In a discussion led by EB-5 investment banker Kurt Reuss, immigration lawyer Michael Harris and securities attorney Bob Cornish address this vital question: When and how should EB-5 investors be notified about issues in a project?
Podcast overview
When something goes wrong with a project, there’s a tendency to minimize the problem to avoid a “run on the bank” where panicked investors try to exit the deal. However, it’s in the interest of a regional center and NCE to tell investors and their lawyers about project issues.
Properly disclosing risk can be a challenge. Projects often want to do the minimum required, but the minimum isn’t enough for reputational management.
What needs to be disclosed? What is material according to securities law? How explicit should a disclosure be? What if the PPM addresses the issue?
A regional center engages in a balancing act disclosing an issue clearly but without undermining the deal. It’s good risk management to communicate in a way that accounts for language and cultural differences.
Another important consideration is whether investors in the same deal should be able to contact each other and have shareholder meetings to discuss an issue with the project.
Some investors may demand records, but projects fear such asks are the precursor to litigation and may not want to do this; some PPMs even try to bar records demands, even though this could violate EB-5 law.
The panel provides insightful guidance from the broker-dealer, immigration, and securities perspective — and raises intriguing questions. Do investors have the power, individually or collectively, to change deals? Should USCIS be doing more to enforce investor rights?
Investors understanding their rights is a growing priority. Some now retain securities attorneys to help them know what they are signing and their future rights.
While regional centers and projects in EB-5 may be anxious about disclosing risks that arise with projects, keeping investors in the dark or muzzling them is not the right way to manage risk. Learn what the law requires, what reputational management dictates, and why investors have the right to information and more transparency.
TRANSCRIPT
Kurt Reuss: So hello everyone. My name is Kurt Reuss. And today's topic is when should EB-5 investors be notified of a potential problem?
Michael Harris. Lawyer out of Miami, Florida brought this question to me and I brought this question to Bob Cornish, the securities attorney in Tennessee now, so let's get started.
Michael Harris: The question is, what should a regional center do when a project has had either a failure or some sort of incident that normally would be reported to the investor?
And usually, in my experience, the investor's attorney would also be notified in the process. I've always seen this for quite a long time, that updates would be distributed without any problem.
So the question is, What are the best practices for a regional center for the issuer for the NCE, for the JCE to take if something does go wrong, should they consider also notifying not just the investor, but the attorney,
Defining what can ‘go wrong’
[video: approx. 1:16]
Kurt Reuss: And Michael, can we also kind of define what do you consider to be going wrong? Is it, is an RFE going wrong?
Michael Harris: It could. It really depends. I think an RFE [request for evidence] that might be on certain policy issues or other questions, maybe there there is something small, but I think even an RFE should be, you should be informed
Michael Harris: It is something that I’ve encountered in a lot of different ways. If an investor is coming into a project and maybe the immigration attorney has already been familiar with the particular project before and something else materializes should be should a RFE be issued later on, what type of notice should be provided to either the current investors, to investors that are maybe considering joining the the project on a ongoing basis in order to, to make sure that investors that might be, haven't even made their investments yet, or might be in the process of doing so and, and there's been an RFE or some other type of serious project failure or, or problem.
Financial difficulties, bankruptcy liquidity what types of issues should be notified? And that’s the reason why we're having this discussion.
The Securities attorney ‘forensic’ point of view
[video: approx. 2:53]
Bob Cornish: I look at these sorts of things from a forensic point of view as a litigator, looking back when somebody comes to me and says a client, potential client says, this has happened. A lot of my work is to figure out exactly what led up to what happened and including what caused what happened.
Who caused it to happen, why it happened, and in the securities context, namely, what was known, who knew it, and why.
So the watchword, I guess, for anything, if we're looking at regional centers and other industry participants, managing risk. Because this litigation and disgruntled investors are a risk.
How to manage risk when issues happen
[video: approx. 03:56]
The question is, how do you manage that risk when these things happen? And you have to have clear objectives as to what you wish to accomplish. And a standing plan to communicate what you wish to accomplish. with those who are affected so that they can either take corrective action with you involved with or be more of a partner than an opponent.
More often than not, when things start to go south in a deal, I think people believe that, well, until it really blows up, there's really not much for me to do or say. And a lot of that has to do with I guess the glacial pace that real estate investments tend to take we take for granted that the investors are going to read financials and read the footnotes and read the accounting comments.
