SEC Continues Crackdown on Allegedly Fraudulent EB-5 Projects
Targeting developers’ shoddy accounting practices and misuse of funds, the federal agency charged with protecting investors, the Securities and Exchange Commission (SEC), has maintained its heightened watch-dog role over the federal EB-5 visa program, announcing just last week another lawsuit against a developer whose projects rely heavily on EB-5 investors’ capital. Since April of last year, in fact, the SEC has filed more than three dozen civil and criminal complaints in its nationwide initiative to combat fraud and rule-breaking in the program.
In the suit, the SEC alleges that Aero Space Port International Group and its president, Andy Shin Fong Chen, deceived 29 immigrant investors who were the source of $14.5 million of capital Chen had raised for EB-5 developments. (Chen denies the charges.) According to the SEC, Chen used “virtually all of the funds” for personal expenses, his unrelated businesses, and other EB-5 commercial enterprises he supported, and additionally misled authorities. The lawsuit seeks to bar Chen from future participation in the EB-5 program, and for the court both to assess civil penalties and require Chen to return the investors’ money.
This complaint isn’t the first in the Seattle area. Since 2015, SEC action has resulted in two settlements in civil cases and two guilty pleas in criminal complaints in the region. One of the more publicized criminal cases was brought against Lobsang Dargey, an immigrant born on a farm in Tibet who rapidly rose to multimillionaire status in Seattle after founding his now-shuttered company, Path America. The SEC accused him of defrauding hundreds of investors out of more than $150 million, and this past January, Dargey pleaded guilty to two felonies, agreeing to pay up to $24.2 million in restitution to investors and serve up to 10 years in federal prison.
The EB-5 Visa
Established in the early 1990s and justified as an effort to stimulate job creation and attract foreign direct investment to economically depressed communities in the U.S., the EB-5 visa program, also known as the Immigrant Investor Program, has facilitated the immigration of rich international entrepreneurs by allowing them to invest a significant sum of money into an enterprise that produces employment opportunities for American citizens (or permanent residents, asylees, or refugees). Specific numerical conditions apply: an intending investor-immigrant has to infuse a minimum qualifying amount of capital, $1 million, into a venture that creates at least 10 full-time jobs for qualifying U.S. workers. For enterprises in certain areas, namely cities experiencing high unemployment and rural communities, the seven-figure capital requirement is cut in half to $500,000.
The years following its creation, in an effort to increase interest in the program, Congress and U.S. Citizenship and Immigration Services (USCIS) periodically overhauled the EB-5. Among the most consequential changes made was establishing Regional Centers, which are USCIS-approved economic development projects into which multiple alien investors are permitted to pool their capital. Notably, the EB-5 visa program has yet to become a permanent fixture of the U.S. immigration system. Instead, the category has been consistently reauthorized for a finite period of time, with the most recent reauthorization set to sunset in about a month, on April 28, 2017.
The Securities Act of 1933 centralized the regulation of investments, stocks, and bonds—collectively known as securities—in the federal government. (Beforehand, individual state laws, commonly referred to as blue sky laws, had exclusively dictated the terms of securities transactions within their borders.) As a result of the Act, all offers to sell securities had to be filed with the then-newly created SEC. Considering the context at the time, creating a robust mediator in the financial industry was hardly surprising. A half-century later, in 1982, a new provision, “Regulation D,” was added to the Code of Federal Regulations that allowed certain groups to offer and sell securities without having to register with the SEC.
Where the EB-5 and SEC Converge
By combining the two brief historical discussions above, it’s easy to see where the nexus between SEC enforcement and EB-5 investment is derived: Because EB-5 applicants enter into an investment contract with their associated commercial enterprises, and because an investment contract constitutes a security, federal law requires these transactions be registered with the SEC, and the SEC is mandated to enforce laws intended to protect investors involved in such securities sales. Regulation D can apply to the EB-5 context, however, as accredited investors in EB-5 projects may be, and often are, exempted from registering with the SEC. Notwithstanding this exception, the SEC partakes in a host of securities-related enforcement actions in order to safeguard EB-5 applicants. Among these actions are rooting out Regional Centers and project owners attempting to attract foreign investors with false or misleading information; levying civil and criminal penalties on unaccredited brokers and dealers; and exercising its statutory authority to respond to investor complaints.
