Fortune dissects EB-5: "The dark, disturbing world of the visa-for-sale program"

Fortune magazine today offers a deep investigation into the EB-5 immigrant investor program, The dark, disturbing world of the visa-for-sale program, by Peter Elkind and Marty Jones.

The narrative focuses at length on a notorious case in Chicago, “World’s First Zero Carbon Platinum LEED-certified and 100% Allergen Free convention center and hotel complex,” promoted by Anshoo Sethi, which was clearly fraud.
But Elkind's investigation confirms and deepens much of what I've reported: that the program itself is inherently suspect:

Today EB-5 commands bipartisan support—and it’s booming. Believers tout the program as a “win-win-win” that helps immigrants and U.S. workers, and provides valuable investment in American communities. A trio of billionaires—Warren Buffett, Bill Gates, and Sheldon Adelson—recently endorsed the program in an op-ed column in the New York Times.
But because the EB-5 industry is virtually unregulated, it has become a magnet for amateurs, pipe-dreamers, and charlatans, who see it as an easy way to score funding for ventures that banks would never touch. They’ve been encouraged and enabled by an array of dodgy middlemen, eager to cash in on the gold rush. Meanwhile, perhaps because wealthy foreigners are the main potential victims, U.S. authorities have seemed inattentive to abuses.
Certainly, there are thriving, completed successes... Others who have examined the program view it very differently. They question whether it generates many jobs—especially in needy areas...
There are two reasons for that. First, the government is exceedingly generous in its employment tally. It gives EB-5 investors credit for all the jobs theoretically spawned by a project even when EB-5 money represents only a sliver of its financing. Second, for many mainstream ventures, EB-5 money isn’t really creating jobs—it’s merely saving developers money for projects that would be financed anyway. (Indeed, those big companies are actually “hijacking” money from worthy smaller investments in hard-hit areas, argues Michael Gibson, a financial adviser who vets EB-5 investments.)

What changed

As explained, the 2008 financial crisis launched EB-5 as a source of cheap capital:

At the heart of the program is an unusual trade: Because the immigrants care far more about getting a green card than anything else (their families get visas too), they’re willing to accept a token financial return. In fact, when “administrative” fees of about $50,000 are added, they’re typically paying for the privilege of sinking $500,000 into a U.S. venture for five to seven years—with no guarantee that they’ll ever get it back. And in part because of distance and language barriers, the targets of EB-5 pitches seem ill-equipped (or disinclined) to assess the business risks.
Though the government issues the visas, private developers reap the benefits. After middlemen get their piece, the cost of EB-5 capital runs between 4% and 6% a year—less than half of what developers would typically have to pay for mezzanine debt or to equity investors. Raising $100 million through EB-5 can add $20 million to a project’s bottom line.
The growing demand for EB-5 financing is being met largely by new Chinese millionaires, eager for greater freedom and less pollution, or to send their kids to college in the U.S. More than 80% of the program’s applicants now come from China, making it the mother lode for EB-5 prospecting.

The article includes a visit to Brian Su’s glitzy annual “Invest in America Summit,” held in March in Shanghai. And, as described, "EB-5 fundraising is a messy process, more like pitching vacation timeshares than any normal form of deal finance."

The lack of safeguards

The article explains:

Despite the arrival of institutions like Related, EB-5 remains a wild and woolly realm. For starters, few of the usual safeguards for multimillion-dollar financings exist. EB-5 investments are typically sold through unregistered securities offerings and rarely involve broker-dealers, so deal documents receive no SEC scrutiny and face little due diligence. Even the corporate attorneys who prepare offering documents rarely check their clients’ claims or backgrounds, according to EB-5 lawyers and experts. Many EB-5 attorneys represent both the project and the investors, a clear conflict, and take undisclosed fees from developers—up to $60,000 per immigrant—to steer clients to particular projects.
The EB-5 program isn’t overseen by a financial regulator but by the U.S. Citizenship and Immigration Services (USCIS), part of the Department of Homeland Security. Accustomed to processing visas and conducting immigrant background checks, USCIS is ill-equipped to review business plans, job- creation studies, and securities offerings. The SEC retains the power to police fraud. What that means is the agency has no mechanism to sniff out a problem until it has exploded, at which point the agency can only clean up the mess.

