Even as the EB-5 Regional Center Program received another short-term extension on December 9 with the Continuing Resolution, comprehensive program reforms and a long-term extension are projected before April 2017. In recent legislative draft proposals, a strong emphasis has again been placed on protecting stakeholder rights. The proposal language mirrors previous EB-5 legislative drafts, which was catalyzed in part by the infamous Jay Peak fraud incident.
The highly-publicized EB-5 fraud incident forced legislators to take a closer look at tenuous pre-existing integrity measures and ask, “How did our measures fail in preventing fraud of that scale from occurring, and what measures would have prevented it?”
After Jay Peak, JTC Americas, formerly NES Financial, conducted a study on the events and abuses that were becoming better known. Beginning with the Chicago Convention Center, the first ever SEC civil enforcement action in the EB-5 industry, and concluding with Jay Peak, we found that the majority of issues arose in the time after money left escrow and before it moved into the JCE.
The Goodlatte bill’s Account Transparency requirement is directly targeted at interfering with fraud during this stage and demonstrates why a third-party administrator is so important.
However, the EB-5 industry is hardly the first asset class to have third-party oversight. Moreover, much of H.R. 5992 has already been widely deployed by the EB-5 industry, a fact not lost on the USCIS. Both the Goodlatte bill’s Account Transparency requirement and the USCIS Director have proposed a requirement for investors to be able to log in online given the mainstream application of this practice. Additionally, the scope of the Account Transparency requirement is relatively narrow compared to the overall life cycle of EB-5.
While portions of the proposed legislation are somewhat vague, it isn’t difficult to identify best practices. The EB-5 industry would do well to get ahead in implementing best practices as to not find themselves in a legislative stalemate later.
The bottom line is as straightforward as it is important: investor funds must be handled properly. Legislators have already realized that the maturation of EB-5 necessitates the same protections from bad actors that have long plagued traditional funds.
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