Client communications tend to gloss over problems
[video: approx. 05:16]
And the reality generally is that they don't. And the tendency in client communications. is not necessarily to gloss over problems, but to minimize them, as to not create a fear or a run on the bank, so to speak. So how do you manage all of it?
Michael Harris: That's exactly my thought.
Bob Cornish: How do you manage that, right?
Michael Harris: It's that analogy to the Mary Poppins. I think of this, this is one of my earliest probably things, that run on the bank. Once one person starts to worry, then others might start to. And I think a project this is my novice sort of experience, but I'm not a novice anymore.
Informing investor lawyers and language barriers
[video: approx. 06:15]
I have investors in these, but as someone who's not a registered investment advisor who's not a securities attorney. I am still pretty much aware that something when it goes wrong, you probably want to try to deal in a, in an appropriate customer relations approach to prevent anything from happening. Blowing up more than it should.
And I think it's, it's in the regional center's interest, certainly the NCE's interest to inform those investors and also make sure their last known immigration attorney is also informed because in my experience, sometimes investors are working with… they might not speak English. They may not understand everything. They’re not from this country. They're working with sometimes foreign lawyers or foreign representatives that are maybe serving as their face, eyes, and ears.
And sometimes those relationships aren't always current. So who best to inform legally than the attorney on these or to keep ip to date on on the latest developments, or what exactly has gone wrong and be transparent with it.
RIA protection and collective investor rights
[video: approx. 08:17]
Because now we have protections for investors under the RIA. And, especially if there is any capital that could be recovered, the investor should have that right, I think, to be able to come together if they so need to take collective action to as a group of investors, as a partnership to try to take, find a remedy that could help all of them, perhaps maybe the people running it are not the ones that are best.
Bob Cornish: Now there are so many hot buttons you raise in your comments, Michael. I think first of all, we have to recognize that we are dealing with non-U. S. people who, frankly, are not familiar. With U.S. law, never mind the nuances of U.S. securities law, which many U.S. attorneys don't even understand.
Conflicting communications
[video: approx. 08:43]
And the communications that people are getting from from a variety of sources are going to conflict with one another, no matter how hard people try to keep things on message. An immigration agent in China may well have some reason not to communicate something to their clients. An attorney working with an immigration agent may not have some desire to communicate bad things.
And even if the bad things are communicated, can you count on the game of telephone actually working towards its inevitable end where somebody actually communicates exactly what was said in the first place. More often than not, at least what I've seen in my experience, is that there is an erosion of veracity as communications go from one party involved in an EB-5 transaction to another.
And that's just human nature. People are going to impose their own experiences and interpretations of what is happening and communicate that to another person and it's up to that person to kind of extrapolate exactly what it is that is being said. So that's a challenge. You have the language barriers, of course.
Investors working collectively and rogue investors
[video: approx. 10:23]
I think we have cultural barriers too that people don't want to speak up if they don't have to. There is in various cultures, a desire for consensus among a group, and that somebody being a squeaky wheel is going to upset the apple cart for others. How do you manage that?
And then you've got people who, frankly, are very self serving and I don't want to use the word amoral, I guess, is the best way to put it. Where I've seen this in lots of EB-5 cases where a group of investors wishes to work desires to be a unit to speak with a unified voice to various players. But there will be one investor or maybe two who will essentially break off from the group. And try to curry favor with the manager or the regional center with the idea they're going to get out and get a better deal than everybody else.
And I think that's probably the biggest challenge at the outset of dealing with these things is letting people understand that you're not going to get a better deal working on your own, probably, because there's always as a litigator, the group, the power of a group is always going to be more intimidating than the power of one person. It’s a very different animal when I'm talking about 20 people acting as one versus one person who can arguably be passed off as disgruntled.
But you have to figure all that in and then I'm not saying these are the things that have to be done, but the reality is that regional centers and industry participants need to understand these dynamics. And understand that there needs to be clear communication at all times with investors and whomever in the most consistent way possible as to avoid confusion and conflicting messages.
It may well be you're giving a different message to an immigration attorney. And another message to a migration agent, simply because you know that they're ultimately going to land in the same place. But those are the challenges.
What does the law require?
[video: approx. 13:08]
Michael Harris: What does the law require? I mean, the RIA as it was passed requires annual reports. Now, a funded, if there's a fund administrator, they're supposed to also have additional, I think additional ways to report it and not just the annual report. But there's, there's nothing affirmatively that says in the RIA or the INA that about this type of notice, but it seems incumbent, especially when it wraps up, rolls in the securities laws in there.
