Wednesday, May 2, 2012

Are Regional Centers violating Securities Laws too?

I recently spoke with a promoter (Michael C. Palmer, CPA) of a Los Angeles based Regional Center ( The legal name of their firm is California Real Estate Regional Center. When I asked Mr. Palmer whether he as a CPA was sure that his firm was tax compliant with US tax laws that specifically PROHIBIT pass through taxation for Non-US persons (i.e. US citizens and Permanent Residents), he had no answer. On further investigation, I noticed that their firm claims on their website that they're a boutique bank and apparently lend money to hotel projects.

This firm was recently certified as a Regional Center in 9/2011, so the question to ask them is, how many investors have obtained permanent resident status through them? The answer is probably a big fat zero!

The other apparent question is, are there any conflicts of interest or are the borrowers at arms length?

The more important question is, are the promoters violating US Securities laws too in addition to tax laws? The reason I have this question in mind is because apparently Mr. Palmer's firm is doing a Reg S offering of membership units in a Limited Partnership to non-US persons in a possible violation of US tax laws. In a number of states, an LLC cannot be formed to conduct certain types of businesses (e.g. banking, insurance), so I am not sure EB5Socal is fully on the up and up when they claim to be an investment bank.

The question is either the entity can do sales of shares in a C corporation to non-US investors or sell shares in a limited partnership to US persons. Better still would be if their attorneys obtained a certificate of compliance (opinion letter) from the US IRS and SEC.

I would certainly like a tax attorney and securities attorney get together and certify that this structure is legal and complies with US laws, because I believe that any entity, irrespective of structure, is prohibited by law from pass through taxation if it has foreign owners. On a final note, I asked Mr. Palmer what is the expected rate of return, and he mentioned a 3% rate. Even I could easily help investors earn at least 3 times better than Mr. Palmer's rate of return without needing to lock up funds in a firm that seems rather shady to begin with.

Finally, failure to disclose material facts is classified as securities fraud, and regional centers routinely fail to fully and truthfully disclose all material facts, such as conflicts of interest and securities law violations.

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