Gaming the system

The article explains:

One essential part of gaining USCIS approval was crafting an acceptable “targeted employment area,” or TEA. The EB-5 law requires investment in a district that is either rural or has a jobless rate that is 150% of the national average. But after years of industry pressure, it’s now USCIS policy to automatically accept any state designation of a TEA, even though states routinely approve gerrymandered districts that tack on distant high-unemployment tracts to allow EB-5 endeavors in wealthy areas.

Will anything change?

The article concludes:

In the aftermath of the scandal—merely the biggest to afflict the EB-5 program—the SEC has brought a second fraud case; issued a formal “investor alert”; and opened a broader inquiry into the business, reportedly issuing subpoenas to more than a dozen regional centers. USCIS says it has beefed up its oversight, hiring a team of experts to more closely scrutinize business proposals. Still, the government hasn’t tightened the rules governing the visa program.
Industry practitioners such as consultant Wright seem to like EB-5 just as it is. As he put it in an email, the Sethi case “is an example of how the U.S. system works to protect investors. The SEC, FBI and [USCIS] stepped in to investigate this situation, and investors were able to recover their funds.”
For its part, the industry trade organization, the Association to Invest in the USA, has launched a new “legislative action center” to “empower EB-5 stakeholders to tell their stories of capital formation and resulting job creation to federal decision-makers in Congress.” Their goal is to lift the cap on visas and dramatically expand the program. Their slogan: “EB-5 is working.”

My posted comment

This very strong piece touches on most of the very troubling aspects of the EB-5 program, many of which I've dissected in my Atlantic Yards Report coverage:

It should be noted, however, that the deception involves not merely small-timers in Chicago.

Major, NYSE-traded corporations like Forest City Enterprises are involved, via the company's New York-based affiliate, Forest City Ratner. The first round of EB-5 funding was purported to go into the glamorous Barclays Center in Brooklyn, but had nothing to do with the NBA. The promoters at the New York City Regional Center admitted to Reuters some of their marketers were misleading potential investors, but disclaimed responsibility.

Actually, as shown in web video I captured from China in 2010, a New York City Regional Center representative misled investors directly.

Now Forest City is back promoting another Atlantic Yards investment, again misleading investors, as I've documented. And the pitch was apparently successful.

What's astounding/outrageous about this latest round of EB-5 funding is that Forest City is partnering with a Chinese government-owned investor, the Greenland Group. So it sounds like something out of The Onion, but it's true: the Chinese government would profit by hawking U.S. green cards to Chinese immigrants.

It's also worth noting how, just as the USCIS has relaxed its standards regarding Targeted Employment Areas (for Atlantic Yards, I called it the "Bed-Stuy Boomerang," given the shape), so too has it relaxed its rules regarding bridge financing, allowing EB-5 funds to substitute for higher-cost capital.

Dartmouth's John Vogel had a particularly insightful analysis last year:  "One of the oddities about the EB-5 program is that the U.S. government is giving out the green cards, but the entrepreneur who puts together the investment gets the money. This scheme seems inefficient and open to corruption. If our government really believes that it is a good idea to sell green cards, maybe we should drop the pretense that this is a job creation program. It might be more efficient to have the money go directly to the U.S. Treasury and reduce the deficit by billions of dollars a year. In fact, the U.S. government could auction off these green cards and perhaps raise even more money."

EB-5 gains much political support, because elected officials like "jobs" and "economic development." Few bother to scrutinize EB-5. Here's coverage of one Senate hearing.

But EB-5 is not really about immigration, or economic development. It's not a left- or right-wing issue. It's about good government. As Fortune's investigation shows, EB-5 deserves much more critical attention.