EB5 Offering Documents & Common Red Flags – Episode 6

EB5 Offering Documents & Common Red Flags

EB5 Offering Documents & Common Red Flags – Episode 6

What documents are required for an EB5 petition and how do they fall apart?

This episode will explore those immigration investment offering documents and uncover common red flags.
 

 
When participating in an EB-5 investment it is of paramount importance to be as prepared as possible; it is necessary that the investor is able to make an informed decision based on an impartial evaluation. Due Diligence is thought of as an investigation (or audit) of a potential investment or a service to confirm all material facts before an investment / sale. An investor should perform some research before initially working with a developer or project; unfortunately, problems are not often visible without digging deeper into financial disclosures, economic reports or other documents. An experienced attorney, economist or other EB-5 professional is going to inform an investor about problems or warning signs; while they cannot tell an investor YES or NO they can provide the necessary background information to produce an informed decision.
Host Mona Shah and co-host Mark Deal talk with Omar Hakim, an expert in securities and the SEC, as well as Rupy Cheema, co-founder of the company EB-5 Diligence about the due diligence research process, what documentation to look for, and the difference between a bad project and a blatantly fraudulent project.

  • Rupy Cheema explains EB-5 Diligence’s role for investors. The company will provide 30-40 reports that look at the entire project from all aspects including business liabilities, immigration risks, document reviews, site visits, and meeting with project management. The work they put in will help an investor in the vetting process and ultimately make a decision on whether to proceed or not.

 

  • It is explained what Offering Documents are and what is actually required in an EB-5 case is discussed.

 

  • Omar discussed what is required when filing for an EB-5

 

  • What other documents does a developer need and what is included in a Private Placement Memorandum (PPM)?

1. Business Plan
2. Escrow Agreement
3. Economic Report
4. Operating Agreement
5. Loan Agreement

  • Investors need to be aware that some Regional Center will provide expanded marketing material or tailor business plans instead of a complete PPM.

 

  • Rupy explains how important the accuracy of financial documents is. Investors are basing the profitability of a project on provided financial information; outdated or inaccurate financials can ruin a project.

 

  • Most EB-5 real estate projects are large enough that outside market feasibility reports are done. But because these projects can be in development for so long that the feasibility reports become outdated. If a report is more than 2 – 3 years old, the report’s financials must be updated.

 

  • The cost structure of feasibility reports is looked at. Are the costs accurate through the next 18 – 24 months (typical project length)? What factors can affect cost and / or price?

 

  • Third-party sources should be used to ensure that project costs are accurate and that everything remains on track. Ruby talks about the importance of industry experts. Her firm works heavily with real estate developments, when they encounter a project outside of their expertise, they do not hesitate to work with an outside colleague who has more experience in the industry in question.

 

  • Mark and Mona reiterate and discuss the importance of accurate financial especially in regard to job creation. There are EB-5 projects that receive denials from the USCIS because of the inaccuracies in job creation numbers due to erroneous financial data.

 

  • Mona and Rupy discuss financial red flags that transpire during the due diligence process

1. Reliability of the information
2. Financial assumptions are not backed or do not seem reasonable
3. Large underestimations
4. Overly aggressive sales or revenue projections

  • Inconsistencies between budgets may not be a major problem but they can cause for concern, creating a Request for Evidence (RFE) from the USCIS and causing delays in the visa process. Rupy discusses how for firm utilize an EB-5 economist to review financial reports to look for any inconsistencies.

 

  • Mona recounts that story of the South Dakota meat marketing plant an EB-5 project which declared bankruptcy as a result of too much undeclared debt. Not enough due diligence was done on the project to discover the undisclosed debt. Lucky, all of the investors were able to get their green cards.

 

  • Mona and Rupy talk about how to discover a projects undisclosed debt. Basic credit checks and background checks are the simplest ways and can reveal a lot of information.

 

  • Fraudulent projects and bad projects are not the same thing and should not be confused. A fraudulent project is one that has criminal intent build into it from the onset; a bad project is one that has every intention of moving forward but, for whatever reason, does not. It is important to note that the USCIS identifies very few fraudulent projects.

 

  • No project is perfect and every project has some weakness. Investors must compare the strengths and weaknesses of those they are interested in, in order to determine what is best the best fit for them.

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