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The contents of this webinar/presentation are for educational purposes only (i.e., not legal advice).

EB-5 Regional Center Compliance: A Systemic Approach to Long Term Success

April 7, 2016 | 3:00 PM EST/12:00 PM PST

Sponsored by:

Today’s Panelists

Jessica DeNisi Associate, Klasko Immigration

Law Partners, LLP

Steve Strnisha CEO, Cleveland

International Fund

Osvaldo Torres Partner, Torres Law P.A.

Ed Beshara Managing Partner, Beshara,

P.A.

Reid Thomas Executive Vice President, NES

Financial

Introduction of Presentation

• The panelists will be discussing the best practices and compliance recommendations to provide guidance to regional centers seeking to conduct businesses in a manner that will foster the growth and success of the EB-5 Program.

• The Best Practices Committee, chaired by David Souders, has kindly provided a draft of the Best Practices “White Paper” (still to be approved by all members) which is titled IIUSA Recommended Best Practices for EB-5 Regional Centers.

• For the purposes of this presentation, we thank the Best Practices Committee and Chair.

Introduction to Recommended Regional Center Best Practices

EB-5 Regional Center Best Practices is not meant to be a list of legal requirements, but rather is meant to provide guidance to Regional Centers seeking to enhance their operations and provide protection to the Regional Center, associated entities, investors, and other related parties.

• Best Practices can refer to the Regional Center as manager of the New Commercial Enterprise and/or should also apply to separate projects that will pay for the license of a Regional Center designation.

• Regional Centers should have sufficient funds to hire necessary staff and have internal office systems to oversee and manage the EB-5 projects to make sure they are in legal compliance with the securities laws, business plans, and legal and financial infrastructures.

• This will help the Regional Centers and Projects to provide the required documentation for the filings of the annual I-924A reports, as well as the preparation and filing of the I-829 Petition to remove conditions to investors’ conditional permanent residency.

Introduction to Recommended Regional Center Best Practices (continued)

Regional Centers should use Due Diligence and reasonable underwriting standards in deciding to associate with a project developer and its key persons.

Regional Centers should utilize a Third Party Fund Administrator to implement fund control measures for tracking the lawful source, transfer, and disbursement of funds (such as funds moving from escrow to the NCE and to the JCE).

The Regional Center and/or Project acting as Issuer should disclose the following to the Investors and Regional Center:

• Material Changes • I-526 Denials • Job Creation Deficiency

Introduction to Compliance Guidelines EB-5 Regional Center Compliance will refer to the minimum legal and ethical standards of conduct by which every Regional Center and/or EB-5 Project must abide.

• Set compliance standards would apply to the EB-5 business plan, economic report, legal and financial structures, and securities offering documents.

• Compliance Guidelines will clearly show that the words “United States,” “U.S.,” and “Federal” shall not be included in the Regional Center’s and/or Project’s name, or have logos affiliated with the U.S. Government.

• Regional Centers should seek approval from any non-federal government entity for use of any City, County, or State name.

• The Regional Centers should make sure that the associated Projects are providing the security offering documents that are legally compliant.

• It seems that the Best Practice for the Regional Center is to have its own Team of Professionals to review the EB-5 compliant documents prepared by the EB-5 Project and the Project’s Team of Professionals

Introduction to Compliance Guidelines (Continued) EB-5 Regional Center Compliance will refer to the minimum legal and ethical standards of conduct by which every Regional Center and/or EB-5 Project must abide.

• Set compliance standards would apply to the EB-5 business plan, economic report, legal and financial structures, and securities offering documents.

• Regional Centers should seek approval from any non-federal government entity for use of any City, County, or State name.

• The Regional Centers should make sure that the associated Projects are providing the security offering documents that are legally compliant.

• Set compliance standards would apply to the EB-5 business plan, economic report, legal and financial structures, and securities offering documents.

• Regional Centers should seek approval from any non-federal government entity for use of any City, County, or State name.

• The Regional Centers should make sure that the associated Projects are providing the security offering documents that are legally compliant.

Integrity and SEC Laws Compliance • Many of the presently proposed goals of EB-5 program reform are laudable and

appropriate.

• Others are based upon a cry for change that may lead to more, possibly unnecessary, regulation that will likely have a chilling effect on the industry and will certainly create regulatory ambiguity.

