Emphasis on SEC compliance

1. Page 18 The Metropolitan Corporate Counsel December 2014
Emphasis on Compliance and SEC Interagency Cooperation
a Year after the Appointment of Chief Nicholas Colucci
to the USCIS Immigrant Investor Program (EB-5)
After more than one year of service by
Chief Nicholas Colucci of the Immigrant
Investor Program (“EB-5”) at U.S. Citizen-ship
& Immigration Services (“USCIS”),
there is a clear shift in favor of increased
compliance efforts and interagency coop-eration,
including Securities and Exchange
Commission (“SEC”) enforcement actions
of the EB-5 investor green card program.
The shift was anticipated by the EB-5
immigration community as Chief Colucci
has an extensive background in fi nancial
crimes and investigations. Previously, Chief
Colucci served as the associate director of
the Department of the Treasury Financial
Crimes Enforcement Network’s (“FinCEN”)
Analysis and Liaison Division. FinCEN
plays a critical role in the United States’
wider battle against money laundering
and fi nancing of terrorist activities. Prior
to FinCEN, Chief Colucci served with
the Bureau of Alcohol, Tobacco, Firearms
and Explosives (“ATF”). Chief Colucci’s
financial investigations experience is a
clear asset to USCIS’s efforts to scrutinize
and enforce compliance of all EB-5-related
fi nancial regulations and in its collabora-tion
with other agencies to ensure fi nancial
and security issues are addressed compre-hensively
by the government. Specifi cally,
USCIS is working with Immigration and
Customs Enforcement (“ICE”), Customs
and Border Protection (“CBP”), the Federal
Bureau of Investigation (“FBI”), and the
SEC’s enforcement division on EB-5 cases.
Given the noticeable shift at USCIS and the
likely acceleration of government fi nancial
investigations efforts under Chief Colucci’s
continued direction, now more than ever, it
is critical that competent immigration coun-sel
are involved in any EB-5 representation.
By way of background, the EB-5 pro-gram
permits foreign nationals who invest
as little as $500,000 and employ 10 U.S.
workers in a rural or economically disad-vantaged
part of the United States to secure
an immigrant visa, which can lead to a per-manent
green card after an initial two-year
conditional period, during which the princi-pal
investor and immediate family members
can immediately live and work in the United
States. Under current USCIS regulations, if
applicants make their capital investments of
at least $500,000 inside a “Regional Center”
located in an economically disadvantaged
area known as Target Employment Area
(“TEA”) or a rural area outside a metropoli-tan
statistical area, or part of a city or town
having a population of 20,000 or less, the
immigrant investor can rely on “indirect”
job creation to have his or her two-year con-ditional
Please email the author at cellsworth@fragomen.com with questions about this article.
status removed.
The Regional Center program, which
originally was scheduled to sunset in 2003,
was extended by President Obama through
2015. A Regional Center is any economic
unit, public or private, that is involved
with the promotion of economic growth,
improved regional productivity, job creation,
and increased domes-tic
capital invest-ment.
When seeking
USCIS’s designation
as a Regional Center,
the organizers must
submit detailed plans
showing (1) how they
plan to focus on a
geographical region
within the United
States and achieve the required economic
growth; (2) a viable business model with
credible assumptions for market condi-tions,
project costs, and activity timelines;
(3) verifi able detail (e.g. economic models)
regarding how jobs will be created directly,
indirectly or induced; and (4) the amount
and source of capital and the promotional
efforts made and planned for the business
project. The vast majority of investors rely
on the Regional Center program to make
their EB-5 investment, and the increased
USCIS focus on compliance and inter-agency
coordination can only help the pro-gram’s
upcoming review by Congress.
