USCIS cracks down on EB-5 regional center applications

The USCIS has issued new guidelines that basically say, "new EB-5 jobs are not created when existing employees of a business are merely moved by an employer that changes work sites and reassigns existing workers to newly leased space in a building financed by EB-5 investor funds."

Lawyers and petitioners who've filed Regional Center applications containing tenant-occupancy calculation methods soon found out that they need to directly create jobs as their mailboxes were hit with a “blizzard of blue” Requests for Additional Evidence (“RFEs”), symbolic of both the color of RFE cover sheets and the seasonal affective disorders triggered in individuals receiving these cerulean missives this past winter.

For EB-5 immigrants doing direct investments, it is quite easy to prove creation of 10 jobs as the financial records speak for themselves. For EB-5 immigrants wanting to get approval via a Regional Center, it is now hard if not impossible to get approved.

http://www.nationofimmigrators.com/investor-immigration/immigration-agency-lawbreaking-revealed-usciss-eb-5-tenant-occupancy-scandal/

Who in their right mind would want to risk their money in a Regional Center?

Regional Centers don't even have a clean exit strategy as you are holding illiquid assets that are not easily saleable. Go ahead, ask them about their exit strategy. Compare it with direct investment, where you usually get total autonomy over when to sell your business and more importantly, get to keep the profit if the business appreciates. They may offer you a subpar return on equity, but certainly won't offer you any appreciation in profits. Most of them require you to use their affiliated entities to liquidate your investments.

Every investor needs to ask EB5 Regional center promoters whether the promoters actually tried raising money from Banks and / or through public offerings? The reason EB5 regional center promoters can't usually raise money from banks is because their projects can't withstand the scrutiny of a bank's underwriters, and the reason why promoters can't raise money by offering securities in the projects to US investors is because US investors simply won't invest their money in projects with low return on investment and an inherent inability to liquidate the investment in short order.

The above are reasons why it is smarter and safer to invest money in a direct investment. At the very least, an investor can usually expect to earn at least 15% return on equity each year and easily sell off their business within weeks if needed instead of locking up money in an unviable project for years.

Are Regional Centers violating Securities Laws too?

I recently spoke with a promoter (Michael C. Palmer, CPA) of a Los Angeles based Regional Center (http://www.eb5socal.com). 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.

http://www.avvo.com/legal-answers/can-i-have-a-foreign-national-as-my-partner--106402.html


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.

Direct investment options in franchises for EB5 immigrants.

Franchises have traditionally offered safe and stable avenues for actively investments. They range in type from gymnasiums to convenience stores to gas stations to delis, and require investments ranging from $100,000 to $20,000,000 or more.

What is the smartest and safest way to obtain permanent residence under EB5 visa category?

Many regional centers have been decertified by USCIS, due to which dozens of investors have lost their immigration status. More importantly, many investors have lost all or significant portions of their equity after investing in regional centers, with the latest example being found in Louisiana (http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CJYBEBYwAA&url=http%3A%2F%2Finfo.eb5info.com%2Fbid%2F134818%2FEB-5-Visa-Investor-Lawsuit-Alleges-Fraud-Deceit-in-New-Orleans-Regional-Center-Investments&ei=lImUT6jJGuOQ2QWN5o3tBA&usg=AFQjCNFiv8s6zCutVrulOMduWN8tPqNQlg). If an investor were to ask regional centers for their audited financial statements, most will refuse to furnish them. If investors ask Regional Centers on the rate of return for past 3 years, almost none will show rates above 3% per annum, and most have a track record of offering returns of 1% per annum or less.

So, how do investors avoid risking their capital and immigration status while still getting the benefit of the EB5 visa?

The simplest and safest way is to apply for EB5 visas under the direct investment route, and starting up or buying businesses such as delis, gymnasiums, clinics, liquor stores, gas stations, laboratories, workshops, farms, etc. where not only is it harder to risk capital losses, it is also typical to get annual ROE of 15% or more.

More importantly, EB5 visa investors who opt for direct investment have full control over their businesses and can manage every aspect of their business, including hiring the minimum 10 employees required to comply with the USCIS requirements in an indisputable fashion, which helps investors avoid any denial or revocation of their immigration status.

Why are so many regional centers getting decertified by USCIS? What happens to their investors' immigration status?

http://www.lexisnexis.com/community/immigration-law/blogs/inside/archive/2012/02/14/aao-eb-5-regional-center-de-certified-job-creation-vs-job-preservation.aspx
http://johnmanley.net/eb-5/el-monte-regional-center-eb-5-what-happened
http://articles.latimes.com/2011/sep/03/business/la-fi-easy-visa-20110904/2

As the above articles show, several EB5 Regional Centers have been decertified, and it is believed that more will lose their certification in the coming months. In case a Regional Center gets decertified, it is quite likely that their investors will lose their Permanent Residence Status and be back at square one. The primary reason seems to be misleading information furnished by the Regional Centers to USCIS, resulting in immigrants endangering their immigration status. Most regional centers refuse to furnish audited financial statements to investors, and are notorious for paying absurdly low returns on investment, if they actually pay at all.

