EB-5 Due Diligence Matters: Industry At Point Of Inflection Regarding Securities Compliance

Private placement offerings are an increasingly active part of the securities business. One especially complicated and emerging area of private placements is the EB-5 Investor Visa Regional Center Program. Under the current rules of the program, an investor interested in a U.S. green card may place $500,000 or $1 million into an at-risk investment, issued by or affiliated with a United States Citizenship and Immigration Services (USCIS) designated regional center. Under current law, the per investor minimum for participation in the EB-5 Program is $500,000 for an investment in a new commercial enterprise capitalizing or facilitating a project based in a rural area or in a specific geographic location of high unemployment known as a "Targeted Employment Area" (TEA). This is a downward adjustment from the $1 million that is required in any area outside a TEA. See Immigration and Nationality Act (INA), Section 203(b)(5)(B). If job creation requirements are met as anticipated in the investment deal, an investor will be eventually eligible to secure lawful permanent residence in the U.S.

The EB-5 regional center program is spiking in popularity along with other citizenship-by-investment programs around the globe. With the increase in interest in EB-5 and efforts by lawmakers to reform the program, securities compliance and due diligence are now more important than ever before for all stakeholders in an EB-5 deal. We have published an article entitled EB-5 Due Diligence Matters. Written with my colleagues Peter Saparoff and John Nucci, this article discusses why due diligence matters to various parties in EB-5 offerings. We also provide strategic guidance and pointers about EB-5 due diligence to practitioners, regional centers, and issuers of EB-5 securities. The summary below provides our readers with our main conclusions from our article. The EB-5 industry is at a point of inflection, with more SEC activity on the horizon. Here are our conclusions on EB-5 due diligence at 10,000 feet.

What are EB-5 regional center investments?

The short answer is that they are almost always securities under U.S. law. EB-5 investments are also almost always illiquid, even if structured with a debt facility such as a loan. As with many forms of illiquid investments, EB-5 deals offer an exit strategy premised on an entity or business stabilizing and having funds to pay back investors. Investors who lose their money may well file lawsuits against issuers and any other party who induced them into a deal, including lawyers, brokers, or regional centers. Additionally, SEC complaints (with their Section 17(a) negligence standard) are almost a...