Best Practices for EB-5 Professionals and Their Clients
This article discusses how lawyers and other professional who practice in the EB-5 space can avoid conflicts and questionably ethical behavior and how potential EB-5 investors may choose their EB-5 professionals wisely.
Overview of EB-5 Ethical IssuesThe EB-5 Immigrant Investor Program captured media attention recently as Jared Kushner's sister touted a Manhattan EB-5 project to Chinese investors. This article reflects in no way on the merits of that project, but immigrant investors and their advisors should be aware that the EB-5 space is awash with fraud, false promises, investment losses, and shattered dreams.
Overview of the EB-5 Immigrant Investor programThe United States Customs and Immigration Service (USCIS) administers the EB-5 program, the same agency which administers family and work-related petitions for temporary and permanent residency in the United States. Investments through the EB-5 program allow non-U.S. investors and their spouses and unmarried children under 21 to apply for green cards (permanent residence) when they invest at least $1,000,000 ($500,000 if the business is located in a "targeted employment area" -- see the May 31, 2017, Washington Post) -- in a commercial enterprise in the United States which creates or preserves at least 10 permanent full-time jobs for qualified workers within two years of the investor's receiving conditional permanent residency. The program is referred to as "EB-5" because it provides for application for issuance of visas under the fifth preference category. This "fifth preference" is something of a misnomer, since an EB-5 investment can result in relatively prompt approval of conditional visas for investors and family members.
EB-5 Offers Two Paths for InvestorsThe EB-5 program provides for two paths for investors and potential immigrants. The first path, enacted by Congress in 1990, is direct investment. Just as the name implies, direct investment means that the non-U.S. investor invests his or her money in either a new or ongoing, standalone business. The second path, created in 1992 by Congress, is investment through a "Regional Center."
Ninety-five per cent of EB-5 investors now choose the Regional Center investment path. Direct EB-5 investments must directly create 10 full-time jobs. Regional Center projects must also create 10 jobs per investor, but these projects are allowed to count both direct and indirect job creation. Regional Center-affiliated projects may be almost any type of qualifying business. In practice, though, these investments are usually real estate projects such as planned retirement communities, high-rise beachfront or urban properties, office buildings, and the like. These investments are similar if not essentially identical to real-estate limited partnership investments.
EB-5 Investors Can Reduce Risk by Paying Attention to Securities IssuesUnique among immigration routes, EB-5 exists at the intersection of immigration law and securities law. Guaranteed rates of return or unqualified promises that an investor will receive long-term permanent residency should raise red flags. So should phrases such as "minimal risk." See "Informed Investor Advisory: EB-5 Fraud," North American Securities Administrators Association. Such promises may violate federal and state securities laws as well as the immigration laws. In order to qualify for a green card, an EB-5 investor must have had his entire investment at risk for the entire qualifying period.
An actual means of minimizing risk, instead of relying on glowing promises in slick brochures, is to work through an independent registered investment advisor who possesses the knowledge and expertise to guide the EB-5 investor through the investment selection process. Although the goal may be the green card, permanent residency comes at a steep price if the investor loses most or all of his or her money. In some instances, the "investment" has turned out to be a fraud, and the investors have not only lost all their money, but to add insult to injury, the United States has revoked the issuance of their provisional green cards. See "Foreign Investors Defrauded Through U.S. EB-5 Visa Program," Forbes, August 1, 2016.
A second means of reducing risk is to engage an independent immigration attorney who is not in any way affiliated or referred by the project or the Regional Center. In addition, it is advisable to retain an immigration lawyer with securities law experience and securities industry experience.
Too many immigration lawyers with no securities experience have, perhaps naively, stumbled into the EB-5 space without realizing that the EB-5 investor is also buying a security and that the sale is regulated by federal and state securities laws. Even today, some immigration lawyers appear at lecterns at immigration law conferences and sanction the subtle recommendation of a particular EB-5 project to investors. Not only is such a recommendation unlawful under the securities laws (because the lawyer is not a registered investment advisor and not associated with a broker-dealer), it also violates the Model Code of Professional Conduct, in that appears to constitute a conflict of interest.
A subset of immigration lawyers have even accepted financial incentives from EB-5 project developers to recommend projects to their clients. These lawyers discovered, to their chagrin, that the Securities & Exchange Commission will use its criminal jurisdiction to indict persons, even attorneys, who violate the securities laws. See "SEC: Lawyers Offered EB-5 Investments as Unregistered Brokers," sec.gov, Dec. 7, 2015.
EB-5 Attorneys and Advisors Should Deal With Each Other at Arms-LengthIn our view at the Gregory Law Firm, the best practice in the EB-5 universe for investors, EB-5 project representatives, immigration lawyers, and registered investment advisors is to engage in arms-length dealings with all parties whom they do not directly represent. An immigration lawyer has an undivided duty of loyalty to his or her client, the investor/potential immigrant. When the time has come to select an EB-5 project, the immigration lawyer should refer his client to an independent registered investment advisor for securities advice. Finally, EB-5 investors must understand that an immigration lawyer who is following ethical rules and avoiding violations of the securities laws can offer only legal, not investment, advice. If the lawyer appears to be doing more than that, the investor should find another lawyer.