Like Elsa, the Princess in Disney’s classic Frozen, once again the Securities and Exchange Commission (SEC) has utilized its power to freeze. In this case, the freezing of assets. In what has become an increasingly common tactic, the SEC successfully sought to freeze assets of several individuals and corporate entities in a complaint it recently brought alleging fraud in connection with securities offerings for projects under the EB-5 immigration program. As we have reported previously, particularly in the EB-5 space, the SEC has in recent years utilized the asset freeze as an enforcement tool. The EB-5 program allows foreign investors to apply for green cards in exchange for a minimum $500,000 investment in a job-creating enterprise. Continue Reading “The cold never bothered me anyway!” SEC again uses its power to freeze an alleged EB-5 scam
Check out what’s new in the EB-5 world, where a team of securities lawyers are at work offering to help lawmakers understand complex legal provisions of proposed EB-5 integrity legislation. The group is called the EB-5 Securities Roundtable (the “Roundtable”) and is made up of securities attorneys (the author of this blog posting included) who represent a broad range of stakeholders in EB-5 deals such as regional centers, recipients of EB-5 funds and lenders.
Anticipating more action from lawmakers on the EB-5 integrity front, the Roundtable has proposed technical language solutions to securities law provisions that may come into any final version of an EB-5 integrity bill. The group is aiming not to lobby but to serve as a resource to help lawmakers line EB-5 reform efforts up with existing securities laws, regulations and policies. Securities law is a very complicated area with its own universe of terminology. We think the Roundtable’s resource will be welcome by lawmakers, industry groups and others who have a stake in EB-5 reform.
One of the goals of the Roundtable, which Mintz Levin co-founded with several firms across the country, is to regularize EB-5 securities law practice. This is an important goal. EB-5 needs to be a more normative form of financing in the toolkit of lawyers. This starts with the securities lawyers in the field — gatekeepers of EB-5 in every sense of the word — giving sound advice to clients and promoting best practices.
Right now the EB-5 Program is still on the margins of the securities industry despite the fact that EB-5 financing benefits emerging businesses seeking capital across sectors, particularly in industries where construction and hard development costs are high. The Roundtable can have an impact as the EB-5 Program develops and becomes more institutionalized.
What is the future of EB-5?
We hope the EB-5 Program becomes established, permanent and normative. But Congress needs to act soon. We are about a month away from the Program lapsing.
Lawmakers are right on to insist on integrity reforms with any extension of the Program. The EB-5 Program has been plagued by bad actors, fraud and loose practices since it became more popularized in 2008. But lawmakers don’t need to reinvent a whole new legal structure to fix this.
Added integrity provisions are a sensible move by Congress. This is in step with current law. But changes to the law should be aligned with our existing securities laws, which are effective. Specifically, the United States has a very strong anti-fraud legal infrastructure in place when it comes to the purchase and sale of securities, including Section 10(b) of the Securities and Exchange Act of 1934, and Rule 10b-5, codified at 17 C.F.R. 240.10b-5, which is one of the most important rules targeting securities fraud promulgated by the U.S. Securities and Exchange Commission. These laws work. Congress does not need to re-write our securities laws in an effort to make EB-5 more sound and secure. The core integrity provisions for EB-5 are for the most part already in place. The technical guidance from the Roundtable can help lawmakers ensure that integrity provisions do not inadvertently create confusion, or conflict with existing obligations of issuers of EB-5 securities.
The Securities Law Roundtable has offered lawmakers a technical resource in the EB-5 reform process
Hopefully lawmakers will consider comments of the Roundtable when finalizing a draft of any legislation.
We’d like to continue to have EB-5 financing as an option in our toolkit to help clients. Many of our firm’s clients have been the recipients of EB-5 financing for projects ranging from the creation of a small media business to large-scale hotels, resorts and mixed-use real estate development. Congress making strategic moves to bring an increased level of integrity to the Program will benefit all. The Roundtable’s contribution to this broader effort is an important step forward, and will ensure that securities provisions in any new law are informed and workable.
