On May 15 2013 by H. Ronald Klasko

Perspectives on EB-5 Due Diligence

Having returned from my second trip to China in the last five months (and my first since the SEC investigation of the Chicago Convention Center EB-5 project became public), I am struck by the two key words that were pervasive in my discussions with investors, agents and the Chinese media.  Those two words are “due diligence.”

Especially since the Chicago allegations became public, investors and the representative had a fresh appreciation of the importance of having due diligence review of potential investment projects.

I emphasized during my presentations in China that three levels of due diligence review are necessary.  Since obtaining US permanent resident status is generally the prime motivation behind an EB-5 investment, immigration due diligence is critical.  This is a service that we provide to investors, investors’ representatives and agents.  We have a thirty plus point proprietary immigration due diligence checklist that we have created for this purpose.  This is also the checklist that we use when we are the immigration attorney for the regional center or the project developer.

The second level of due diligence is financial due diligence to be conducted by a qualified investment advisor, accountant or similar financial professional.  This person does not necessarily need any EB-5 background.  The financial due diligence covers issues such as financial risk of the investment, exit strategy, rate of return, financial solvency of the project developer, sufficiency of collateral for any EB-5 loan and similar financial issues.

The third level of due diligence is business/common sense due diligence.  Does the project make sense?  Has the project developer successfully completed similar projects?  Are the timelines, occupancy rates, revenue projections, expenditure projections reasonable and in conformity with industry standards.  If the business plan does not seem credible to a layman, it may not be credible.  If it is not credible, it likely will not withstand USCIS scrutiny.  Even if it did withstand USCIS scrutiny, the project may never go forward as planned.

We have long provided investors with a due diligence list of questions to ask when considering a project for investment.  In light of recent developments and changed USCIS standards, we have revised the due diligence list.