Introduction:
On February 6, 2013, the Securities and Exchange
Commission (SEC) charged the EB-5 project A Chicago Convention Center (ACCC)
and its principal Anshoo R. Sethi with securities fraud. The project was
marketed primarily in China, with great pomp and fanfare. It offered 499 limited
membership interests to EB-5 investors and managed to sell more than $145
million in securities, unfortunately under misleading pretenses. There was $11
million in administrative fees collected from more than 250 investors. Despite
a promise to refund this fee should the case collapse, more than 90 percent of
the administrative fees have already been dissipated. Fortunately for the
investors, the actual investment money was kept in escrow and thereby saved.
However, as this event is unprecedented in EB-5 history and the first time an
EB-5 transaction of this size has been put on the radar of the SEC. The ACCC case
has had profound impacts in EB-5 marketing trends in China.
Current
Situation with the ACCC Investors and the Negative Publicity of the EB-5
Program in China
At present, $147 Million of investor's funds from the
ACCC project are held in escrow in US based accounts. On March 6, 2013, the SEC
filed a formal opposition to the Investors' Motion to intervene for the
investment to remain with the escrow agent or to be transferred to an
alternative escrow agent. The SEC opposition[1] is
based on a number of factors, including the lack of unanimity amongst the
investors and the appointment of a receiver for disbursement of investor
funds. The SEC argues that the money
should be returned directly to the investor. The authors believe that the SEC
will prevail in the opposition to the motion to intervene. If the funds will be
wired back to the investors' personal accounts, it will take months before the
investors' funds can be transferred to a new EB-5 project.
China Central Television (CCTV), the biggest television
network in China has highlighted the US Securities and Exchange Commission
(SEC) prosecution against ACCC and EB-5 investment as "high risk investment
products."[2] On March 8, 2013, the Chinese Ministry of
Foreign Affairs[3] warned the Chinese investors of the "EB-5 Fraud" in the immigrant investor
program and stated that the Chinese investors should carefully choose among the
migration agents. It is very rare for the Chinese Ministry of Foreign Affairs
to make such a bold comment. The important issue that should not be forgotten
is that the joint action of USCIS and the SEC actually prevented the investment
funds from being dissipated.
The EB-5 immigrant investor program in the United States
became popular among foreign investors, including Chinese investors, because
the US has always been a desirable destination to live. The determining factors
include: - having the highest worldwide GDP and the No. 1 world economy; world
renowned universities and higher education; the most diverse cultures; basic
constitutional rights and freedom; US is still perceived as the land of the
opportunities, etc. However, the
unrelenting problems of the EB-5 program had started to cause a regression
among Chinese investors against investing in the United States long before the
ACCC scandal. Though at the end of February 2013, the State Department Visa
Office confirmed that as the visa usage dropped in recent months, which is
another sign that US has been losing investors to other countries, it is no
longer expected that China will reach the country limit quota in 2013.
The negative publicity surrounding ACCC certainly has contributed
to pushing potential investors into the arms of the European competition. In the last month alone, we are aware of at
least 20 confirmed investors, who had signed up for US EB-5 projects, withdraw,
preferring to invest in Portugal instead. Based on our constant interaction
with the Chinese investors, brokers and marketing consultants, issues such as
the prolonged processing times (investors are tired of waiting for as long as
18 months to obtain a I-526 approval), the greater investment risks,
unpredictability in policy making, not to forget the massive amount of negative
publicity in China, following the ACCC debacle, have all contributed to this
detachment.[4]
European
Countries Offer the "Citizenship for Sale" Option
As the popularity and demand for EB-5 money grows, we
have almost come to expect that these foreign investors will want to park their
money in no other country but the United States. In actuality, the United States is facing
severe competition from other Countries, including Spain, Portugal, Cyprus,
Ireland not to mention the United Kingdom and Canada.
In October 2012, Senator Chuck Schumer (R-NY) and Senator
Mike Lee (R-UT) proposed an initiative to offer visas to foreign nationals who
would invest $500,000 to purchase a residential property. This homebuyer visa
was severely criticized as "citizenship for sale", a dangerous step toward
monetization of nationality. While the United States is debating the morality
of the homebuyer visa, other countries such as Spain, Portugal and Cyprus have
made the homebuyer visa reality. Foreign investors can purchase a home in Portugal,
Spain, Cyprus and Ireland to obtain permanent residency.
Who
are Competing with the United States to Attract the Immigrant Investors?
