Q:  I haven't paid taxes, individual or business, because my country of residence doesn't require it or it isn't customary. Is this a problem?

A: Catharine: We normally tell clients if they can provide income tax returns, it’s great to do so. If they can't, it's not going to make or break their petition. 

We let them know that if USCIS EB5 sends a request for evidence (RFE) for copies of their income tax returns, they will need to either produce them or get a letter from an attorney in their country of residence stating the legal reason behind why they can't provide those tax returns.

I always request tax returns but I’ll still file a petition if I don't have them. 

Take an overview of EB-5 visa requirements

There are a number of responsibilities involved in supervising the New Commercial Enterprise's (NCE’s) EB5 loan to the Job Creating Enterprise (JCE). What are the best practices for ensuring proper supervision and what are the potential issues that can arise?

David Appel: One common issue is when a project starts and there's no money in the budget for supervising and administering the loan to the JCE. 

Examining EB5 Loan for Job creation

Lets explore how to structure, manage and monitor a deal so that investors are afforded significant protection against fraud.

Rupy Cheema: The first question we ask when looking at an offering is what is the NCE industry knowledge and experience? When I conduct a site visit and meet the NCE management, I want to better understand the manager’s experience with underwriting a loan or investment.

Do they understand the industry and the market they are investing in? Do they have access to the market data they need to prepare cash-flow models? Do they have an investment committee that ultimately makes the investment decisions?

Kurt: Some of the benefits of working with an EB5 business plan writer include their access to data subscriptions and their knowledge of USCIS memorandums and Requests for Evidence (RFEs) that have come out (quietly) over time. ‘Matter of Ho’ was a nice starting point for the industry, but it's evolved since then and one really does need to keep an eye on new precedent decisions.

Phil: It's really important to stay abreast of all USCIS comments and memoranda. It really helps to make sure that your business plan gets through the adjudication process with as little resistance as possible.

Marge: Data subscriptions are very helpful. For example, say for a 50,000 square foot hotel, we’re trying to determine whether or not the cost provided by the developer is within the realm of reason. If there are big variances between the figures provided and the data sets we’re referencing, we try and figure out where these are coming from, such as which cost segments are higher than this particular market calls for?

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.

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 related to the EB5 project, 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 EB5 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.

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 EB5 regional centers 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 EB5 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 of those 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 EB5 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 EB5 program were able to get their green cards, what does that mean? Who measures that and how has it been verified?

John Tishler: SEC Rule 10b-5 is what I’d call the primary rule of liability we’re concerned about in EB5 offerings or EB5 projects. It applies to any offering of securities that has any jurisdictional nexus to the United States. Jurisdictional nexus simply means that some mode of interstate commerce was used: the telephone, an email, postal delivery. I think it is impossible to imagine an EB5 transaction taking place that did not somehow avail itself of the means of interstate commerce in the United States.

In any event, 10b-5 is going to apply and what it says is that it’s unlawful for any person in connection with the offer or sale of securities to omit or misstate a material fact or to state a fact that, in the context in which it is stated, is misleading and that’s considered to be a fraud. When people talk about securities fraud, Rule 10b-5 is what they’re referring to. 

In terms of the commonly used word “fraud” and the common sense understanding of it, lets discuss what it means to commit fraud. The standard for securities fraud is quite a bit lower than the common sense understanding of fraud. 

Fraud also includes an intent to omit a fact or to state a fact that wasn’t complete in its context. Rule 10b-5 has what’s called a “scienter requirement” in relation to the omission of facts from which means there has to have been intent. 

Rohit Kapuria:I’ve got a question for the economists regarding the issue of 2007 data versus 2010 data. Now that the BEA has indicated that they’re going to update the numbers later this year, and afterward the methodology they’re proposing, do you foresee a significant difference in terms of what the new data is going to be for job creation? From my perspective, 2007 has usually resulted in more jobs, but I have always been worried about a deal that uses 2007 data because, at this point it’s eight years old versus 2010 multipliers. For 2015, what are your expectations in terms of how that’s going to impact the job count?

Rupy Cheema.: What should we look for when reviewing a TEA (targeted employment area) letter?

Michael Kester.:As an economist, when reviewing the project to see if it’s TEA eligible, especially since it is such a make or break issue, it’s very important that we see that the TEA letter is current. USCIS has specifically mentioned outdated TEA letters as being a persistent problem with applications, so that’s the very first thing we check and recommend that the project get an updated letter.

The TEA letter really comes into play at the time when the investor makes an investment and when the I-526 is filed. Where it becomes difficult is when you’re trying to figure out if your project is located within a TEA long before the investors come on board. We’ll look at the date, then we’ll look at the census tracts or census block groups that are listed in the letter and I’ll just plot them on a map myself just to make sure that they are actually contiguous.