Due diligence, USCIS compliance issues
May 03, 2016
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Kurt Reuss
Kurt Reuss
Kurt Reuss is a registered securities broker who has been specializing in EB-5 since 2012. He offers advice on investment structuring and market conditions related to EB-5 investments.

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Challenge of Valuing Equity Contributions When Self-Dealing

Kurt: Robert, do you have a particular conflict of interest in EB5 that you think regional centers and attorneys should be careful of?

Robert: One which did occur to me is the interests of a party which sells something into the job-creation enterprise (JCE), like a land-owner which may be related to the developer or the regional center owners or the manager of the NCE or all of the above.

There's an important challenge to validate or confirm the value that is put on whatever it is that is being sold into the entity and to disclose who is getting paid for it.

Kurt: Does that need to be disclosed in a prominent way to say, "this is what I'm valuing my property at and this is the equity contribution I'm making to this deal"? Is that how you disclose that conflict?

Robert: Yes, and "this is how we came to that value which is tied to the land."

Kurt: I was looking at a deal recently where the contribution was intellectual property. Obviously, when you get into the value of things like intellectual property you probably have to really think through it and get experts to help to develop reasonable valuations.

Robert: Lately, I have noticed that the SEC has occasionally insinuated that there was something inappropriate about the landowner then using the proceeds of the land sale to do something that would have been inappropriate for use of the EB5 capital.

In particular, using the proceeds to pay "extra commissions" (beyond the administration fee) up front to the foreign agent. I personally don't think that that is wrong, because once EB5 money is properly spent on reasonably valued land (or intellectual property, or whatever), it shouldn't matter what the the recipient of the payment does with it.

If the recipient chooses to use it to pay extra commissions, that is not an immigration problem and it shouldn't be a securities problem, except to the extent that the nature and amount of compensation to the agent may have their own reflection of a conflict of interest of the agent that needs to be disclosed.

You need to let people know that the SEC has asked a lot of questions about those transactions, i.e. where you got money from selling your land into the JCE and what you did with that money.

Kurt: In some ways that talks to an ever bigger issue. It shouldn't be anyone's business what you do with your money after you sell your land into a project, and yet, we all need to realize that we as an industry are under a microscope.

Just striving to follow the letter of the law and thinking that you're therefore going to be in the clear is probably a mistake because if there is a perception that things are being done to avoid regulations or to structure things in order to take liberties, the SEC may come down on you.

And they don't need to win to make that possibility a nightmare outcome.

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