As the founder of EB5 Diligence, Rupy Cheema knows that an independent and thorough review of an EB-5 project will help inform investor decisions prior to them wiring their funds and filing their I-526 petition. EB5 Diligence provides independent third-party analysis of EB-5 projects, including verification of the claims made in the offering and identification of the investment’s strengths and risks relating to immigration and return of capital. We recently spoke with Rupy, a member of IIUSA, the national not-for-profit trade association for EB-5, about her firm’s redeployment services, including the fiduciary responsibilities of fund Managers, and mitigation of conflicts of interest.

Why should issuers preparing to redeploy retain a redeployment advisory service?

EB-5 fund Managers are not investment advisors. Yet they are asked to make an investment decision when it comes to redeployment — a challenging responsibility, full of conflicting investor goals and potential conflicts of interest for the EB-5 fund Manager.

If an NCE decides to redeploy EB-5 capital as a loan or equity investment into an “entity engaged in commerce,” the engagement of a registered investment advisor (RIA), to evaluate the investment and the process, provides greater protection to both the EB-5 fund and its Manager.

The service should include an independent and comprehensive analysis of the proposed redeployment options including conflicts of interests and mechanisms for dealing with them, exit scenarios, and more.

Evidence of fairness of both the process and the price/terms from an RIA, experienced with EB-5 due diligence and suitability determinations, can be a major advantage in the event of future litigation. This service can also provide the transparency required by the “Duty of Disclosure” for an investor vote.

What are the fiduciary responsibilities of EB-5 Fund Managers, and what happens if the Manager doesn’t obtain a third-party evaluation?

State laws governing EB-5 investment funds impose fiduciary duties on fund Managers. These fiduciary duties include a “Duty of Care” and a ‘“Duty of Loyalty” to investors. Duty of Care requires the Manager to act in a manner that a reasonably prudent person in their position would act. “Duty of Loyalty” requires the Manager to put the fund’s interests ahead of its own.

Both duties require an objective and expert evaluation of the redeployment decision and process.

For some redeployment transactions, the Manager sits on both sides of the transaction — managing the EB-5 fund’s investment and having an interest in the target investment. When such a fundamental conflict of interest exists, a court may employ the strict ‘“Entire Fairness Standard.” Under this standard, a court will independently evaluate whether the price/terms of the redeployment were fair and whether the Manager used a fair process to select the redeployment investment and determine its price/terms.

How will a Manager meet that burden without a third-party evaluation?

In the defense of any allegation of breach of fiduciary duty or bad faith, an independent and comprehensive analysis of proposed redeployment options will make a significant difference.

Even if the Manager of an EB-5 fund has waived fiduciary duties in its organizational documents, it still has a duty of good faith to the fund, and that duty can be challenged in a redeployment transaction, particularly one involving conflicts of interest.

Additionally, when a Manager is seeking an investor vote, it has a duty to disclose all material information to inform that vote. Failure to provide this disclosure, or a disclosure that is later deemed misleading, can undermine the protection that would otherwise be afforded by an investor vote. An independent report can provide the backbone for full and fair disclosure – including both its advantages and disadvantages, as no investment is without risk.

As a Medallion Partner of JTC Americas, Formerly NES Financial, can you explain why working with a third party is important to providing oversight?

When managing redeployed funds, providing transparency adds a layer of reassurance to investors. Robust fund administration is especially important in the situation where the NCE-lender and JCE-borrower entities are under common control. An independent fund administrator will keep track of all fund transfers in and out of accounts and provide regular reporting to investors.

Even if there are no conflicts of interest, Managers can benefit from services provided by fund administrators such as online portals that provide real time reporting and flow of investor funds to and from the project. And investors will be far more confident knowing an established third party maintains vigilant oversight of their funds — and thus their immigration dreams.

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