Emphasis on Compliance and SEC Interagency Cooperation a Year After the Appointment of Chief Nicholas Colucci to the USCIS Immigrant Investor Program (EB-5)

Thursday, November 20, 2014 - 09:50

After more than one year of service by Chief Nicholas Colucci of the Immigrant Investor Program (“EB-5”) at U.S. Citizenship & Immigration Services (“USCIS”), there is a clear shift in favor of increased compliance efforts and interagency cooperation, 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 financial 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 financing 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 financial regulations and in its collaboration with other agencies to ensure financial and security issues are addressed comprehensively by the government. Specifically, 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 financial investigations efforts under Chief Colucci’s continued direction, now more than ever, it is critical that competent immigration counsel are involved in any EB-5 representation.

By way of background, the EB-5 program permits foreign nationals who invest as little as $500,000 and employ 10 U.S. workers in a rural or economically disadvantaged part of the United States to secure an immigrant visa, which can lead to a permanent green card after an initial two-year conditional period, during which the principal 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 metropolitan 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 conditional 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 domestic capital investment. 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 conditions, project costs, and activity timelines; (3) verifiable 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 interagency coordination can only help the program’s upcoming review by Congress.

Over the past year, Chief Colucci has brought more transparency and resources to the EB-5 program. Specifically, USCIS has hired more qualified 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 diligence 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 filed by potential immigrant investors are now centrally adjudicated by the Immigrant Investor Program office 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 compliment 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 consolidate existing EB-5 policy memoranda and the Adjudicators Field Manual into one comprehensive EB-5 policy guidance document. 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 concerns regarding fraud and other issues challenging the EB-5 program. Securities laws can greatly impact an EB-5 program and specifically how the offerings are structured. Regional Centers must partner closely with securities counsel to determine if any fundraising activities constitute the “sale of securities.” “Security” is broadly defined by the SEC. Generally, the government considers any investment a “security” if the investor’s money is put at risk in a project whose success 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 registered with the SEC unless an “exemption” applies. There are a variety of Regional Center activities that could require registration 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 finder/agent by connecting potential buyers and sellers with each other for a fee, etc.

The new regulatory environment mandates that Regional Centers partner closely with counsel to analyze all applicable securities 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 exemptions by EB-5 issuers include the Regulation S “foreign offerings” and Regulation D “private placement” exemptions. Specifically, 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 placements to raise capital from foreign investors and allows for general solicitation, but the securities must be sold to “accredited investors” only, and the issuer must take reasonable 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 Corporation 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 specific desire to invest in the United States. Specifically, 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 verification on the Regulation D private placement accredited investor exemption, the SEC now recommends that the issuer review the investor’s Internal Revenue Service (IRS) forms reporting income or foreign-filed 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 sufficient 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-specific and programming 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 firm partner with conducting 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 attorneys continued to represent to the investors that the project was ongoing.

The SEC also has been conducting frequent investigations of Regional Centers by issuing broad subpoenas seeking information about specific EB-5 transactions. The subpoenas generally request any approval from USCIS to participate in the EB-5 program as well as documentation regarding the Regional Center and its business plan, including any subsequent recertification; 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 number 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 officers 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, accounting, recruiting or consulting services; and a description of the service provided. Again, partnering with competent counsel will be increasingly critical to navigate the heightened 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 financial investment regulatory issues and interagency cooperation with the SEC. Compliance standards 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 field. 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 significant net benefit to the U.S. economy, and any instances of fraud and noncompliance only jeopardize a program that otherwise has wide bipartisan support. Working with competent counsel is the best way to help ensure the EB-5 program’s continued success in this new environment.

Chad Ellsworth is a Partner at Fragomen, Del Rey, Bernsen & Loewy, LLP. He is a member of the firm’s Corporate Compliance Group in the New York City office.

Please email the author at cellsworth@fragomen.com with questions about this article.