Warning Signs of fraud in EB-5 Investments

The first question on any EB-5 Investors mind is how to safeguard their Investment from fraud and bad projects. In this post, we will focus on fraud in EB-5. As many of you must have read or heard about fraud cases in EB-5 projects, it is very much a big challenge to ensure that an Investor is not taken for a ride. So what are the warning signs of fraud, some of them are quite obvious, some of them not so much, so here we go.

Verify EB-5 Advisor credentials

If you are using an advisor for your EB-5 project, check to make sure that the advisor is a FINRA registered representative. This can easily be done through Brokercheck. If you are in the US, it is imperative that you only use a Registered rep. as it is unlawful for non-registered reps. to solicit EB-5 investments. If you are outside the US, you might use agents/middlemen in your own country for finding an EB-5 project, but remember that your Investment should always be made directly from your bank account to the escrow bank account of the EB-5 Project’s Regional Center. If anyone is asking you to route the funds through them for currency exchange purposes or country restrictions, that is a red flag for EB-5 fraud. USCIS does check to make sure that your funds were transferred to the escrow account in compliance with all the rules and regulations of your country of residence.

Guarantee of a EB-5 Visa or Permanent residency

Investing through the EB-5 program makes you eligible for an EB-5 visa and the permanent residency after going through the steps of the EB-5 process. But any Regional Center/Project or Agent that guarantees it is obviously unaware of the USCIS EB5 rules which explicitly mention that EB5 investments should be “at risk investments”, which basically means that Projects cannot guarantee the return of Investment. Any agreement signed by the Investor and the Project guaranteeing the return of investment or green card will be disqualified by USCIS and the USCIS will reject the investors EB-5 petition. If a side letter is signed between the parties, those documents need to be filed with the EB-5 petition. So in effect there is no way any EB-5 project can guarantee it. This might seem like a small point, but this has happened in EB-5 investments and investors have been rejected.

High Investment Returns

Investment returns in EB-5 are mostly loan based. There are some EB-5 projects that are equity based which I will address also. But first, in loan based models, the EB-5 Regional Center creates a New Commercial Enterprise (NCE), which collects all the EB-5 investors funds and loans it out to the EB-5 project that the Investor has chosen to invest in. Usually, the loan term is 5 years at the end of which your investment is returned to the NCE, at which point the Regional center pays you back your investment, subject to the terms of your EB-5 petition. (The terms are set by USCIS and are the same for all: investors are eligible to get back their investment after 24 months of receiving the conditional green card). The prevailing interest rate in EB-5 is 0.5% to 1% P.A. This has been the norm for many years. The understanding is that Investor puts in the money at these low interest rates and in return gets a green card. I would be wary of projects that promise higher interest rates. First of all, to run a Regional center and be USCIS compliant, there are quite a lot of expenses involved for both the Regional center AND the Project that is taking the investors funds. If the project is willing to jump through the hoops to be an EB-5 Compliant project, there are costs involved like hiring Securities attorneys to ensure the project is SEC compliant. Hire 3rd party economists to ensure the project is TEA compliant and the requisite number of jobs are created. Immigration firms are involved to ensure that the EB-5 project documentation (I-924) is successfully approved by USCIS. A non- EB-5 project would not incur any of these costs, hence they are able to pay regular interest charges to their lenders. But an EB-5 project will not be paying the same interest rate to the EB-5 investors after incurring the above mentioned expenses. It just doesn’t make sense for a EB-5 project developer to pay more to get the same funds. It might not be a sign of EB-5 fraud, but either the project doesn’t have enough credibility or there is some other trouble with the project and the Project developer is trying to raise EB-5 investments from foreign investors who cannot do the same due diligence as US based banks and financial lenders.

USCIS approval of an EB-5 regional center application does not in any way:

  • Constitute USCIS endorsement of the activities of that regional center;
  • Guarantee compliance with U.S. securities laws; or
  • Minimize or eliminate risk to the investor.

Potential investors are encouraged to seek professional advice when making any investment decisions.

So how would a potential investor safeguard himself? Be curious, ask a lot of questions, do some digging around. Google the Regional center & project principals names, review their professional experience and background.

Things to Check when reviewing EB-5 Projects for fraud

  • Read the private placement memorandum (PPM) also called Offering Memorandum, a legal document provided to prospective investors when selling securities. SEC rules mandate private offerings (EB-5 offerings) issue the offering Memorandum to every eligible investor who is planning to invest in the project. The PPM is the document that discloses everything the investor needs to know to make an informed investment decision prior to investing. Unlike a Business Plan, the PPM details the investment opportunity, disclaims legal liabilities and explains the risk of losses. The PPM is important because it provides the investor with all of the required information they will need to make an investment decision and includes the actual documentation to effect the investment transaction. PPMs are designed as a stand-alone document – meaning that there need not be other information presented to the investor for them to make an accurate investment decision, which also means that anything and everything related to your investment should be detailed in the document.
  • Once you have read the PPM, you should have an understanding of the following:
  • Breakdown of the fees.
  • Specifics on the return of investment.
  • The jobs cushion the project provides.
  • Able to evaluate the reasonableness of the data inputs, including whether or not 3rd party feasibility / market studies were conducted.
  • Your funds Escrow mechanism.
  • The reasonableness of the project timeline.
  • Risks associated with the project.

Regional center history & track record needs to be examined carefully. Ask for:

  • When was your Regional Center approved?
  • How many investors have had their I-526s approved under your Regional Center, and under the project currently offered for investment?
  • Has the Regional Center ever had an I-526 petition denied or withdrawn?
  • When will the Regional Center provide information to support the I-526 petition?
  • How many I-829s have been filed so far?
  • How many past investors have gotten their investment back?

We can help!

I go through every step detailed above with each EB-5 Project that I recommend. I personally visit the project sites and meet with the Regional Center and Project Developer team to understand the risks and benefits of the Projects. 

We have successfully guided our clients through many EB-5 Projects because of our years of experience in the EB-5 industry. Get in touch with us.

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