EB-5 Investment Fraud: Lessons Learned from Failed Projects

EB-5 Investment Fraud: Lessons Learned from Failed Projects.

The EB-5 Program requires that petitioners make an “at risk” investment into a New Commercial Enterprise (NCE), that the petitioner sustain that investment for the requisite period of time and create new “qualified” jobs as a result of that investment. Nowhere in these requirements is the EB-5 petitioner expected to make a foolish or senseless investment or expose themselves to EB-5 investment fraud. Elsewhere in this website you will find information on due diligence and how it is incumbent upon the prospective EB-5 investor to conduct a proper due diligence.

An EB-5 investment involves a substantial amount of money.

In the perspective of the regional center program, where a pooling of multiple investors is involved, this means that tens or even hundreds of millions of dollars could be involved. Bad actors have made their way into EB-5 and that was the focus of the United States Congress when they passed the EB-5 Reform and Integrity Act of 2022. Our Congress recognized the fraud within the EB-5 industry and they acted in the hope of preventing or reducing future incidents of fraud.

Don’t be scared of the EB-5 program.

The intent of this article is not to scare you away from EB-5 but to scare you enough that you conduct that proper due diligence beforehand with the goal of not becoming one of the poor souls that has been defrauded. An EB-5 investment is intended to be a “life changing” event but for good reasons not bad reasons. Prospective investors should learn from the past in the hope of not repeating history.

Failed EB-5 projects.

The listing of failed EB-5 projects below does not even come close to all the failures within the EB-5 industry. There is a common denominator amongst these projects though and that is the fraud that was involved. In the United States we have a name for this type of crime based upon the targeting of a specific group of individuals. “Affinity Fraud” is an investment fraud that targets a specific group of individuals. In EB-5 the targeting may go deeper than just those seeking permanent residence to the United States. The “targets” are many times prospective EB-5 investors from a specific country and the bad actor could have connections to that same home country.

Prospective EB-5 investors should never take anything at face value.

Keep it Simple: Prospective EB-5 investors should never take anything at face value. Some EB-5 offerings of the past, that resulted in EB-5 investment fraud, included claims that should have triggered concerns amongst prospective EB-5 investors. As an example, the AnC Bio project claimed that it would create a “state-of-the-art stem cell laboratory and artificial organ manufacturing plant” and that this plant would generate hundreds of millions of dollars in new revenue. There was one immediate problem and that was a lack of FDA approval. These kinds of wild claims were not limited to just the AnC Bio project. Another was a gold mine that would easily return capital to investors either though a cash repayment or in the way of newly mined gold from the gold mine itself. A common denominator amongst these was the one project had not manufactured an artificial organ, and the gold mine had yet to produce any gold!

Done right, EB-5 can provide tremendous benefits to all parties involved. Done wrong, EB-5 can create tremendous harm and the harmful effects are most likely to be felt by the immigrant investors.

By “keeping it simple” we mean look for something that makes sense and it falls in line with other successful EB-5 offerings. (Not that this is far as you have to look but rather as a means of determining, on the surface, what seems to make sense as compared to something that just does not sound right.)

In EB-5, qualified capital expenditures equate to jobs being created. The same can hold true for revenue being created however, it is generally regarded to be safer in EB-5 to project jobs from capital expenditures than from projected revenues.

A large construction project will have fine-tuned estimates on what the overall construction spending will amount to. An economist can then use an economic methodology to calculate EB-5 qualifying jobs from the capital expenditures of the construction project. EB-5 qualifying jobs related to revenue projections do not have the same assurance of being created therefore there may be a greater risk associated to job creation.

Government Reporting of Examples of Failed EB-5 Projects:

Jay Peak EB-5 AnC Vermont Project

Idaho Gold Mine

Chicago Convention Center

SEC Charges Lawyer and Her Husband in EB-5 Fraud

Summing up

It’s important to remember that EB-5 investments are not without risk, as they are tied to the success of the commercial enterprise in which the investment is made. Therefore, it is crucial to conduct thorough due diligence before making any investment, including researching the commercial enterprise, regional center, and individuals involved in the project. Additionally, prospective investors should consult with experienced counsel to ensure that they fully understand the risks and benefits of the EB-5 program and their investment options. Taking these steps can help investors mitigate the risk of fraud and make informed decisions about their investments.

Feel free to contact us directly with any questions you may have. Our staff will be able to help you or to put you into direct contact with the parties that can.

Please Note:

AIM works exclusively with developers and our compensation comes from the developers we work with. However, we understand the importance of the EB-5 investor’s needs and priorities, and we strive to ensure that our developers take these into consideration. Our goal is to educate our clients (developers) on what matters most to prospective EB-5 investors and how certain structuring in a Job Creating Entity can benefit all parties involved.