EB-5 Investment Voice
Mona Shah & Associates Global Podcast Series
Reported by Hermione Krumm, Esq.
EB-5 Investment Voice is the only Podcast series that focuses on the United States immigrant investor visa, EB-5 and foreign direct investment. Mona Shah welcomes guests from the industry including: developers, regional center operatives, attorneys, legislators and politicians.
The complex program that is EB-5 can confound investors, lawyers, and developers alike. In this episode, Osvaldo ‘Ozzie’ Torres, a sought-after EB-5 expert, joins Mona to discuss the ins and outs of administrative fees, explaining how they function to defray offering expenses and the requirements around disclosing how much of the fee is devoted to broker commission. They cover the role played by offering documents, alternatives to the full-blown Private Placement Memorandum (PPM) appropriate for small deals, and the integrity issues addressed by new legislative proposals.
Securities laws ensure the disclosure of material information so that investors can make informed decisions. In fact, if an investor’s mind might be changed based on facts that are omitted or misrepresented, that’s the essence of securities fraud. Yet, the increasingly high price of administrative fees is known to befuddle investors. Where does the fee go? Does any portion of it pay the agent’s commission? Is there any situation in which the administrative fee might not be necessary?
Osvaldo ‘Ozzie’ Torres is uniquely qualified to address these issues, as he regularly speaks at EB-5 conferences on securities issues as well as other aspects of the EB-5 practice. He has enjoyed a 30-year career negotiating complex corporate transactions, including securities offerings, mergers and acquisitions, and other sophisticated deals. He has focused on EB-5 since 2011, working on various EB-5 offerings such as hotel development, multifamily residential construction, senior independent living complexes, healthcare and medical device companies, restaurants and franchises.
Why Projects Charge an Administrative Fee
- Regional Center projects charge an administrative fee of $50K to $85K on top of the $500K capital investment. The capital investment must be at-risk at all times, so no expenses can be deducted from that amount.
- Administrative fees defray offering expenses, and agent commissions or finder’s fees qualify as an offering expense. In the world of securities law, only individuals licensed as broker dealers are eligible to receive a commission; real estate brokers do not qualify.
- In most cases, offerings should be uniform. However, on a practical basis, some investors would demand an admin fee reduction and the practice is frequently done. It is not proper to charge investors different fees, however, unless offering documents disclose this possibility. It presents the issue of irregularity.
Why is There No Uniformity of Admin Fees?
- Mona and Ozzie both contend that back a few years ago, admin fees seemed to be lower. What drives the amount of admin fees these days are what brokers/migration agents are demanding. Most of the time they demand the entire admin fee or more.
- Often times, the last thing the brokers want their investors to know is that the entire admin fee is going to the agents’ pockets, not to include the fee separately charged to the investors from the start. If the investors knew, they would certainly look at the brokers from a new perspective and look at the incentive of an agent to close the deal, i.e. the so-called the salesman’s stake, which is the hallmark of a commission.
- Securities laws require full disclosure around how much of the administrative fee goes to brokers because it is considered a material item. If an investor’s mind would be changed because of some fact that has been omitted or misrepresented, that is the essence of securities fraud.
Potential Exceptions to the Administrative Fee Rules
- If a small developer is raising money for her own project, she should not use any of the administrative fee for personal expenses, as that goes beyond the bounds of expected use. Administrative fees should be used for offering expenses only, unless the offering documents specify otherwise.
- A scenario with no administrative fee would be highly unlikely. Someone needs to prepare the necessary legal documents associated with an offering.
- When associates decide to form a company together, it could be argued that no one party is soliciting the other. In this rare case, offering documents would not be necessary. Whenever there is solicitation, offering documents are essential.
- While disclosure documents do increase the overall cost of the transaction, sponsors should be more concerned with protecting themselves against any allegations. If you are concerned about the economics of a small deal, there is an alternative to a full-blown PPM called an access letter.
What If There is No PPM Where it is Required?
- To determine the consequences, we need to know what types of investors are being solicited or involved and what kind of offering, if any, took place. If we have a Reg D offering with accredited investors, theoretically no disclosure document needs to be provided. If there was reliance upon the right to assets exemption, i.e. the offshore exemption, we must have disclosure documents.
- Without disclosure documents, a developer basically has no protection against allegations that a statement he made is true or untrue. The beauty of a properly drafted disclosure document is that it contains all the material information pursuant to which someone can make an investment decision. In a lawsuit, it would be easier to prove that there was reliance upon the PPM.
- Disclosure documents protect developers and investors alike. USCIS is used to seeing these documents, and the agency is likely to reject any petition that is lacking.
Protections in Proposed Legislations
- Integrity issues are at the core of the new legislative proposals. The industry as a whole is supportive of such integrity reform.
- Most deals gone bad (as illustrated by Jay Peak) involve affiliated party transactions in which the project or developer and the EB-5 fund are managed by the same control person. Proposed legislation would impose regulations to ensure more transparency and financial controls in the form of third party oversight.
Would third party oversight be extended to admin fees?
- While Ozzie believes that admin fees do not ever get to the project, or more accurately phrased as the development or job creating enterprise (JCE), Mona argues that the latest trend has proven otherwise.
- Admin fees would go to the fund or the general partner of the fund or completely to migration agents or otherwise. Generally speaking, the funds that make it over to the JCE is the capital being raised. That’s where we usually see third party oversight with the JCE where a senior lender is usually involved.
- While third party oversight does not usually extend to admin fees or how it is used, there have been instances of oversight relating to the escrow and escrow release. These days you might be looking at I-526 petition filing as a trigger for the release of the admin fee as well as the capital contribution although there might be a holdback generally as to the capital contribution amount. That also means admin fees usually get paid into escrow if there was an escrow agent and does not get paid into the regional center or the developer directly, although Ozzie and Mona have seen deals where admin fees bypassed the escrow and went directly into the new commercial enterprise (NCE) or the general partner of the NCE.
Please see the link below for access to the podcast episode: http://mshahlaw.com/the-ins-outs-of-eb5-admin-fees-osvaldo-ozzie-torres/ .