Friday, March 02, 2012

A blow to the EB-5 immigration investment industry: heavily promoted project in Vermont sees partnership ended, with questions looming

To attract immigrant investors under the federal government's EB-5 program, promoters must design projects that:
  1. provide sufficient job creation (10 jobs, however indirect, per $500,000 investment) to generate green cards for themselves and their families
  2. be secure enough investments so that the investors, after granting a low- or no-interest loan for five years, get their money back from project promoters.
(With the Atlantic Yards EB-5 investment, promoters have gotten the United States Citizenship and Immigration Services to sign off on job-creation figures that I think bear little relation to reality, while it's way to soon to see if the investors will get their money back.)

A setback for Jay Peak

One project that has proven its bona fides, at least with the job-creation challenge, is the Jay Peak Resort in Vermont, which has garnered much good press as an EB-5 exemplar. Its president, Bill Stenger, has testified at least twice before Congress about EB-5, including before a Senate Committee led by his friend, Sen. Pat Leahy (D-VT).

So it is a serious blow to the EB-5 industry that, as reported by EB5Info.com, the firm that brokered investments in Jay Peak to potential investors has ended "what may have been the longest and most successful agent/broker relationship in EB-5 visa history," with letters to more than 100 immigration attorneys. (Note that we haven't heard Jay Peak's side of the story yet, as a commenter points out.)

Writes EB5Info's Michael Gibson:
The combination of marketing to immigration attorneys and substantial overseas promotion led to the funding of one of the largest EB-5 regional center projects in the program today.  Statements made by Bill Stenger and James Candido with the Vermont Agency of Commerce and Community Development (VACCD) put the amount of investment in the state at over $200 million and 400 investors. Assuming that figure to be correct, the fees paid to agents and attorneys involved with the sale of these securities offerings (the subscription fee used to be $65,000 but is now $50,000) would be well over $20 million.
(Note that the Atlantic Yards EB-5 effort, in which the New York City Regional Center raised $249 million in a low-interest loan for Forest City Ratner, is even larger.)

What happened?

So, what happened? Gibson can only quote speculation that either Jay Peak is in shaky financial condition or the job creation numbers will not be met.

Given that economists' reports are presumably aimed to meet the requirements of the law, I'd say that the issue is more likely financial.

I actually interviewed Vermont official Candido in January, who said of investors, "everything points to them getting their investment back" but stressed "that's not under the jurisdiction of the government."

The role of the state-run regional center--the only publicly overseen regional center, which are otherwise private investment pools federally authorized to recruit investors-- "is to make sure that indirect job creation is happening," he said. In other words, the state agency must make sure the economist's report makes sense.

Because Jay Peak did not start getting investors until 2008-09, none have seen their investment periods reach maturity, so they haven't had a chance to get their money back, Candido said. The investment is a private transaction, he said, "unless a company we see is blatantly or intentionally trying to deceive investors."

Perhaps we will learn if, in fact, Jay Peak's former partner will make that allegation.

Lingering questions

Gibson, one of the few people to offer due diligence services for potential investors, raises several questions at the end of his post:
The question of whether federal and state regulators would consider Rapid USA Visas to be an unregistered broker whose activities included marketing, soliciting and facilitating the sale of a U.S. security in exchange for a commission (finder's fee) will be explored next, as well as the State of Vermont's role in supervising the activities of the projects that fall under their jurisdiction. Questions must be raised as to VACCD's role in supervising the marketing, promotion and solicitation of these projects involving possible unregistered brokers / agents and the payment of fees to unregistered persons (such as attorneys) in accordance with federal (SEC) and state securities laws and regulations.

We will also explore the role of immigration attorneys in the recommendation of securities to their clients, issues of ethics, dual compensation, due care, conflicts of interest, and their liability should the Reg. D exemption found to have been violated and the offer rescinded, as well as what potential liability they could face should there be a failure of the project to create sufficient jobs to remove conditions or fail to repay a significant portion of the capital invested.

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