HOW do immigrant investors protect their interests?
The best way is to do a direct investment, so that investors can not only have the ability to furnish complete financial details, but also have the ability to control their own business in order to be in control over compliance with USCIS and IRS regulations. In cases where direct investment is involved, it is quite easy to ensure compliance and avoid losing immigration status, and in 36 cases handled by us, EVERY investor has managed to easily earn a return of at least 15% per annum on their investment, and in most cases, has earned over 22% per annum. However, investors need to keep in mind that high returns means working hard to ensure that the business grows and continues earning revenues and goodwill.
It is better to do a direct investment and

Do Regional Centers violate federal income tax laws?

I recently came across this scenario, so I felt I should share it with you. As you know, many Regional Centers happen to work as LLC's (Limited Liability Company), and LLC's can elect to be taxed as either a partnership, sole proprietorship, s corporation or c corporation, depending on the number and type of members.

For an LLC to be taxed as a sole proprietorship to avoid double taxation, the IRS requirement is posted at http://www.irs.gov/businesses/small/...158625,00.html.

For an LLC to elect taxation as a partnership or S corporation to avoid double taxation at both personal and corporate levels, the number of investors is limited by law and they must be eligible to have US Social Security Numbers (i.e. Citizens and residents) and LLC's that have members who aren't citizens or permanent residents may be committing tax fraud when they admit members who aren't citizens or permanent residents and continue single taxation when legally they're required to have double taxation. As such, it is EXTREMELY IMPORTANT for investors to see if the LLC's are complying with the tax laws as the failure to comply with tax laws is imputed to all members of an LLC. An LLC which engages in single taxation when legally they're supposed to have double taxation (electing to be taxed as C corporation) may possibly be engaging in tax fraud.

It is a lot more advisable for investors to take their money and invest in their own business where their own CPA & adviser can guide them on how to proceed and what changes to make at what step, because it is better than forfeiting funds to the IRS due to the carelessness of an irresponsible idiot.

As such, please feel free to ask the Regional center you are considering about their structure and how they are complying with the tax laws.

The above is simply my personal opinion and is NOT to be construed as legal advice. Please consult your own CPA and attorney to independently check facts for yourself and get accurate advice. Also, please double check with the IRS if a non-resident and non-citizen can legally qualify for single taxation in an LLC that elects to be taxed as a partnership or S corporation, before you invest your hard earned money in a Regional Center that will cause you to lose your hard earned money.

Taxation of LLC Income and Loss

Speaking strictly in taxation terms, an LLC, when taxed as a partnership or sole proprietorship is not a separate tax-paying entity in the eyes of the IRS. Each member is separately and individually liable for the taxes on his share of the LLC (profits, losses, deductions, and credits). Each member must report his share of his tax liability, and each tax liability retains the same character it had when earned or incurred by the LLC. The pass through of items to members means that income avoids being double taxed, and losses may offset income that the member may have from other sources.

In direct contrast, a C corporation is a separate entity for even tax purposes and is such, is required to pay its own taxes. Income and profits are taxed at the corporate level when earned, then taxed again when distributed to the various shareholders as dividends. Dividends are always taxable as income, irrespective of the source. Therefore, when distributing corporate profit, it may be advantageous to pay the gain as salary or bonus rather than as a dividend, which is tax-deductible to the corporation.

S corporations are taxed in a somewhat similar fashion as are partnerships. The tax burden on retained earning in an S corporation passes through to the individual shareholders. Each shareholder reports his percentage share of the income on his tax return. However, the income can be re-characterized. For example, if the S corporation earns profits that would be taxed as ordinary income if earned by an individual, the S corporation can pay the earnings as a “distribution to shareholders.” When one received payment in this fashion, they can avoid Social Security and Medicare tax, currently a 15.3% tax savings. One must tread carefully with the LLC as an S corporation because the LLC may be taxed as a C corporation, even if the S corporation election is made, if the requirements are not met and it is operated like a “regular” corporation. For example, if the entity has even one foreign owner it will be deemed to be a C corporation for taxation purposes. This means, everyone will be subject to double taxation. Similarly, if excessive passive-type income (such as rental income) is generated by corporate assets or if the corporation disposes of assets that had built in gain when the election was made to be treated as an S corporation, the IRS may see fit to tax the LLC as a C corporation.


LLC Termination

Change in ownership of the corporate shares does not terminate a "C" or "S" Corporation for Federal Tax purposes, unless the change involves foreign owners. Because a multi-member LLC can be considered a Partnership, it is subject to the Termination Rule of IRC Section 708(b). An LLC terminates for Federal Income Tax law purposes whenever 50% or more of the interest in capital and profits are sold within a 12 month period. This means that even though the LLC may technically still be in existence under State Law, for tax purposes, it terminates and re-starts. This has the same effect establishing a new entity for accounting purposes, and brings the current LLC tax year to a close.