SEC cracks down on development green card program

TRD New York /
Sep.September 11, 2013 05:27 PM

New York City developers are increasingly taking advantage of a federal program that lets overseas investors get green cards in exchange for financing real estate projects. But as the program has gained in popularity, the U.S. Securities and Exchange Commission has turned its attention to the middlemen securing the funds.

The EB-5 program allows foreign nationals to become permanent legal residents in exchange for investing at least $500,000 in approved projects in the country, including real estate developments. For developers like Extell Development and the Durst Organization, the program provides affordable capital from overseas– particularly useful given that other construction financing is scarce.

But only licensed broker/dealers can solicit investors, and with more unlicensed individuals facilitating investments for developers, the SEC is taking a closer look at these projects, Kate Kalmykov, an attorney with Greenberg Traurig, said yesterday at a panel at Manhattan’s Harvard Club.

The rules are being “heavily violated,” she added.

But it’s not difficult to see why, given the complex and highly technical process of sourcing EB-5 funds. If so-called finders, who connect investors with developers, receive a fee, they are subject to SEC oversight under the Investment Advisers Act of 1940. Indeed, anyone who receives transaction-based compensation in such a scenario becomes a de facto broker/dealer and must have the proper license, Kalmykov said.

In one recent case, the SEC sued Ranieri Partners, a Manhattan-based investment firm, because one of its consultants allegedly made $24 million referring investors while unlicensed.

In March, the firm settled the case and the manager who hired the consultant agreed to pay a fine and was ordered not to engage in securities trading in the future, according to documents filed with the SEC. Both the agency and Ranieri representatives declined to comment.

The regulator also launched a fraud investigation against Chicago-based real estate developer Anshoo Sethi in February for allegedly improperly soliciting millions of dollars from Chinese investors for what he claimed was the world’s first zero carbon emission, Platinum LEED-certified hotel and conference center in Chicago, a release from the SEC shows.

Many similar cases are under review by the SEC as well, Kalmykov said.

In order to receive funds through the EB-5 program, a developer must first establish a relationship with a so-called “regional center,” an entity that can legally receive funds from overseas. Funds must go to an approved project in either a rural area or a region that has 1.5 times the national unemployment rate, which the New York City area has qualified as in the past.

The problems occur when developers need to locate would-be investors in foreign countries. (China has been the most active in investing in EB-5 projects, panelists said).

While a referral from a person within the foreign country’s borders is not subject to SEC regulation, a referral from a person inside the U.S. falls under the agency’s purview, and constitutes peddling a security. If that person is not licensed as a broker/dealer, he or she could face fines, permanent prohibitions on trading securities and even criminal charges.

A finder in violation of broker/dealer rules may also be subject to state penalties. In some states a finder who is not a broker/dealer can even be on the hook for the full amount of the investment lost if the project goes bad.

“State securities administrators have the authority to seek sanctions and other remedies against individuals,” said Steven Anapoell, a securities lawyer at Greenberg Traurig, in an interview. “California also provides the investor with the right to sue the unregistered broker/dealer for monetary damages,” opening the finder up to serious financial liability.

Unfortunately, in many cases some involved parties might not have realized they were potentially committing crimes.

“There is a big misconception that this is fast money — it is not,” Kalmykov said. “There are a lot of hoops to jump through.”

Still, the program is extremely popular, as evidenced by the enthusiastic crowd at the lunch, who peppered panelists with questions up to the last minute.

With mezzanine capital expensive and construction loans still in short supply, pursuing EB-5 is easily worth the “hundreds of thousands of dollars” a developer will “run through” setting up a regional center, said Shalom Segelman, who runs Extell’s regional center, at the event.

The process of applying and securing funding should take between nine and 12 months, Kalmykov said.

“It’s very technical, very complex,” to negotiate the various entities that regulate EB-5 funds, said Segelman. “But it’s very simple with the right team.”

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