The Securities and Exchange Commission (SEC) has just published three new decisions in connection with administrative proceedings against two well known immigration lawyers, as well as against a third lawyer. One party has allegedly earned $450,000 in commissions from one EB-5 Offeror alone. This enforcement is not surprising. Last year, we saw several immigration lawyers subject to the same proceedings and sanctions. The allegations are resoundingly familiar: Violation of Section 15(a)(1) of the Securities Exchange Act of 1934 (the “Exchange Act”). We expect even more SEC enforcement activity in this space. Why is the SEC targeting immigration lawyers? What implications are there for all parties in an EB-5 transaction and to the industry as a whole when an EB-5 Offeror pays finder’s fees to lawyers?
Immigration lawyers are EB-5 gatekeepers
The SEC has a strong interest in prosecuting civil violations of securities laws by gatekeepers of securities markets.
Immigration lawyers are viewed as gatekeepers to the EB-5 Program. What is a gatekeeper? In the securities law context, a gatekeeper is a professional that holds a position of trust who should be looking out for the interests of a specific securities market. The idea is that the integrity of markets is kept in check by professionals charged with executing their responsibilities. Accountants, lawyers and auditors are often gatekeepers of the securities marketplace.
The SEC has the objective of keeping gatekeepers accountable. The SEC expects gatekeepers — be they accountants, lawyers or auditors to name a few — to raise red flags when there are visible issues and problems in an offering of securities. This maintains the integrity of markets and protects investors. When gatekeepers violate securities laws or engage in conduct that turns the concept of protecting investors on its head, the SEC becomes very interested in holding those individuals accountable. The idea here is that gatekeepers are front-line protectors of a marketplace. Immigration lawyers in the EB-5 industry have often taken on this role. They are often the first to be able to spot an irregularity in an EB-5 transaction. And immigration lawyers often comment on or assist with drafting documents prepared in connection with an EB-5 offering.
The SEC likes to hold out gatekeeper-violators of securities laws as examples for an industry. This is no consolation for the attorneys facing sanctions and disgorgement, but it does explain to some degree how the SEC prioritizes investigations and why immigration lawyers are of interest. Attorneys with high profiles in the EB-5 industry who are involved in producing investors for regional centers or who engage in marketing should be concerned. And so should the attorney who takes a finder’s fee from a regional center one single time. The SEC also pursues “minor violations” particularly by gatekeepers to set an example for an industry. One of the attorneys in today’s proceedings had received $37,500 in finder’s fees. This was sufficient for the SEC to pursue administrative proceedings and sanctions.
Transaction-based compensation is often not difficult for the SEC to trace and later prove
The DNA of these three recent cases is virtually identical, with the SEC finding that each of the attorneys earned transaction-based compensation for steering clients to specific EB-5 regional center projects. The SEC ordered disgorgement of unlawfully earned commissions along with interest in all three cases. One of the three attorneys also incurred a civil monetary penalty of $30,000. He is alleged to have had commissions transferred to a foreign bank account despite the fact that his business is U.S. based. In the case of one of the other attorneys, he had a “Referral Services Agreement” in place with the EB-5 regional center that paid him compensation. This means that these attorneys left their fingerprints in very identifiable places, which SEC investigators love. Continue Reading Three Immigration Lawyers Sanctioned by the SEC for Brokering EB-5 Investments
On August 11, 2016, USCIS published new processing times for I-829 petitions. The news is not good for EB-5 investors. USCIS is now taking in excess of 21 months to adjudicate I-829 petitions. This means that EB-5 investors may wait more than one or even two years for final approval of an I-829 from USCIS. The delays are unconscionable.
For those less familiar with EB-5 terminology, the term I-829 refers to the form number of the petition that an EB-5 investor files within 90 days of the expiration of his or her conditional green card status. An investor’s I-829 is supported by proof that, among other things, there has been sufficient job creation to support his or her green card case. At the I-829 stage of the process, an investor must also evidence that his or her investment has been sustained. For thousands of investors, what should be a relatively ministerial process of verifying facts has turned into a bottleneck. Continue Reading I-829 Delays Reach All-Time Record: Thousands of EB-5 Investors in Limbo at USCIS
EB-5 regional centers and issuers take heed. The Securities and Exchange Commission (“SEC”) is pursuing litigation against parties in several EB-5 deals. We expect the SEC to increase efforts to prosecute regional centers, issuers and broker dealers who don’t play by the rules in the EB-5 investment industry. Mintz Levin’s EB-5 Financing Practice just released an alert on limiting securities litigation risks in EB-5 transactions. This is go-to reading for anyone in the EB-5 industry. Here are the highlights of the article, along with a few of our thoughts about concerns that borrowers need to have before accepting direct proceeds in loans from EB-5 regional centers. Continue Reading Securities Law Risk Mitigation in EB-5 Offerings
For alleged EB-5 fraudster Lin Zhong there is a cold winter ahead. A deep freeze. As we expected when news of the case recently broke, the Securities and Exchange Commission (SEC) obtained a court order freezing Zhong’s assets as well as those of her company EB-5 Asset Manager LLC. It is alleged that under the guise of the EB-5 regional center program, Zhong raised at least $8.5 million for EB-5 projects. Zhong is accused of diverting nearly $1 million to purchase luxury personal items such as a boat, a BMW and a Mercedes. Zhong is the latest alleged EB-5 fraudster to be stopped in her tracks by the SEC.
