On Mar 07 2016 by H. Ronald Klasko

A 3-Step Due Diligence Primer for Migration Agents

Our EB-5 team spends a lot of time meeting with and training migration agents, who have the difficult task of choosing projects to promote for potential EB-5 investors. I recently completed a full day agent training session on due diligence at the EB-5 Investors Conference in Las Vegas. As this blog is published, two attorneys from our Klasko EB-5 Team are in China performing agent due diligence training. Hopefully, this primer will be of value to agents who are not able to attend our training sessions.

EB-5 due diligence is a complex 3-step process. First, there are many issues that need to be reviewed carefully to determine whether a project is EB-5 immigration-compliant. Completely different issues need to be evaluated to determine the financial risks of a project. Finally, a different type of due diligence is required to ensure that a prospective investor is investing in a project that has compliance systems in place to be able to maximize the chances that its investors will be able to achieve successful condition removal.

This blog discusses the 3-step due diligence process in detail.

Step 1

Step 1 of due diligence is immigration due diligence. This involves reviewing a project for compliance with USCIS regulations, precedent decisions and policies to determine the likelihood that a project will receive I-526 approval. Many issues go into an immigration due diligence review. Some examples are:

  • Do the offering documents comply with the “at risk’ requirements, and do they avoid any “guaranteed redemption”?
  • Are the escrow arrangements consistent with USCIS policy?
  • Is the business plan fully compliant with Matter of Ho?
  • Does the project comply with the 2 ½ year rule for job creation?
  • Are only indirect construction jobs counted if the likely construction timeline is less than 2 years?
  • Are the assumptions in the business plan supported by sufficient and credible source documents?
  • Is the state TEA letter current and valid?
  • And many other issues.

The largest agents may have sufficient qualified people in house to perform immigration due diligence. If so, the staff must be sufficiently knowledgeable of EB-5 law and be committed to keeping up with constantly evolving USCIS policy.

For most agents, the immigration due diligence process needs to be outsourced to qualified EB-5 immigration counsel. We perform this service for many agents.

Step 2

Achieving I-526 approval is very important, and perhaps the most important issue for many investors. However, it is not the only issue. Agents will have unhappy investors if they obtain their conditional green card but lose most or all of their investments. This is not a matter of immigration due diligence – it is a matter of financial due diligence.

For this purpose, unless the agent has a qualified in-house staff to thoroughly evaluate an investment project in the U.S., it is necessary to obtain due diligence review from a qualified broker-dealer, accountant, business lawyer or financial advisor. This due diligence review will include issues such as likely viability of the business; risk of business failure; exit strategy; viability of the industry; viability of the location; review of the capital stack; analysis of security for the loan; likely cash flow to repay investors; and many other issues.

Step 3

Many agents focus on the first two steps of due diligence, but do not focus on the very important third step. The third step focuses on the likelihood of investors obtaining condition removal and therefore obtaining their permanent green cards, which is ultimately the most important issue to the investor.

Due Diligence – Step 3 involves an analysis of the regional center and/or project’s compliance systems. A project cannot begin to deal with the condition removal process at the end of an investor’s conditional residence. That is a recipe for disaster. Rather, the compliance process begins at the time of the first investor’s investment and the time of the first expenditure of the investor’s funds.

The condition removal process requires a regional center and project to be able to trace and document every investor’s investment into the escrow account; every transfer of funds from the escrow account to the NCE; every transfer of funds from the NCE to the JCE; and the actual usage of the funds by the JCE to create jobs. The condition removal process also requires a detailed accounting of all expenditures for construction with a breakdown between various soft costs and hard costs. If the operations jobs are to be counted, a system must be in place to provide a detailed accounting of revenues of the project.

This is a process that requires the appropriate tracking systems, data entry systems, loan administration systems, auditing and legal review on an ongoing basis.

As part of the due diligence process, agents should ensure that they recommend a project that has in place the necessary compliance systems, procedures and professionals to maximize the chances of a smooth and successful condition removal process.

Our dedicated Klasko Compliance team provides this due diligence service for our clients’ projects. Agents should insist on a project having our firm or another qualified firm to perform this service.

However, the safest project is a project that not only utilizes Klasko Compliance, but also avails itself of systems, procedures, software and other services that provide the data necessary for our law firm to provide the legal auditing and legal compliance review. We recommend NES Financial’s suite of services for this purpose. We recommend that agents review the NES services and products at www.nesfinancial.com. If requested, we are happy to make introductions of NES Financial to interested agents.

With the complete data provided by NES, we are able to perform compliance due diligence with the goal of having all information prepared and ready long before the date of filing of the first investor’s condition removal petition. If our review reveals variations from the business plan and the economic projections, we are able to address those issues and either resolve them or, at worse, identify them at an early enough stage for an investor to take protective action.

For Step 3 Due Diligence, NES Financial has designated Klasko Compliance as the only immigration law firm solutions provider. Projects that utilize our joint compliance due diligence solutions earn Medallion Award status, which provides an agent the highest level of assurance that the project is prepared to do everything necessary to achieve the investor’s ultimate goal of unconditional permanent residence status.

With an increasing number of projects that have been the subject of SEC investigation, that have had project denials or that have failed to return money to investors, due diligence is an increasingly important and difficult process. Hopefully, this blog will provide agents some guidance on these three steps of due diligence that they should address when selecting a project to promote to their investor clients.