Over the past year, Chief Colucci has
brought more transparency and resources to
the EB-5 program. Specifi cally, USCIS has
hired more qualifi ed staff to help improve
government processing times. Most new
hires are economists and securities and
immigration attorneys, which has advanced
the agency’s competency in the due dili-gence
department. Competent counsel
welcome the government’s efforts to quickly
approve investment projects that are highly
likely to succeed (e.g., major infrastructure
projects coordinated with state and/or local
agencies) or deny those project not likely
to assist the U.S. economy. Additionally, all
applications seeking the Regional Center
designation and all initial petitions fi led by
potential immigrant investors are now cen-trally
adjudicated by the Immigrant Investor
Program offi ce in Washington, DC. USCIS
also has staff from the Fraud Detection
and National Security Directorate who are
dedicated full-time to the EB-5 program and
are fostering enhanced communication and
collaboration.
Moreover, USCIS has begun revisions to
EB-5 regulations, which are likely to com-pliment
many of the increased compliance
and interagency corporation efforts. The
EB-5 community anticipates that the revised
regulations will focus on and address fraud
and national security issues to enhance the
integrity of the program. Similarly, USCIS
is also in the process of developing the
EB-5 policy manual in an attempt to con-solidate
existing EB-5 policy memoranda
and the Adjudicators Field Manual into one
comprehensive EB-5 policy guidance docu-ment.
Again, stakeholders welcome these
initiatives as USCIS further professionalizes
the program and strengthens the chances of
reauthorization of the EB-5 program.
As indicated above, another major shift
over the past year has been the coordination
between USCIS and the SEC to address con-cerns
regarding fraud and other issues chal-lenging
the EB-5 program. Securities laws
can greatly impact an EB-5 program and
specifi cally how the offerings are structured.
Regional Centers must partner closely with
securities counsel to determine if any fund-raising
activities constitute the “sale of secu-rities.”
“Security” is broadly defi ned by the
SEC. Generally, the government considers
any investment a “security” if the investor’s
money is put at risk in a project whose suc-cess
depends on the efforts of others. Once
an investment is deemed a “security,” the
Securities Act of 1933 as amended applies
and requires that all securities sold be reg-istered
with the SEC unless an “exemption”
applies. There are a variety of Regional
Center activities that could require registra-tion
unless an exemption applies, including:
soliciting someone to purchase or sell one
or more securities; helping an issuer identify
potential purchasers of securities; making
valuations as to the merits of an investment
or giving advice; acting as a fi nder/agent by
connecting potential buyers and sellers with
each other for a fee, etc.
The new regulatory environment man-dates
that Regional Centers partner closely
with counsel to analyze all applicable secu-rities
laws to determine if any “exemptions”
apply that allow issuers to raise capital for
the investment project without registration
as a broker-dealer. Commonly used exemp-tions
by EB-5 issuers include the Regulation
S “foreign offerings” and Regulation D “pri-vate
placement” exemptions. Specifi cally,
Regulation S allows for an exemption of
the broker-dealer registration requirements
provided there are no directed sales efforts
inside the United States for offerings of
securities to non-U.S. persons. Regulation
D, as amended by the 2012 Jumpstart Our
Business Startups Act (“JOBS”), allows
Regional Centers to conduct private place-ments
to raise capital from foreign investors
and allows for general solicitation, but the
securities must be sold to “accredited inves-tors”
only, and the issuer must take reason-able
steps to verify the investor’s status. As
a general matter, neither foreign offerings
nor private placements are subject to some
of the securities laws and regulations that
are designed to protect investors, such as
the comprehensive disclosure requirements.
