Much has been written about the Chicago Convention Center project over the last two months. In early February the Securities and Exchange Commission (SEC) filed suit against the Regional Center and its principals alleging violations of securities laws and fraud. Appropriately, both the SEC and the United States Citizenship and Immigration Service (USCIS) are being recognized by the EB-5 community for their efforts in protecting the integrity of the EB-5 program in the face of this investigation and its aftermath. The two agencies worked closely together to investigate the situation and take action before any further harm could be done.
As a result of this action, Regional Centers are focusing more on ensuring compliance with SEC regulations and providing more security and transparency to their investors. Investors themselves are carrying out more extensive due diligence, and everyone is looking to see that funds are held, invested, and managed in the most secure ways.
In the initial complaint filed by the SEC, they highlighted the fact that a significant portion of the administration fees paid by investors had either been spent or were unaccounted for. This drew a significant amount of the media’s attention in the matter. What surprises me most is that these articles fail to emphasize that the subscription funds invested, a far larger amount in comparison to the administration fees, were safely being held in an escrow account and 100% of each investor’s subscription funds was available to be returned to each and every investor as promised.
Far too many of us have participated in what appeared to be very safe investments in our own country, and despite the protections afforded by the SEC, our money was lost due to fraud, misrepresentation, or just poor management (i.e., WorldCom, Enron, Lehman, Nortel). The same risk existed in the case of the Chicago Convention Center, where foreign investors found that the project they had invested in may have in fact been fraudulent and that they were in danger of losing not only their money, but also their ability to obtain a United States green card through their investment. Yet despite the failure of the investment, and thanks in large part to the decision to raise the capital for this project in an EB-5 escrow account, each investor will be refunded 100% of their subscription funds in addition to some, if not all, of their administration fees. I have really enjoyed sharing this news at recent industry events. Just last week at an ILW event when I told the audience about this great news everyone was thrilled. Some people even clapped!
The resolution of the troubles with the Chicago Convention Center investment is a perfect example of the importance of the SEC and its regulations. But, we shouldn’t forget that using industry best practices, such as holding funds in escrow, is what really prevented the investors from losing all of their money. Perhaps surprisingly, there are currently no regulations dictating that EB-5 funds be held in escrow or how those funds are to be managed at all. It is up to us as stakeholders to promote best practices in the industry and, given the positive end result for the investors in this case, it is likely we will start to see future investors demand it as well.
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