European countries have offered the investors the option
to purchase a residential property to obtain permanent residency and eventually
EU nationality. Both Portugal and
Ireland offer the homebuyer visa for 500,000 euros (approximately $651,000).
Hungary offers residency to those who purchase 250,000 euros worth of
government issued bonds. Spain topped the list of minimum investment among all
the immigrant investor programs on the global market. To obtain permanent
resident status in Spain, the Investor only needs to purchase a home in Spain
that is worth at least 160,000 euros (approximately $208,000).
There are other advantages for the Chinese investor
interested in Europe. In Portugal, for example, no source of funds documents is
required, the process takes as little as 6 months and even the investor's
parents are included in the petition.
The investors have nearly no risk in obtaining the permanent resident
status. None of the countries mentioned above require the immigrant investor's
capital be placed "at risk". The investors immediately obtain a residential
property in these countries. The agents/investors admit that they understand it
may not be the best investment products, considering the on-going debt and
housing crisis in those countries. But the permanent residency in those
countries is a safety net.
Another advantage of the homebuyer visa in European
countries is investors consider it as a fast track to E.U. citizenship. Any
E.U. country passport is a valid travel document in all E.U. countries. It
gives the investors access to European countries like the United Kingdom, which
have restricted immigration policies. Chinese immigration agents and brokers
are all encouraging this investment, as there is a faster turnaround, no I-829
headache and overall, less work. The
typical commission to the agent is 12% to 17% of the € 500,000 with at least
10% up-front payment to the agents.
The Market
Outlook
It is not all doom and gloom for the EB5 Industry, despite
all the above mentioned competition and other issues. On the down side, the properties, particularly
in Spain and Portugal are mostly foreclosed or "crashed" properties, left over
from the construction boom of 5 years ago. Those Investors who want to emigrate
for the sake of their children's education will continue to prefer the US. There
will always be a market for US immigrant investor program; however, the Chinese
investors and agents will be even more cautious in choosing the good investment
projects. Large-scale projects may become more difficult to sell. It will take
longer to fill a certain project than it is.
For countries that offer the homebuyer visa, such as
Portugal, they continue to be heavily in debt. Euro zone funding to Portugal is expected run
out in the third quarter of 2014[5]. If
the Country defaults on the debt, as appears likely in Portugal 2014, long term
recession, currency devaluation and social instability follows, as occurred in
Argentina in the early 2000's. The residential properties that the Chinese
Investors are purchasing will have low resale value, nothing close to the sum
paid. When we raised these points with Chinese agents promoting Portugal, the
response was: "we are not promising a return of capital, only permanent
residency".
Conclusion
In a meeting Mona Shah & Associates with the
President of Beijing's Exit / Entry Industry Trade Association[6] and major global migration agencies in December 2012, we were told that that
there is always a market for the US, but we have to work together to beat the
competition. Once the furor over the
Chicago Convention Center calms, and there are more EB-5 success stories, we
are confident that eventually, the tide of public opinion will pull the
straying Chinese investors back to the US. The question is how long does it
take.
Mona
Shah & Associates reserve and hold for their own use, all rights provided
by the copyright law, including but not limited to distribution, producing
copies or reproducing, sales of this document. This article is a general
summary of complex securities law issues. No legal advice is provided in this
article. Please consult the securities
attorney for advice applicable to your particular circumstances.
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rights reserved by Mona Shah & Associates ©
[1] SEC v. A Chicago Convention Center, Anshoo
Sethi, Case: 1:13-cv-00982 Document #: 34 Filed 03/06/13 with UNITED STATES
DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION
[2] Central China Television (CCTV) website on "Six Traps in EB-5 Immigrant
Investor Program": http://wap.cctv.com/caijing/caijingtoutiao/2013-02/18/content_235711_2.htm
[3] The Announcement posted on the Chinese Ministry of Foreign Affairs website: http://cs.mfa.gov.cn/lsyj/t1013431.htm
[4] CCTV will air a whole program dedicated to the "Fraudulent EB-5 Projects" that
jeopardize the Chinese consumers/investors investment safety on Consumer
Protection Day on March 15, 2013.
[5] WSJ.COM: WHAT'S NOW | JANUARY 24, 2013 http://online.wsj.com/article/SB10001424127887323854904578261653244885768.html
[6] The Exit Entry Administrative Office under the Ministry of Public Security is
the governmental agencies that regulates and supervises all global migration
issues in China. The Exit Entry Industry Trade Association is the
quasi-government organization that supervises the activities of the migration
agencies and enforces the government policies regarding immigration in China.