OVERVIEW OF THE EB-5 MARKET INVOLVING REGIONAL CENTER PROJECTS By Linda Lau 1 & Tina Lee 2

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1 Marketing Practice Pointer OVERVIEW OF THE EB-5 MARKET INVOLVING REGIONAL CENTER PROJECTS By Linda Lau 1 & Tina Lee 2 Like any other sector of business activity, the EB-5 arena encompasses a "market" that goes deeper than a display of well-defined products or technical processes with the EB-5 label. The market is where the activities of a whole host of players converge to facilitate and direct the flow of EB-5 investment funds. Without at least a general understanding of the forces and dynamics at work in the EB-5 market, immigration law practitioners and U.S. business principals alike cannot engage meaningfully with the EB-5 program. Accordingly, the following overview is offered as a helpful starting point for understanding some of the players in the EB-5 market and how their varied goals and demands may impact the decisions made by projects and investors. 1. Who's who. Major players in the EB-5 market, other than EB-5 practitioners, and business principals seeking capital are briefly described below. Professional immigration consultants/agents - This category refers to individuals and companies outside the U.S. who are engaged in the business of providing emigration-related services to prospective EB-5 investors for a fee. Professional immigration consultants exist throughout the world and may be required to have a license or certification depending on the country in which 1 Linda Lau (J.D., University of California, Los Angeles, School of Law) currently serves as Vice Chair on the American Immigration Lawyers Association ( AILA ) EB-5 Committee and is a former chair of the Executive Committee of AILA s Southern California chapter. Her Los Angeles-based firm, Global Law Group, specializes in U.S. and global immigration strategies for professionals and high net worth individuals. Ms. Lau is admitted as a member of the California State Bar Association and a solicitor of England and Wales. 2 Tina Lee (J.D., University of California, Los Angeles, School of Law) is the Supervising Attorney in charge of overseeing case matters at Global Law Group. She was admitted to the California State Bar in 2003 and is a member of the American Immigration Lawyers Association, for which she has co-authored several articles on EB-5 topics. 1

2 they operate. In China, immigration consultants are required to be licensed and bonded with the Ministry of Public Security of the People's Republic of China. Immigration consultants assist investors by providing them information on the EB-5 program, gathering documentation, and assisting them with translations to be forwarded to U.S. immigration lawyers for review, and may also provide landing and follow-up services for new immigrants. In general, immigration consultants also play the dual role of acting as finders for specific EB-5 projects in exchange for a finder's fee from the project. Because of their networks with and access to high net worth individuals, immigration consultants play a significant role in determining which projects in the market receive EB-5 investor money. This is especially true of China, which in the first quarter of FY 2011 generated over 68.1% of EB-5 visa usage. Immigration consultants may also influence the fee structures of other professionals involved in EB-5 case processing, such as firms that provide source of funds analysis and immigration lawyers, and may even impacts the manner in which EB-5 petition preparation is managed. U.S. companies that provide advisory and due diligence services to prospective investors - On the U.S. side, various companies provide analysis and advice to prospective investors on the business aspects of EB-5 projects in which they are interested. In the regional center context, services can include describing and recommending several regional centers from which an investor can choose, running background checks on regional center principals, reviewing financial projections for a specific project, opining on the business strategy and projected return on investment, assessing risk factors, and running a comparative analysis of numerous projects. Advisory service companies receive service fees from investors, and may also receive fees from regional centers. 2

3 U.S. companies providing marketing services to EB-5 projects Other U.S. companies act as marketing consultants focused on EB-5 projects and regional centers rather than prospective investors. These companies may be connected to foreign markets and therefore attempt to provide regional center and project principals with up-to-date information about relevant rules and practices in those markets. While developing their networks abroad, they introduce project principals to immigration consultants who can provide investors, and coordinate outreach opportunities such as seminars and conference participation. They also design and execute foreign-language marketing campaigns and translate project materials into foreign languages for distribution toprospective investors. EB-5 marketing consultancies are paid by the EB-5 regional centers and projects and compensation will depend on the range of services requested and other arrangements unique to each project's needs. It is noted that these types of U.S. companies will have to be in compliance with foreign laws governing the marketing and promotion of investment opportunities, and failure to comply may result in adverse action against the company which damages the reputation of a project, and even results in penalties. In China, for example, the Supreme People s Court in January 2011 issued an interpretation of a criminal statute regarding illegal fundraising activities. Under the interpretation, the definition of illegal fundraising includes the solicitation of funds from the general public without approval from the appropriate authorities, or through the use of mass media, presentations, flyers and SMS text messages. It is not definite in the face of the interpretation whether EB-5 marketing activities would fall into this category. Occasional or casual finders - These include attorneys, certified public accountants, and real estate brokers who, because they are connected with high net-worth clients through their normal line of work, may refer a client to an EB-5 project for a finder's fee. Where the finder is an immigration lawyer, they may either be retained by the client to process the EB-5 case, cocounsel with another immigration lawyer who is more experienced in EB-5 work, or refer the 3

