EB5 Diligence
EB-5 legislation and regulations
Sep 15, 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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Preparing for the Integrity Provisions in New EB-5 Legislation

Bob: Getting ahead of legislative changes rather than waiting for them is very important. As far as we know, there is no date certain set for when new EB5 visa requirements are going to be imposed.

But there's no question that the folks working on Capitol Hill are ultimately going to put revised legislation forward.  We just don't know when this legislation is going to be enacted and when it's going to become an active requirement. 

Whatever the case, you'll have to be prepared to change your internal business processes because whatever cookie cutter approach you have to newly instituted regulation is probably not going to be looked upon favorably.

Kurt: Why do you suspect that a cookie cutter approach won’t be an effective strategy?

Bob: We have to remember that the people who will be enforcing new regulations are going to be examiners or auditors, most likely from the SEC. The SEC has an office called the Office of Compliance, Inspections and Examinations (OCIE), and those people are trained in a very mechanical manner as to what things need to be present and what things raise a red flag. This means that you’re generally going to need to have things done to the letter to avoid any issues.

This includes having written procedures for the operation of your business that memorialize what people are doing, who's doing it and the frequency of what is being done.

There is a danger of doing too little or too much, if it is to the extent that you don’t follow your own procedures. Cathy could probably share stories of people in the investment management business who used cookie cutter EB5 compliance manuals or procedures that are 600 pages and the SEC punished them for violating 200 pages that weren’t relevant to their situation.

Now is the time to review what your business is doing, review what your project is doing, make sure that business procedures are memorialized and that you can institute proper internal controls.

I also suspect that in the future there will be some kind of notice documentation or registration required of the agents who are facilitating deals between U.S. sponsors and people overseas. This notice registration, in my view, will be similar to that used by the IRS with tax shelter promoters. It certainly won’t be full-blown FINRA-type registration.

Whatever happens, it's a good idea to have your relationships with overseas agents memorialized on paper or preferably in a contract. Having these arrangements on paper is going to be a chore. You're dealing with people overseas who aren't familiar with the U.S. legal system or terminology so there will likely be some pushback. But getting your documents in order and getting your relationships memorialized is something that is very important to start working on now.

Cathy: What people should be doing now is reviewing their current policies and procedures that they use to cover securities law compliance, due diligence, fund administration and loan administration. All of those procedures are already required to have but the Integrity Act is going to require you to document how you’re in compliance with them.

The fact is that if you're not in compliance with securities laws and you're not properly doing due diligence or administering your funds, you're already at risk for regulatory actions against you by the SEC or by USCIS, and at risk of lawsuits from the people involved with your offering.

Be proactive, do these things now so you can show that you are in compliance today and you'll be one step ahead when the Integrity Act is passed.

Mike: I think that the Integrity provisions are going to be approved, or agreed upon and set aside, next year, although it is possible that a last-minute push from Congress may be made to add EB-5 visa Program changes before Sept. 30.

Therefore, whether changes are proposed sooner or later, I think it makes a lot of sense to look at what the Congress has proposed, in particular Senate Bill 1501, which Congressional aides and legislative counsel have indicated will likely be the foundation for the eventual Program changes.

The EB5 Securities Roundtable has proposed revisions to that bill because we are expecting that some version of the ideas first put forth in that bill are going to be passed.

Even though we're not sure exactly when these additional compliance obligations are going to become formal requirements (whether by 9/30, or some time in 2017), people are well-advised to read HB 5992 and the Securities Roundtable's proposed improvements, and see what's coming, to understand what's going to be expected of them and, in a world of best practices, start adopting some of these procedures before they become technical requirements, even if it seems like a pain in the neck.

These regulations are a part of the price the industry must pay for Congress to start making some of the other much desired improvements to the program that the industry wants: Namely, an increase in the number of visas and decreased processing times. I think if we get Integrity off the table first, there's a huge opportunity for the industry to get what it wants on those other issues on its wish-list down the road.

Robert: Regional centers and NCEs should start formalizing their compliance and their associates’s compliance through checklists and through actual validation and auditing.

There's a significant chance that the legislation will require regional centers to get pre-approval from USCIS for any changes concerning their ownership, management or administration. We're definitely pushing back on that because it's not realistic in terms of timing but it could happen. You might want to pursue those changes now while there are no pre-approval requirements.

In anticipation of rules prohibiting foreign ownership, consider divesting foreign ownership for US ownership of the EB5 regional center. It’s unlikely that there will be prohibitions on foreign management of the JCE or the NCE.

Kurt: When we see the changes come into effect, the increased demand for compliance services is likely to raise the cost and may limit who you can get to represent you.

Now is the time to reach out to some of our panelists or speak with a broker dealer and find out what the costs are to prepare for the new legislation. Get a compliance regime in place before everyone else rushes to the few service providers that really understand this space.

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