USCIS compliance issues
Feb 17, 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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EB-5 Regional Center Certification Requirements

Kurt: Certifications in the Integrity Act of 2015 require EB5 regional centers to have policies and procedures in place to monitor New Commercial Entities (NCE) and the Job-Creating Enterprises (JCE) to ensure they comply with all immigration laws, all federal securities laws, all applicable state securities laws and to describe their due diligence procedures. Greg, could you talk a little about the implications of this bill.

Greg: What the bill does, without getting too far into the weeds, is address a “new view” of how to regulate the EB5 industry. That is, without relying on the New Commercial Enterprise (NCE) as the only entity responsible for compliance, due diligence and meeting the terms of the EB5 program.

For that matter, the securities laws are also not going to rely on the JCE or the developer because these entities are not, strictly speaking, "the issuers” of the securities being offered to foreign investors. The concept is, from a USCIS standpoint, that we've given a license to the regional center. So USCIS is saying to the regional centers “We need you to be the sheriff. We're going to put these responsibilities on you.

We're going to require you to achieve compliance, to do due diligence, to certify compliance and actually to tell us when people are not complying.”

There's an affirmative obligation to do these things and USCIS is going to look to the regional centers for accountability. This proposed legislation would significantly extend the liabilities associated with these deals specifically and in a clear statutory manner, to the regional centers.

Essentially, USCIS is going to ensure that the regional centers are the focus of ongoing compliance.

As the sponsor of the EB5 deals, the regional center’s failure to abide by these terms and responsibilities could have serious and numerous repercussions. Those repercussions range from fines to “disbarment.”

Ultimately, for a more egregious violation, the USCIS has the right to kick you out. What it all boils down to is a whole new ball game for regional centers. They will have to become more professional.

They will have to be aware that they have potential liabilities which could lead to fines equal to 10% of the amount raised. They are being made vicariously liable for compliance by third parties. They're being made primarily liable in other ways.

Now, that’s not to say that regional centers shouldn't have been doing all these things all along anyway, but that's just my take-away.

Kurt: Obviously, we are at an interesting stage in EB5. In last week’s webinar we talked about how both FINRA and the SEC have identified EB5 as an examination priority this year.

Apparently, we, the EB5 industry, haven't done a great job complying with securities laws as FINRA and the SEC sees it. This, then, is an attempt to find a way to do that.

Ozzie, clearly this is going to be a problem for the “Rent-A-Center” model. What do you think about that?

Ozzie: I don't think it's out of line to suggest that we should have policies and procedures in place which would ensure that there are systems that we’ll monitor, and at least try to ensure compliance from the entities that are under our control, which could include a “rent-a-center” model.

As we delve further into regional centers, annual certifications and the re-issuance of certifications, I think it becomes a little more problematic for the rent-a-center to certify that an NCE has complied with securities laws.

Kurt: Let's say this was the law tomorrow. What would you tell your regional center clients? How would they best start to develop the policies and procedures in order to provide the certifications that they'd be required to?

Ozzie: It would take a lot, honestly, to get the current regional centers on-board with developing the necessary policies and procedures. I think it would take quite a lot of labor, as well. It is revolutionizing the regional center mod11el right now, in terms of a rent-a-center. Now, of course, it is the licensee of an economic zone. There should be obligations imposed on it that would ensure that nobody's running amok, as it were.

Currently, there are sufficient laws in place that do effectively regulate securities compliance. I think that any regional center that's involved in a deal that went bad is going to find itself in the cross-hairs. The question really becomes, does the regional center incur issuer liability when, in fact, it is not the issuer? I think that's the crux of the matter right now.

Kurt: I agree. As we know, USCIS issues licenses for regional centers. Greg, do you think it's reasonable for USCIS to turn to an entity that really isn't involved in the EB5 project offering, that isn't the issuer in many cases, and hold them responsible for all these things?

Greg: A part of this multi-faceted bill, this Integrity Bill, is transferring liability that normally sits with an issuer, to the regional center. I suggest that there are two separate liabilities for regional centers that I foresee could crop up. The first is that the regional center could be fined or sanctioned for failure of the issuer (the NCE).

To some extent, that seems to me to be a pointless endeavor. I think that what is going to happen is that regional centers are going to try to contract or work around this requirement by obtaining indemnities and contribution agreements.

In essence, they’ll try to pass that risk back to the issuer, contractually. Now, whether those indemnities and agreements will be lawful or not, I don't know. I think that is probably unnecessary to have the issuer risk passed over to the regional center. I'm just not sure that we need to do that.

There's another risk in EB5 or another type of liability which is liability for being negligent; that is, for the regional center itself not keeping records, not monitoring what the issuer is doing, not doing due diligence, and so on.

I think it is, to a degree, reasonable and fair to put the onus for failure to do these things on the regional centers, because they are gatekeepers. I don't know where exactly to draw the line between those two types of liability.

I do think Ozzie makes a good point on shifting issuer liability to the regional center, especially given that monetary penalties could be 10% of the amount raised. For example, in a $500 million deal, as a regional center, you could find yourself owing $50 million because of some kind of fraud or whatever committed by a third party.

Ozzie: Gregory, I completely agree with you. Again, you already have a set of laws where, if I'm responsible for a particular activity and I let bad actors into that activity, I’m at fault. I think good regional centers do that, now, anyway.

We check to ensure that we know who the parties are on the other end. We run due diligence on them. We certainly wouldn't let in a criminal or someone who's been banned.

You already have “not-bad actors” certifications with Reg D. It might not be issuer liability, but certainly I think that it is good that we check, and certainly the EB5 regional center would be responsible for permitting a bad actor to conduct an offering in its economic zone.

NOTE FROM AUTHOR: Each of today's panelists are part of a larger group of EB5 securities attorneys who are currently working to improve the current version of “The Integrity Bill of 2015”.

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