4 client out completely to an EB-5 practitioner to avoid malpractice claim or conflict of interest issues. Where an immigration lawyer is the finder but involves another immigration lawyer in preparing the EB-5 petition, transparent communications between the two lawyers should be emphasized and allocation of services should be agreed upon at the outset of the EB-5 case. Registered broker-dealers - This category refers to persons or companies that are, engaged in the business selling securities for the account of others, as defined in Section 3(a)(4)(A) of the Securities Exchange Act of 1934 and the analogous state blue sky laws. Such broker-dealers are generally required to register with the Securities and Exchange Commission, and those who receive finder's fees in the U.S. should check with securities counsel as to whether they might fall within the definition of a broker-dealer. Even those who consider themselves merely occasional finders may be subject to registration requirements. SEC registration requirements do not apply to foreign persons, such as immigration consultants. The presence of many players in the market reflects the abundance of opportunity available. It also indicates that before an EB-5 case is undertaken by an immigration lawyer, multiple parties must generally come to an agreement regarding their respective fees and roles. If a scenario involves an immigration consultant or finder who views themselves as an intermediary for the client, the communication protocol must also be clarified. 2. Fees and Roles The various parties interfacing with EB-5 investors give rise to a diverse array of fee arrangements and relationship dynamics. Typical fee arrangements 4

5 As noted above, immigration consultants charge investors a fee for their service, and also take finder s fees from the investment projects to which they introduce investors. If a project uses a loan structure (EB-5 funds invested into the new commercial enterprise are loaned out for use by a job-creating project), immigration consultants may also want the project principal to assign them a percentage of the interest spread on the loan. In some cases where a lawyer is responsible for connecting a client to a project, the lawyer may take finder s fees from the project. Receipt of finder s fees should be preceded by checking on applicable state and federal securities laws, and accompanied by written disclosure to the investor as required by the ethical rules of the relevant jurisdiction. Disclosure is an issue where the lawyer taking the finder s fee is also the lawyer who will process the investor s EB-5 petition. Regional centers employ a wide variety of fee structures. Some regional centers have in-house attorneys who handle the EB-5 petition filings for their investors, in part because doing so keeps overall costs low. Although a finder s fee is not involved, this arrangement carries inherent potential for conflicts of interest because the in-house attorney jointly represents the regional center and the investor. Full disclosure of potential conflicts of interest should be disclosed in writing to the investor, who should knowingly waive the conflicts. If a regional center does not choose to use in-house counsel for the immigration filings, it likely wishes to control the process by which immigration lawyers are engaged. For example, some regional centers require investors to use the services of an exclusive lawyer. Others ask investors to select a lawyer out of a small panel of EB-5 practitioners approved by the regional center. Both of these scenarios allow the regional center to control and monitor the project-related 5

6 information that is submitted to USCIS. Under current USCIS policy, only the investor s counsel may submit a G-28 as attorney of record. The regional center does not receive notifications regarding the case and does not have the opportunity to see any of the projectrelated information that is submitted by investors counsel to USCIS in response to its request for evidence. Thus, if an investor uses an immigration lawyer unknown to the regional center, it risks the submission of inaccurate information to USCIS that may affect other investors cases. Another advantage of instituting an exclusive or panel lawyer policy is that it gives regional centers the ability to influence the amount of legal fees charged. Projects typically pay finder s fees taken out of administrative fee money collected from investors: investors pay an administrative or processing fee in addition to the threshold capital investment amount, and these fees are used to cover the regional center s costs. A portion of the administrative fees may also be used to cover legal costs for the investor, especially if the regional center s in-house attorney will prepare the immigration filings. Payment of legal fees by the regional center gives them greater control over the preparation of the filings, but investors often pay their own legal fees directly out separate funds. Clarifying Roles When a third party, i.e. broker, agent, or immigration consultant, is involved as a middle person, the third party will generally want to dictate or at least influence how communications with the investor are handled. Different third parties have their own unique set of preferences and requirements, and immigration lawyers should be sensitive students of these so that case management is as smooth and efficient as possible. Third party involvement in client communications raises confidentiality concerns, and may even raise conflict of interest concerns, which should be disclosed and waived in writing by the investor at the outset. 6

7 It should be noted that non-lawyers may try to negotiate with a regional center to handle certain aspects of EB-5 petition preparation. Regional centers should consider the risks they assume when they delegate petition-related tasks to non-legal professionals without substantial knowledge of the EB-5 program. Conclusion Knowing who s who and understanding the fee arrangements underlying a case will provide insight into the practical expectations of the parties involved. This will enable all parties to accomplish their EB-5 objective with maximum efficiency and synergy. 7