As an example of increased scrutiny
by the SEC, the Division of Corpora-tion
Finance recently released Compliance
and Disclosure Interpretations relating
to accredited investors under Regulation
D. The recommendation is an attempt to
provide methods to verify if an investor
is credible, accredited, and has a specifi c
desire to invest in the United States. Specifi -
cally, Rule 501 of Regulation D states that
an “accredited investor” includes a person
who (1) has earned income that exceeded
$200,000 (or $300,000 together with a
spouse) in each of the two previous years
and reasonably expects to earn a comparable
amount for the current year or (2) has a net
worth that exceeds $1 million either alone
or with a spouse. If a Regional Center relies
on the income-based verifi cation on the
Regulation D private placement accredited
investor exemption, the SEC now recom-mends
that the issuer review the investor’s
Internal Revenue Service (IRS) forms
reporting income or foreign-fi led tax forms
for the previous two years. If applicable, the
SEC also recommends that the issuer obtain
written representations stating (1) IRS forms
are not available, (2) the amount of income
received for the most recently completed
year, (3) that such income was suffi cient to
qualify as an accredited investor, and (4) that
the investor reasonably expects to reach the
requisite level of income in the current year.
The burden is on the issuer to demonstrate
compliance of these provisions.
Further, over the last year, there has been
a visible and public effort by USCIS and the
SEC to coordinate on case-specifi c and pro-gramming
levels and to educate the public
on issues that challenge the EB-5 program.
To this end, there have been joint USCIS-SEC
investor alerts warning investors
about fraudulent investments. Also, there
has been an uptick in SEC enforcement
actions involving fraud. As an example,
in September 2014, the SEC charged a
California-based immigration attorney, his
wife, and his law fi rm partner with conduct-ing
an investment scheme to defraud foreign
investors trying to apply through the EB-5
program. The SEC alleged that the attorneys
raised approximately $11.5 million from
two dozen investors to invest in an ethanol
production plant. The investors’ money was
misappropriated for other purposes and the
ethanol plant was never built, yet the attor-neys
continued to represent to the investors
that the project was ongoing.
The SEC also has been conducting fre-quent
investigations of Regional Centers by
issuing broad subpoenas seeking informa-tion
about specifi c EB-5 transactions. The
subpoenas generally request any approval
from USCIS to participate in the EB-5 pro-gram
as well as documentation regarding
the Regional Center and its business plan,
including any subsequent recertifi cation; the
total annual amount of investment and the
number of individuals by country of origin
making investments through the Regional
Center since it has been in operation; the
name, address, and a description of each
business in which the Regional Center has
made an investment of funds and the num-ber
of jobs created by each investment; any
fees charged to EB-5 applicants or received
by the Regional Center, including amount
and description; a list of any current or
former corporate offi cers of the Regional
Center, including title, position, and dates
of employment, and the name and address
of any individual or entity (either foreign or
domestic) that the Regional Center has an
agreement with to provide legal, account-ing,
recruiting or consulting services; and a
description of the service provided. Again,
partnering with competent counsel will be
increasingly critical to navigate the height-ened
SEC scrutiny.
In summary, the appointment of Chief
Colucci has brought unprecedented changes
to the EB-5 community, including a strong
focus on compliance with fi nancial invest-ment
regulatory issues and interagency
cooperation with the SEC. Compliance stan-dards
have been more regularly enforced
and strengthened. Additionally, current
anti-fraud provisions have been enhanced
by the interagency cooperation. Given the
enhanced regulatory environment under
Chief Colucci, Regional Centers must
ensure that they are competently run and
assisted by counsel who specialize in the
EB-5 fi eld. USCIS’s recent efforts largely
help ensure that Regional Centers are
administered by reputable professionals,
thereby assisting the program’s long-term
success. The EB-5 program is a signifi cant
net benefi t to the U.S. economy, and any
instances of fraud and noncompliance only
jeopardize a program that otherwise has
wide bipartisan support. Working with com-petent
counsel is the best way to help ensure
the EB-5 program’s continued success in
this new environment.
Chad Ellsworth
Chad Ellsworth
FRAGOMEN, DEL REY, BERNSEN &
LOEWY, LLP
Chad Ellsworth is a Partner at Frago-men,
Del Rey, Bernsen & Loewy, LLP. He
is a member of the fi rm’s Corporate Com-pliance
Group in the New York City offi ce.