How much due diligence are we Immigration lawyers expected
to conduct in EB-5 cases? What are the expectations from USCIS and the SEC? On the
April 3, 2013 EB-5 Engagement between the SEC and USCIS, Rob Silvers opened the
call by noting that USCIS has been engaging with the SEC at the programmatic
and case-specific level. Mr. Silvers declined to confirm whether this joint review of actual cases has
identified endemic or repeated practices in the EB-5 program that could not
only be problematic from the SEC prospective, but could also threaten the
progression of the EB-5 program.
Clearly EB-5 is an area where the average Immigration
attorney lacks the expertise to navigate the myriad of financial ambiguities and
corporate nuances. The general advice is to always refer the investor client to
a due diligence professional.
False statements and schemes to defraud are obvious to
all, but beyond that what should the EB-5 attorney need to know when
structuring and promoting EB-5investments? Can we look to the SEC to help us
identify and publicize any commonly-used practices in EB-5 deal structures and
marketing that are almost certainly problematic securities-wise? Or even
reassure us about what is most likely safe, for that matter?
As EB-5 project owners continue to raise capital through
conducting private placement offerings to overseas securities purchasers, how
to conduct securities law due diligence becomes a pressing matter in EB-5
Practice. We want to keep our job-creating American business people safe from
litigation. We also do not want EB-5 to become the new asbestos or to fade
based on unfounded fears.
Alert in Private Oil and Gas Offerings:
The Securities and Exchange Commission (SEC) recently
warned investors about certain risks and possible fraudulent activity involving
private offerings of securities for the oil and gas industry. In a recent
investor alert, the SEC stated that "investing
in private offerings, however, carries unique risks, and private oil and gas
offerings have additional risks to consider." 
Although the below red flags are referring to Private Oil
and Gas Offerings, the pointers can be used for any EB-5 private offering.
Flags in Private Offerings
The SEC published the following common investment "red
flags" for private offerings:
Overinflated or misrepresented prospects and claims: One
common thread among all fraudulent schemes, including those related to oil and
gas, are claims that they are about to strike it rich, or that it is likely or
even guaranteed that the returns will be too good to pass up. The rule of thumb
should be that higher returns typically mean higher risks of loss.
Investing to support drilling and completion
operations: The SEC has investigated many oil and gas
offerings that claimed they were about to strike oil or gas and they just
needed some investment to pay for drilling and completion. The promoter often
omitted to explain that he owned the drilling company or planned to hire a
driller at far less than what was stated on the offering or business plan,
pocketing the difference. The promoter ended up making money even if the well came up dry.
v Hartmut Theodor Rose,
told investors that oil and gas production was about to start when many of the
wells were actually marginal or even dry. They misrepresented the
"success" of prior wells to raise funds for new wells and touted the
"low-risk" opportunity as "once-in-a-lifetime."
Use of Proceeds
It should be noted that a project principal may violate
securities law by not disclosing the full use of proceeds. The project
may not be a fraudulent scheme, however, but a principal may inflate the
development costs and use part of the investment capital raised to pay for
personal items or unrelated business expenses. The investors should speak
with industry experts and financial advisers to obtain the industry standard
for the budget.
In several cases, the SEC alleged misrepresentations
about what the invested funds were going to be used for. Misrepresentations
and omissions about uses of investors' monies included (i) paying big sales
fees to brokers, (ii) the nature and size of compensation to the promoter and
employees of the venture, (iii) operating and other expenses for unrelated
businesses and (iv) using the money to pay for personal items. For example,
in SEC v Wellco,
the complaint alleges that the promoters misrepresented that investors' funds
would be used for oil and gas wells when, in fact, 58% of money raised went
to pay sales fees as well as the promoter's personal mortgage and child
The Right Questions to Ask
of proceeds. What is my money going to be used
for? Can you estimate how much of the money you raise will be used for
each of the job creating activities? If commission fees will be paid, how
are those fees calculated? It is reasonable to expect the company raising
the money to have plans for it, particularly if the persons involved have
prior industry experience. Otherwise, why are they raising that specific
Attorneys who provide investment advice to investors do
not need to registered with SEC or FINRA as long as the advice is incidental to
the legal opinion. It is important to conduct the independent research.
Does the project have the "due diligence
report"? The broker/adviser may not just rely on the project promoter for
information. Instead, the broker must check the statements and claims about the
investment. This report should outline how the broker evaluated the venture's
prospects and claims.
The person recommending a financial product to the
investors should be a registered broker/dealer, either as registered as a
broker with the SEC and must be a member of the Financial Industry Regulatory
Authority, or FINRA. Investor can find out if someone is registered and
obtain information about a registered broker by visiting FINRA's Broker Check website
or calling FINRA's Broker Check hotline at (800) 289-9999.
For a registered investment adviser, the investor may be
able to obtain information about the adviser by visiting the SEC's Investment Adviser Public Disclosure (IAPD) website.
It is always important to consider if the project principal
has a track record of running similar business. Part of the due diligence is to
find out whether the project has prior history of selling similar offerings and
if those offerings failed.
Prior Relationships with the Project
Does the broker or adviser have a relationship with the
promoter of the venture, or otherwise has a personal stake in the transaction?
If the broker/adviser has a business relationship with the securities issuers,
there may be potential conflict of interests. The investors should be aware of
the prior relationship the extent of their business together, and any personal
incentive in the offering. These or similar questions should help alert
investors to any potential conflicts and biases that may exist in recommending
the particular offering.
 The Investor Alert on the SEC
official website: http://investor.gov/news-alerts/investor-alerts/investor-alert-private-oil-gas-offerings
 U.S. SECURITIES AND EXCHANGE
COMMISSION: Litigation Release No. 21031 / May 8, 2009 Securities and
Exchange Commission v. Hartmut Theodor Rose and James Patrick Reedy, Civ.
Action No. 3:09-cv-00857-G (United States District Court for the Northern
District of Texas, Dallas Division)
 U.S. SECURITIES AND EXCHANGE
COMMISSION, Litigation Release No. 21040 /
May 15, 2009 SEC v. Wellco Energy, LLC, Justin
William Rifkin, Patrick V. Looper, Richard G. Pacheco, and Dustin D. White, (United States District Court
for the District of Colorado, Civil Action No. 09-cv-01114-MSK-KLM)
Mona Shah & Associates
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