In a recent call with EB-5 stakeholders, USCIS discussed several tips for avoiding EB-5 fraud. Similar tips can be found on the SEC’s website, which includes an investor alert issued in 2013. Some of the tips, however, may be less than effective. For example, asking if the promoters are being paid will not help if the promoters do not tell the truth. Instead of relying on the word of promoters, prospective EB-5 investors may want to focus on conducting independent research and learning from SEC enforcement actions in the EB-5 context.
Research and understand the EB-5 program
An excellent starting point is the EB-5 section of the USCIS website. Here, prospective investors can find links to EB-5 resources, procedure, and program requirements. Additional information on regional centers is also available. Some key EB-5 program information is available in Simplified Chinese, and investor alerts are available in Spanish, Korean, and traditional Chinese.
Experienced counsel may also be able to assist in the critical next step.
Read the offering material
Although USCIS and the SEC do not explicitly list this tip, it is critically important and difficult (even for a native English speaker). These documents are the template for the uses of investor capital and must be strictly followed for USCIS to approve investors’ green card petitions. Without a careful review of this material, an investor will not have enough information to evaluate whether an EB-5 project is misusing funds.
For example, an investor would need to review the business plan and related contracts to learn square footage of a building in a construction project before undertaking a site visit.
Visit the project site
USCIS is taking this step, but if an investor fails to do it before investing it may be too late.
In SEC v. Edward Chen, the regional center had raised $9.5 million for one of its projects apparently before anyone bothered to visit the project site. According to the SEC’s complaint, the offering documents represented that the building to house the project was approximately 10 times larger than its actual size. Job-creation estimates for this project were based on the size of the warehouse. A simple visit to the project site before investing could have confirmed the actual size.
Similarly, in SEC v. Justin Moongyu Lee the project promoters represented to investors that construction of an ethanol production plant was in progress, despite halting construction two years earlier. A site visit to determine whether construction was truly “ongoing” and evaluate whether it could feasibly “be in operation by November 2011” may have saved some later investors.
Meet with the individuals in charge of the project
In SEC v. A Chicago Convention Center, the SEC alleged that the offering material claimed that the principal operator, Anshoo Sethi, “age 29” had “over 15 years of experience in real estate development and management.” For this statement to be true he would have had to begin his real estate development and management career at fourteen years old. An investor who read the offering material and met with Mr. Sethi prior to investing would have had the information necessary to evaluate the truth of this claim.
Conduct online background checks
Even when meetings with project operators do not raise red flags, investors should investigate further. In addition to simple Google searches, prospective investors may want to invest in a PACER account to learn about promoters, project operators, and principals. Remember, these are the people entrusted with managing capital contributions, and are a major factor in each investor’s green card petition.
In SEC v. AJN Investments, the SEC alleged that “AJN and its then CEO Jason Adam Ogden” raised approximately $6.7 million between 2011 and 2015, and then changed plans midstream. A simple Google search for ‘jason adam ogden lawsuit’ revealed a story from 2013 in which the job creating enterprise named in the SEC suit was sued by a bank. Though somewhat more difficult to find, freely-available court records from Broward County, Florida would show additional civil suits against Mr. Ogden dating back to 2013. Similarly, a PACER search for “Bruce A Cole,” the defendant in SEC v. Cole, revealed multiple civil suits and bankruptcies pre-dating the EB-5 offering. Investors who had this information prior to making their investment could have taken additional steps to verify what connection, if any, the person in charge of the EB-5 project had to these cases.
Verify as much information as possible
Many of the claims made in offering material can be confirmed (or falsified) by reviewing publicly available information. In SEC v. A Chicago Convention Center, the offering materials stated that the project principals would contribute land valued at over $170 million. According to the complaint, this figure was “vastly overstated.” Though the project’s address was perhaps somewhat obscured by the offering documents, its location is currently searchable on the websites of the Cook County Treasurer, the Cook County Assessor, and the Cook County Recorder of Deeds. Anyone who reviewed this data prior to investing would have been able to conclude, as the SEC put it, that “the property was acquired by a company affiliated with Sethi in 2008 for less than $10 million.”
Even if land title records are verified and legitimate an investor should still obtain up-to-date records of local building permits to ensure that the project can be built. Again, this information is often available online, or upon request to the city and county zoning authorities.
Although due diligence services exist, the best way to mitigate the risk of fraud is to thoroughly research the EB-5 program and the prospective investment. Much of the material information related to a project is freely-available online, and a visitor visa is available to prospective investors who wish to visit the project site and meet with the principals. By taking extra time to carefully review key factors related to both the EB-5 program and the specific investment project, prospective investors stand a better chance of avoiding EB-5 fraud.