The US EB-5 program offers permanent residence to investors making at-risk investments of $1 million in an enterprise or Regional Center, which is reduced to $500,000 if such enterprise or Regional Center is located in a rural area or a Targeted Employment Area. Further, the investment must, in order for the applicant to qualify for the green card, comply with additional job creation requirements.
Pending the announcement of a revised program requiring increased investment thresholds, the EB-5 visa is also cheaper than many other programs offering citizenship or permanent residence and thus very popular amongst investor, globally. High demand for the visa has led to an increase in abuses of a growing number of projects affecting the status of thousands of the investor applicants. With the program under ongoing scrutiny over regulatory violations and other issues, investors are advised to carry out effective due diligence of their proposed investment to ensure it complies with INS requirements. This is an ongoing requirement.
Due Diligence in EB-5 Regional Center Investments
Regional Center financing typically falls under federal SEC legislation and requires issuers and all parties acting on behalf of issues to reasonably ensure that all information provided to purchasers of the securities is accurate and complete at all times. During due diligence, the investigator verifies that this requirement has been met by the issuers. The investigator must adhere to that standard of assessment that he or she would follow in a transaction involving his/her own property.
Most investments made under the EB-5 program are liquid in nature and can be recovered by the investor only after the enterprise earns enough profits to repay its investors. Failed ventures may ultimately result in litigation between the applicant and all other parties on the grounds of fraud, negligence, mismanagement etc. Benefits of due diligence include-
- Independent assessment of the viability of the project for the EB-5 applicant.
- Comprehensive investigation ensuring compliance with all rules and regulations governing disclosures.
- Evidence of exercise of reasonable care by parties when facing litigation or government investigations
Due Diligence Benchmarks
There are no absolute benchmarks for private placement of securities and a lot depends on the facts and circumstances of a financing. Generally speaking, there are two parameters that should apply to due diligence in most EB-5 projects.
First, due diligence cannot be a formula or checklist-based affair involving perfunctory or mechanical assessment of pre-determined parameters. It must go beyond mere verification of the prospectus and must cover review of the terms and material facts of the offering and the development process of the private placement as a whole.
Secondly, what constitutes proper and thorough due diligence depends on the nature of the deal. Whether omission of a fact related to the transaction constitutes a material omission or not and whether this impairs or affects the rights of the investor cannot be assessed in a formulaic manner.
Due Diligence Issues in the EB-5 Industry
Involvement of the due diligence expert after the business plan has been conceived and documents have been prepared often causes the due diligence process to end up as a mere formality.
Additionally, treating due diligence as just another process involving routine queries and a standard checklist reduces its efficacy and puts the project and all parties associated at risk. A deal-centric approach focusing on comprehensive and thorough analysis is the essence of effective due diligence.
Third, conflict of interest arising out of involvement of issuers of the securities in the due diligence process impairs the reliability of the final analysis. The process should be done in an independent manner with no involvement of the developers and issuers.
Finally, there are instances where thorough due diligence is compromised due to financial or time-related constraints. The EB-5 investment is a major decision with significant long-term implications for the applicant. Accordingly, one should not proceed without assessing and verifying the extent of compliances undertaken by the issuers.
EB-5 Visa Due Diligence Best Practices
Any EB-5 private placement is a high-risk transaction. Incorporating due diligence during the development of the business plan and tailoring the strategy based on the nature and unique characteristics of the project is preferable to an ad-hoc approach.
Applicants must employ experienced professionals with expertise in accounts, laws related to immigration, corporate, and securities; and the subject matter of the enterprise to conduct the process.
The EB-5 due diligence process should go beyond mere fact checking and investigate the Regional Center as a whole. This benchmark is important to ensure the efficacy of the process is not questioned in the event of disputes and litigation at a later date.
Finally, all red flags that would otherwise raise doubts over the accuracy of a prospectus or issue document prepared on the basis of audited financial statements should not be ignored in the final assessment of the transaction.
The financial success or failure of a Regional Center is not the sole factor that determines the fate of the investor’s EB-5 visa application. Due diligence should be a dynamic and ongoing process conducted as a fundamental and integral part of the investment project to ensure regulatory compliance.
The difficulty in these transactions is securing predictability. Unfortunately approved projects typically undergo review after an investment is made where INS either refuses to issue visas or even at the condition removal stage. Buyer beware cannot be overstated in this area.
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