EB-5 loan administration is critical

Posted by Kurt Reuss on July 13, 2016

I have always been a big proponent of loan administration as a key EB-5 process best practice.

It is essential that for the integrity of the program, given the fact that most EB-5 capital is deployed in a loan model, that loan transaction more closely resemble a traditional loan. It is prudent to provide many of the protections seen in a traditional loan transaction to the EB-5 lending company and its investors.

I-526 Insurance; Proper Disclosure is Critical

Posted by Kurt Reuss on April 20, 2016

Kurt Reuss: Proper disclosure is an important issue with this I-526 product, considering it is a new product with no claims paid to date. Doug, how do you approach a product like this, when developing disclosures in the PPM?

Doug Hauer: I think you have to be very careful to, in plain language, describe the mechanics of how this policy is actually working.

An investor who is reviewing the PPM should be able to review the section on the insurance and walk away with an understanding of how mechanically a policy would work and what kinds of claims would result in there being coverage and what kinds of claims would result in a denial of coverage.

I think the trap for an issuer or an EB5 regional center issuing a deal is that the term 'insurance' conveys a safety net, or a risk-free proposition. You have to be careful here if you're an attorney drafting a PPM for a client; you need to spell out in clear terms what the limitations are and what the parameters of the product are.

I think it would be important to alert investors, in a PPM, of the risks with this product.

One area that we see in these policies that leads to some confusion is how 'fraud' is defined. Fraud, in a securities law context, when you're talking about an issuer, can mean many different things.

It's going to be important to calibrate those disclosures, make them clear, put those disclosures in plain language, and ensure that all parties in a deal get protection through understanding what the limitations of the product are.

The importance of the timeline in an EB-5 business plan

Posted by Kurt Reuss on March 14, 2016

Kurt: Sales and marketing, management profiles, expense and revenue projections. These are obviously important aspects to an EB-5 business plan.

It also seems that a timeline can be especially helpful to understand the timing of the jobs created as well as what happens as timelines adjust and how this impacts other parts of the plan.

Marge: Project timing is very important because it affects the timing of job creation. The project economist makes adjustments to revenue, essentially deflating revenue from project year dollars to the equivalent of those dollars in the year from which the multipliers they use for their analysis were published (in this example, 2010). If the timeline for the project shows that the business will open in November 2017, the economist deflates revenue by seven years to 2010 dollars before applying the multipliers.

Is a feasibility study required for an EB-5 business plan?

Posted by Kurt Reuss on March 09, 2016

Kurt: Here is a brief summary of the items that go into a business plan:

  • Project description
  • Management's background
  • Description of the EB-5 sources of funds, (i.e. whether a senior loan or equity).

Marge, how frequently are you provided a feasibility study as an aid to drafting the business plan and how important is it?

Marge: I probably see a feasibility study about 80% of the time if not more, and I think its very important to the business plan.

Not every developer wants to pay the cost for a feasibility study, but I think it adds a great deal of credibility to both the numbers you're trying to support in the business plan, as well as on the marketing side.

Using a company such as PKF Consulting or Colliers International, or another firm with brand presence adds credibility, both to the project and to the projections themselves.

Kurt: As I see it, without a feasibility study, you've got two problems. On the one hand, you could be underestimating your inputs, which means you aren't counting as many potential jobs in your business plan as you could and alternatively, you could be overestimating your inputs, which is probably going to be the bigger problem in the long run.

The Dual Purpose of EB-5 Business Plans

Posted by Kurt Reuss on March 08, 2016

EB-5 Business plan purpose

Kurt Reuss (Host): The EB5 business plan has two purposes. First, you want to make sure your business plan is written to be I-526 compliant and therefore ultimately approved by USCIS and second, your business plan needs to position your EB5 offering for marketing to attract investors.

My belief is that everything you do in your business affects your brand and certainly this includes in a significant way, your business plan, which is given to investors as part of the offering. The business plan is going to make an impression on investors and influence their decision of whether to participate. Obviously your business plan needs to recognize that reality while still being accurate.

Let's begin by discussing the I-526 approval aspects. Marty, would you mind starting us off by talking a bit about ‘Matter of Ho’ issues and the precedents they allude to for EB5 applications?

If Broker Dealers Can't Raise Money For Most EB-5 Deals, Do You Need Them?

Posted by Kurt Reuss on November 10, 2015

Kurt Reuss: John, as a broker dealer in EB5, what about the argument that you probably don’t have the ability to raise money for an offering right now.

A Broker Dealer: I would agree. Last year, we probably brought 30 investors into deals but to get these deals done you really have to go through China. That’s simply how this business is currently designed. 

Kurt Reuss: What is the role of a broker dealer and how do they provide compliance? And where in the process does that compliance sometimes fall apart? Are there situations where an issuer doesn’t get the compliance or coverage that they thought they were going to get and that they’re paying for?

A Broker Dealer: Certainly, I guess there are a number of ways to frame it. If you hire an immigration attorney, they’ll do their job as an immigration attorney. If you hire a securities attorney, they’ll draft the documents. The fact is we reject more than half the deals we see. Probably 9 out of 10 of the deals we see in this space, we reject. If you can recall the recent issue of fraud in Seattle, we would not have done that deal.