Sharp, Sustained Rise in EB-5 Interest: Causes and Effects
While no more than a few hundred EB-5 applications were filed in the 1990s, by the late 2000s, EB-5 petitions were on the cusp of reaching their statutory cap of roughly 10,000 visas per year. In addition to an increasing number of Regional Centers (which, as of March 2017, included nearly 900 nationwide) and the surge of independently wealthy individuals in China, central to the upswing in EB-5 popularity was the aftermath of the Great Recession. At the time, developers, particularly those with real estate projects, confronted an investment climate cool to their endeavors. But they soon found a patient and willing source of capital in potential EB-5 applicants.
As a consequence of these trends, between 2008 and last year, the number of EB-5 petitions filed (Form I-526) spiked more than tenfold, from 1,258 applications to more than 14,100 in 2016. Moreover, in 2014, for the first time, the number of EB-5 petitions filed exceeded the yearly cap, and immigrant investors from mainland China—who account for the vast majority of EB-5 applications—started experiencing a backlog in visa availability that continues to the present. (For additional information on this retrogression and others, refer to our visa bulletin.) The graph below depicts the rise in EB-5 popularity.
Source (data): USCIS
Even though EB-5 visas comprise a fraction of the total number of permanent-resident visas issued each year, the stakes involved in awarding them are anything but insignificant, particularly in high-profile urban centers. In the Seattle area, for example, EB-5 investment finances at least $2 billion in ongoing projects. Generally lax regulation of the program, which dates back to its inception, and the failure of Congress to permanently authorize it have combined to create an environment wherein fraud can easily occur. Enter eager developers and their well-connected projects, on the one hand, and vast—indeed, increasing—pools of foreign investors’ capital available to be infused in such projects, on the other, and the mere risk of fraud in EB-5 enterprises becomes more of a probability than a possibility. That the SEC has recently assumed a sustained, aggressive oversight role—succeeding in freezing the assets of unscrupulous developers and recouping tens of millions of dollars of investors' money, while cracking down on immigration attorneys and businessmen alike—reflects this reality.
We’re proud to include foreign investors among the thousands of clients we’ve represented over the years. Whether in the past or currently, the EB-5 visa petitions our firm takes on feature honest, industrious individuals who conform to all rules and requirements stipulated, and whose investments lead to jobs for U.S. workers. As such, we emphatically agree with the necessity of SEC action targeting shady businessmen, brokers, and developers who unconscionably steal capital investments sourced and supplied lawfully by people like our EB-5 clients, and who in so doing tarnish the reputation of this visa program.
In our view, there’s much more to be done to enhance the integrity of the EB-5 visa. Congress can start by deciding whether or not to permanently authorize the program, and if it does, seriously consider the findings of a September 2016 Government Accountability Office (GAO) report. While it is not our place to specify how investors’ capital is used, in too many cases, EB-5 Regional Centers are designated on the basis of economic and population data that are cherry-picked to include legitimately economically depressed communities but whose projects are in the end located far from these communities, in comparably well-off enclaves like downtown Seattle or midtown Manhattan, where Regional Center projects include luxury hotels on Wall Street.
With billions of investment dollars ready to be released into local economies, and consequently thousands of employment opportunities ready to be filled by American workers, the positive potential of the Immigrant Investor Program is clear. It’s ultimately this reason, we believe, that makes the EB-5 visa worth strengthening and preserving.
If you are interested in filing an EB-5 petition, please do not hesitate to contact us.
Founded in 1996, Zhang & Associates, P.C. offers legal services to clients nationwide in all aspects of U.S immigration law. We have successfully handled thousands of immigration cases.
At Zhang & Associates, P.C., our attorneys and supporting professionals are committed to providing high-quality immigration and non-immigration visa services. We specialize in NIW, EB-1, PERM, and I-485 cases. In the past twenty years, we have successfully helped thousands of clients get green cards. If you plan to apply for a green card, please send your CV to Attorney Jerry Zhang (firstname.lastname@example.org) for a free evaluation.
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