the Jay Peak Resort in Vermont in 2016, two executives at a Regional Center project were sued by the SEC for securities fraud involving losses of more than $200 million to EB-5 investors. Financial institutions involved in the EB-5 process have exposure to liability as well, with EB-5 investors suing money managers and banks for alleged negligence concerning Regional Center projects.
Instances such as Jay Peak are unfortunately common in the EB-5 world. Since 2013, there have been over 70 lawsuits in federal courts and before the SEC, involving causes of action including, inter alia, fraud, breach of contract, and especially securities violations. These lawsuits involve substantial losses to hundreds of hopeful investors, usually amounting to tens or hundreds of millions of dollars.  Even with a successful award of damages in such litigation, a monetary award offers no recourse in terms of what was the original goal: a green card. The prospective immigrant will either need to start afresh, with new funds and a new petition, or abandon the dream altogether.
Minimal recourse for failed EB-5 Projects
A hopeful immigrant-investor who places funds in a project, has little recourse if the project fails. USCIS requires that an EB-5 investor submit “evidence that the petitioner has placed the required amount of capital [at least $500,000] at risk for the purpose of generating a return on the capital placed at risk.” Additionally, the petitioner must demonstrate, within two years of being granted a conditional green card, that the investment has generated and sustained at least ten jobs. If a project fails within that two-year period, the investor will be unable to remove the conditions on the green card, and have no recourse within the scope of immigration law. While the investor may sue a Regional Center and/or principals of a failed project for loss of investment funds, a successful civil lawsuit will still leave the investor without means to a green card, the original goal of the investment.
How investors can better protect themselves
The risks associated with EB-5 investments are numerous. Lack of government liability for failed investment vehicles, no fiduciary duty on the part of Regional Centers, and shaky finances of those Regional Centers make it imperative that EB-5 investors conduct thorough, enhanced, professional due-diligence investigations of Regional Centers prior to financing a project.
Recent fraud cases and failed projects have shown that basic public records due diligence on investment destinations is often neglected in the EB-5 process. USCIS currently lists 78 former Regional Centers that have lost their accreditation as approved EB-5 investment vehicles. Such risk to the investors has demonstrated that a thorough and independent due diligence process, vetting all parties involved, is increasingly important for a successful EB-5 petition.
To be informed and better shielded from possible loss, investors need to investigate Regional Centers and the management teams behind them. Basic public records due diligence can often surface noteworthy issues concerning the financial history, litigation history, past and current insolvency, false claims of SEC and FINRA licensing, and any other potential liabilities of the entity conducting an EB-5 project, as well as those of the individuals behind it.
Considering USCIS’s lack of mandate to protect EB-5 investors, and the SEC’s growing but still-deferential role in supervising securities offerings connected to EB-5 investments, investors would be well advised to engage in a thorough, professional due diligence investigation of all parties involved in their investment. An EB-5 petition is an “all-or-nothing bet” without a hedge, where a mistake or oversight could result in the hopeful immigrant going home without a green card, and a loss of all or part of their $500,000 investment. A deeper vetting of prospective EB-5 investment projects and their management teams is becoming a necessary undertaking by the investor to reduce their underlying risk.
The extra step hopeful immigrant investors take in performing adequate due diligence on their investment can save them hundreds of thousands of dollars in the long run. On the positive side, a savvy investor who has conducted thorough due diligence can eventually walk away from a successful project with both a green card and a healthy return on their initial EB-5 investment.
 The $500,000 threshold has the qualification that it must fund a project in a “targeted employment area,” (“TEA”) defined as a rural area or a census tract with high unemployment. In practice, this requirement has proven to be easily manipulated. If the area is not classified as a TEA, the EB-5 investment threshold is $1 million.
 Private firms, approved by USCIS, that match EB-5 investors with development projects and job creation. Each EB-5 investor must demonstrate at least 10 jobs created as a result of the investment funds.
 Cohen acknowledges in his testimony the SEC’s traditional deference to USCIS in supervision of the EB-5 program.
 See Goldberg et al. v. Raymond James Financial Inc. et al., case no. 1:16-CV-21831
 See, e.g., EMC Young v. Henderson, case no. 3:16-CV-04262; Lan et al. v. Walsh et al., case no. 9:16-CV-81871 (alleging damages of $50,000,000 connected to investment in fraudulent Florida real-estate project); SEC v. Liu et al., case no. 8:16-CV-00974 (SEC action against couple accused of defrauding Chinese EB-5 investors of nearly $27,000,000).
 8 C.F.R. §204.6(j)(2)