One person controlling every aspect of a deal, that’s a pass, a complete pass. The fact that a deal’s getting done, that it has a securities attorney and an immigration attorney doesn’t necessarily mean it’s a good deal or a bad deal. It might mean that no one has really dug into the transaction from the investor’s perspective. Ultimately, that’s the job of a broker dealer. As a service provider, you never want to be associated with a fraud or a failure in any business and EB5 is a small business so certainly, you wouldn’t want to be associated with that.

EB-5 marketing materials should be taken very, very seriously!

Posted by Kurt Reuss on November 09, 2015

Bob Cornish: One thing I’ve seen issuers put too much reliance on is the fact that they’ll provide the investor with the marketing materials at the same time that they provide the PPM, which actually is very good, however, giving out the PPM doesn’t shield you from any potential liability from misstatements made in the marketing materials.

There are dozens of SEC and FINRA enforcement actions where people have been brought to task for the distribution and use of misleading marketing materials on everything from basic stocks to mutual funds. If you go to the SEC website, these mutual funds have more disclosure than anything you’d ever see. These things need to be handled with care.

Kurt Reuss: Could you talk a little about some of the more surprising situations that you’ve come across in EB-5 which were related to marketing materials?

Broker Dealer: Giving up complete control to your partner in China. I think they should be viewed as a partner, whereby you’re both on the same page. We’ve been involved in transactions where we’ve had conference calls with the agent and the issuer and they acted as partners, they followed the same procedures. With other clients however, we’ve been told, “Do not contact the agent. Do not get involved in this relationship.”

There’s a big divergence in what the issuers find acceptable or what the agents find acceptable and ultimately it’s going to fall on the issuer.  They need to control their information. They need to control the process. If they take that position, they’ll stay away from any problems. Once you give up control and allow in a third party that’s not familiar with these regulations and with US law and the SEC, that’s got the potential to be a major problem. The bottom line is you don’t want to give up control of the information.

Liability associated with EB-5 marketing materials

Posted by Kurt Reuss on November 02, 2015

Kurt Reuss: In looking at marketing materials from a number of regional centers there are some common elements we typically see in the larger offerings such as talking about their experience; the results they’ve gotten from previous projects; the fact that principal has been paid back to investors; the percentage of I-526 and I-829 approvals; the project’s description and highlights. 

Sometimes we see marketing material that include information on the budget; loan amounts and both the senior loan and the EB-5 loan. Developer equity is often in there; as is job cushion; the rate of return to investors and the term.

Bob, is there anything in that list that strikes you as being something that you’d want to be cautious about?

Bob Cornish: Certainly, results from previous projects and principal paid back to investors is, in my mind, probably the most prominent issue on this list, simply because there are so many prohibitions and guidelines regarding how you represent past performance, how you represent what the results may be from a certain strategy.

One of the problems you have in the EB-5 context versus traditional investment management vehicles is how do you actually measure performance? Is it the return on the investment? Not really since most investments are not designed to generate monetary return other than the return of principal and the green card. More importantly, how do you measure what a successful result is? If 97% of the people who went into the EB-5 program were able to get their green cards, what does that mean? Who measures that and how has it been verified?

Considering section 17b of the Securities Act when marketing an EB-5 offering

Posted by Kurt Reuss on October 29, 2015

Section 17b from EB 5 investments perspective

John Tishler:  This a specialty issue and while it is not going to apply to some EB-5 marketing materials or EB-5 Investment offerings it will apply to some and I think it’s worth bringing up. In EB-5, Section 17b is relatively unknown. Let me first give you some background on Section 17b which is also known as the “Anti Tout Rule.” 

Just about everyone has received an email or a piece of junk mail that hypes some stock or offering, you know—it’s the next Apple stock or something like that, trading for pennies now, but destined for big bucks.

Now, if you look at the really fine print, it might say, “The person putting out this notice was paid by the issuer,” or, “We were paid $50,000 for mailing this and we received a million and a half warrants in this company.” That’s the disclaimer; it’s there because it’s required by law and that law was designed to get at exactly these kinds of things called tout sheets. With a tout sheet, people are touting a security; they’re not offering the security, per se

The rule basically says that if you publish something about a security, not necessarily an offer in and of itself but as it relates to a security and if you are getting compensated for doing that, then that must be disclosed. The person who publishes it has to disclose that they’re being compensated and the exact amount of the compensation. Let’s talk about how that might show up in EB5.

Structural Weaknesses in Path America's Offering

Posted by Kurt Reuss on September 12, 2015

Kurt: As you’re no doubt aware, the SEC has made allegations against Path America. These allegations include the defendant’s misappropriations of $17.6 million of EB5 investor funds. Of that, it’s alleged that $2.5 million was spent on a personal residence, and other money was spent on various gambling expenses. It’s also alleged that a great deal of the money has been diverted to unrelated projects, which may threaten the green card petitions of EB5 investors. 

As an investor or an agent representing an investor, it's important that you be circumspect when evaluating projects where the entire enterprise is under the control of a single person, as it is in the case of Path America. Rupy, what are some of the weaknesses that you see in Path America’s transactional structure?