It is clear that the SEC is now focused on prosecuting EB-5 market participants and issuers who violate the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The allegations here are similar to those alleged in recent cases – the SEC has alleged material misrepresentations and omissions to investors by Zhong. According to the SEC’s website and recent press release, the Commission also obtained a court order appointing a receiver to administer and manage the business affairs and assets of the company and its subsidiaries for the protection of investors. Continue Reading SEC freezes assets of EB-5 Asset Manager LLC and Alleged Fraudster Lin Zhong
USCIS updated its online list of terminated EB-5 regional centers on October 22, 2015. In the coming two months, regional centers are required to comply with the requirement to file their Forms I-924A in order to update USCIS on relevant job creating activity over the past year. We expect that USCIS will terminate more regional centers in the next six months where there are credibility issues over data supplied by regional centers in these filings, or where regional centers simply fail to update the agency through filing a Form I-924A. It would be fully within the realm of reasonable expectations to see at least 100 or more terminations initiated within the coming year. As USCIS uses more resources to tighten up administration of the EB-5 regional center program, and with lawmakers looking closely at the program, dormant or non-compliant regional centers may find their designations revoked. Continue Reading Don’t End Up on a USCIS List of Terminated EB-5 Regional Centers: Be Creative and on Time with your I-924A Filing
What do a $175,000 Sea Ray yacht, a brand new $100,000 Mercedes Benz S-550 and a $55,000 BMW X5 SUV all have in common? According to the SEC, they were all items purchased by one Lin Zhong (a/k/a Lily Zhong) with money she fraudulently obtained from investors who were told that their funds were being invested in EB-5 real estate development and construction projects. Zhong also purchased with investor funds homes for herself in Poinciana Florida and Worcester, Massachusetts – all while telling investors that 100% of their funds would be used in construction projects and that all investments would be held in escrow until their EB-5 immigration petitions were approved. Continue Reading Life is Larger than Fiction in EB-5 Litigation: SEC Moves For Asset Freeze, Accounting, and Receiver Appointment in Civil Fraud Action in Florida
Private placement offerings are an increasingly active part of the securities business. One especially complicated and emerging area of private placements is the EB-5 Investor Visa Regional Center Program. Under the current rules of the program, an investor interested in a U.S. green card may place $500,000 or $1 million into an at-risk investment, issued by or affiliated with a United States Citizenship and Immigration Services (USCIS) designated regional center. Under current law, the per investor minimum for participation in the EB-5 Program is $500,000 for an investment in a new commercial enterprise capitalizing or facilitating a project based in a rural area or in a specific geographic location of high unemployment known as a “Targeted Employment Area” (TEA). This is a downward adjustment from the $1 million that is required in any area outside a TEA. See Immigration and Nationality Act (INA), Section 203(b)(5)(B). If job creation requirements are met as anticipated in the investment deal, an investor will be eventually eligible to secure lawful permanent residence in the U.S. Continue Reading EB-5 Due Diligence Matters: Industry at Point of Inflection Regarding Securities Compliance
EB-5 deals present risk for regional centers, issuers and investors.
With the uptick in EB-5 litigation, risk mitigation could not be more important for all stakeholders in an EB-5 transaction.
Hear from Adam Sisitsky, a member of Mintz Levin’s Securities Litigation Practice, on the three D’s of EB-5 risk mitigation: Continue Reading The Three D’s of EB-5 Risk Mitigation [VIDEO]