• Every single act of wrongdoing by the several bad actors in the EB-5 industry that have been discovered and prosecuted to date reveals that sufficient and effective laws, rules and regulations are already in place to punish wrongdoers.

Integrity and SEC Laws Compliance (continued) • In the end, the integrity concerns may be based on a lack of clarity regarding the

nature and role of regional centers. And that is where the compliance conundrum begins.

• At its simplest, a regional center is an economic unit authorized by USCIS to conduct economic activity that will promote economic growth within the geographic area designated by USCIS. Of course, the main benefit of locating a project within a regional center is the ability to count indirect as well as direct jobs in meeting the 10 job minimum requirement.

• Where the regional center itself (or through an affiliate) owns and controls the job creating entity, the new compliance issues proposed in the ‘‘American Job Creation and Investment Promotion Reform Act of 2015’’introduced by Senators Leahy and Grassley (the “Leahy/Grassley Bill”) would seem less problematic.

Integrity and SEC Laws Compliance (continued)

• However, what if the regional center “sponsors,” contracts with or “rents” its regional center status to an unaffiliated new commercial enterprise (“NCE”)?

• What degree of oversight and control should the regional center exercise over the activities of the unaffiliated NCE?

• What liability should the “rent-a-center” incur for the misdeeds of the NCE to which it rents its status? Many are divided on the answers to these questions.

• In the typical EB-5 loan model deal, the NCE is the entity that pools the EB-5 investment funds and is the issuer or seller of the securities to the EB-5 investors.

• Once the EB-5 funds are available for investment, the NCE then makes a loan to the job creating entity.

• As the issuer of the securities, the NCE (and potentially its controlling persons) would generally bear any liability for any material omission or misstatement in connection with an offering.

Integrity and SEC Laws Compliance (continued)

• If the regional center or its controlled affiliate is the issuer, then in such case the regional center should bear the liability for the harm.

• If, on the other hand, the regional center is not the issuer, is not affiliated with the issuer or does not otherwise control the issuer, the Leahy/Grassley Bill would have imposed or imputed such “issuer liability” to the “rent-a-center.”

• How so? Because the regional center would have been required to issue a certificate affirming that the offering complied with applicable securities laws.

• But what would it take for a certifier to become sufficiently capable of and comfortable with providing such certification?

• Giving a certificate that essentially “blesses” an offering is not a matter to be taken lightly.

Planning for I-829 Begins at I-526

 Project should set up procedures for tracking flow of funds and job creation BEFORE raising money

 Investors should ask what procedures are in place before investing

 Investors should demand projects that have an established compliance program

The Importance of the Audit Trail

About 90% of the I-829 petition comes down to documenting two things:

Flow of funds from the investor to escrow, then to the NCE and JCE, and NOT back to the investor during the conditional period

Job Creation

Documenting EB-5 I-829 Petitions

 Investment and commercial enterprise have been sustained throughout two-year conditional residence period

 NCE established (or invested into) by the investor

 Investor invested required capital

Documenting Job Creation

 What is the burden? Show the underlying facts in the econ report came true and the jobs are “deemed to be created.” In other words, prove the model

 Documentary Evidence – Verification of underlying facts found in the economic report

 Direct employees – payroll records, I-9s and immigration status

The I-924 A On-going Compliance

The I-924A request data specific to the particular fiscal year, including:

 The number of I-526 and I-829 petitions approved, denied or revoked

 The name and address of each commercial enterprise sponsored by the RC that received EB-5 funds and the amount of funds

 The total number of jobs created at each NCE or JCE during the fiscal year

 Total EB-5 money invested through the RC during the fiscal year across all NCEs

Ongoing compliance

CIF: Regional Center Operations

CIF focuses its investment on new , job creating Real Estate Development through debt financing (USCIS designated Jan. 2010)

 Operate as an arms length lender to developers or institutions seeking EB-5 financing

 Initially projects exclusive to Northeast Ohio, recent expansion through approval of I-924 amendments to other major Ohio and Pennsylvania markets

 Assist others in similar markets applying for regional center status and offer on a contractual basis marketing and back office functions related to loan monitoring, investor relations and EB-5 compliance to less experienced regional centers

 CIF projects include a wide range of real estate asset classes  Office, Hotel, Retail, Residential, Healthcare , and Parking

 CIF focuses on projects of scale due to certain fixed costs related to all offerings  Generally project size of $35 million and up

CIF Activity Profile  $220+ million of EB -5 funds under management for 8 projects, comprising 12 loans

 370 I-526 approvals for Conditional Residency Status to date

 Approximately 87 Conditional Green Cards awarded to CIF’s EB-5 investors and their immediate family members to date

 CIF’s first EB-5 Investors are being issued Permanent US Green Cards; first repayment of EB-5 investors is anticipated in 2016

 China is primary market but investors come from multiple countries

 $44.5 million in current offerings, contingency planning underway to deal with market uncertainty and potential changes associated with program reauthorization

CIF’s Compliance Considerations Commitment from outset to EXCLUSIVE FOCUS on EB-5 and BEST PRACTICES (reduce business risk and gain market advantage)

 Creating the Team  Internal Team-Underwriting, Marketing, Operations, Invt. Relations, Finance  External Team-Legal (immigration & transactional), Economist, Escrow Serv., Foreign Finders, Tax and Audit Balance Internal for control & consistency with External expertise

 Monitoring the Team  Stay current with program developments and trends (IIUSA, ect.)  Best teacher is experience (modifications from offering to offering)  Stay consistent to principals but open to making necessary changes Values should be adapted for new information but not compromised away

 Examples of Adapting to an Evolving Program and Market Place  Compliance starts at project selection  Err on the conservation side as it relates to securities law considerations  “Very Good” if not “Best” Practices will yield results  Invest in compliance but also CYA (i.e. appropriate insurance coverage)

Compliance Trends for RCs to Consider Those regional centers that give priority to compliance going forward will not only be those that survive but also those that thrive

 Any long term reauthorization of the EB-5 Program will come with greater compliance requirements so RCs should start preparing now

 Prepare to invest more resources in compliance measures and/or find operational efficiencies (e.g. 3rd part outsourcing, collaboration/consolidation)

 Prepare to say “np” to certain projects and methods for identifying and securing investors

 If you are not yet an RC, think long and hard about the financial commitment to becoming one (no longer low bar to entry); working with an existing RC may be better route

• Solutions designed specifically for EB-5 and other specialized financial transactions

• Powered by NES Financials proprietary, purpose-built technology

• Company was founded to bring increased security, transparency, and compliance to parties involved in complex financial transactions

• Leading provider of EB-5 financial administration solutions • Intelligent EB-5 Solution Suite offers solutions for every stage of the EB-5 life

cycle

• Established banking partnerships to enable proven escrow solutions tailored to EB-5

• Experience with over 450 EB-5 projects, representing more than $20B in capital

Confidential 22

About NES Financial

Confidential 23

HR 616 Amadei/Polis January 2015

S.1501 Grassley/Leahy

– Increased reporting – Additional annual filing information – Site visits & audits – Increased securities compliance – Immigration compliance scrutiny

June

HR 3370 Lofgren/Guttierrez July

September 30

Regional Center program extended by continuing resolution

October

S. 2115 Flake S. 2122 Paul

December Draft legislation circulates for inclusion in omnibus bill

Regional Center program renewed without changes through September 2016

S. 2415 Flake

The Compliance Train is Coming

• EB-5 is becoming a mainstream investment • Rapid growth of the EB-5 industry has prompted increased scrutiny

and enforcement actions • Look to history of other fund regulations – Private Equity

Confidential 24

Investor Transparency

Conflicts Of Interest

Market Evolution and

Trends

Increasing Compliance is Not Unique to EB-5

3rd Party Controls Will Become the Standard in EB-5

I-829 Audit Trail Starts

Confidential

EB-5 Requires Multi-Year Compliance Commitment

Confidential 27

EB-5 Subscription

Escrow

New Commercial Enterprise (NCE)

Drawdown account

Designated Account

NES Financial verifies draw requests

• 3rd Party Verification • Project-specific • Not commingled • Audit Trail

A “Drawdown” Account Provides Enhanced Compliance

Presenter

Presentation Notes

Confidential 28

Compliance Platform is Next Level of Due Diligence

The contents of this webinar/presentation are for educational purposes only (i.e., not legal advice).

Thank you for attending!Q & A

Ed Beshara: Jessica DeNisi: Reid Thomas:

Osvaldo Torres: Steve Strnisha:

[email protected] [email protected]

[email protected]

Panelists:

[email protected]

Sponsor: [email protected] Dave Souders:

IIUSA: Allen Wolff: [email protected]

[email protected]

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