What are those requirements?
Bob Cornish: Laws and the RIA well, let's go back to the RIA for the RIA doesn't place any obligation really on the participants offering these products. To manage risk per se manage litigation risk, let's put it that way, or manage the communications risk that something is happening that may or may not be true that causes a run on the bank or causes people to run down the street with pitchforks.
Projects may try to do the minimum
[video: approx. 14:12]
There is this notion, and every attorney who's worked with a brokerage firm or a financial advisor investment firm knows this. There's no… you don't get a bonus for a plus compliance. No one gives you a star. Nobody gives you a fruit basket. C minus is usually enough and C minus necessarily is going to be the minimum.
Reputation management requires disclosure obligations to manage risk
[video:approx. 14:46]
And the question is, is the minimum that the law requires equivalent to good risk management. And my, the answer to that is no, just because the law, I mean, yeah, the law is there obviously for good reasons, but we're talking about something totally different here. We're talking about managing reputational risks because I don't think any legitimate participant in this industry wants to be a liar or a fraud.
They have a risk of reputation overseas, which can essentially make or break their business, and they have a reputation of being able to maintain as to the service they provide to the clients they have under their umbrella. It's not just rolling out the carpet when somebody signs a subscription document.
It's understanding that once that person subscribes, that not only do you have, does the NCE, JCE, other parties have communications obligations. They have a disclosure, they have disclosure obligations to manage risk in a way that prevents things from getting worse, if in fact things take a turn for the worse.
The worst thing that participants can do essentially is just not say anything when things go wrong.
Kurt Reuss: Maybe we can get into more specifics related to this. I think it'll be a lot more helpful so, Michael, have you encountered anything recently that you're wondering? Hey, what kind of responsibility is there of the issuer or the regional center to inform the investors or maybe their lawyers?
Projects wanting confidentiality from investors
[video: approx. 16:56]
Michael Harris: Yeah, the questions that I'm starting to form and then I'm seeing in the market is what what level of confidentiality should a project hold an investor to?
And should that project limit their investors, even speaking with anyone about it, let you not, maybe not even their own attorneys is the concern that I have. Because yes, a lot of us attorneys may want to may have a lot of questions, but there still, I think, can be I think a delivery of the notice to the attorneys as well these are represented.
Kurt Reuss: So are you saying that you've seen situations where the project is encountering a problem, and their concern is if they notify the investor then the word gets out and things start to spiral downward?
Michael Harris: Yes, precisely. That exactly. That is the concern. I think that I'm seeing that some projects or regional centers, in fact, have what Bob has suggested that things go bad and the project stays silent or they don't, maybe they don't take the right type of action to protect the investors involved.
I think that I think that communication is key. I've seen some of the largest regional centers out there where they're always going to share the good news. They still will share other news. If something else is not exactly going according to plan. If there's a delay, I've seen emails about that.
And just recently I had an email like that from an investor client. And they said, well, is this a problem? Well, I explained that the project was going to do a mandamus and it wasn't really a major problem, but still when a regional center or project and I've been asked to sign NDAs and I have no real qualms doing it because I'm signing it on behalf of my investor and if they, if they want me to do that.
But at the same time, I should be able to counsel with my investors so that they can do what's right for them. Maybe they they have their interests involved. They have their decisions that they made and whether or not to invest in this project it's not based on my recommendation and they may not fully comprehend what options they have.
On the on the immigration side, do they wish to continue? Can they exit at this point? Do they want to start over where they need to consider filing an amendment under the which is a new thing? We don't have any guidance on that.
Issuer and regional center discloser requirements and materiality
[video: approx. 19:58]
Kurt Reuss: I could just try to ask Bob a more pointed question, because I did see recently that CMB came out and disclosed some issues that they had, and I thought, well, that's interesting. I would not have thought they needed to disclose that. I thought they got ahead of things and I wondered how that would impact their deal.
Bob, is there any kind of guidelines of what an issuer and by association, the regional center should feel clearly that they need to disclose, do you have a sense of, of those kinds of guidelines we can provide people, or is it too difficult to do that?
Bob Cornish: Well, there's certainly the securities law concept of materiality meaning that is that fact going to be something in the total mix of information that is going to be a differentiator in someone's decision to buy, hold, maintain, and investment.
Kurt Reuss: So how do you determine whether it's a material issue or not.
Bob Cornish: Goes back to the reasonable person standard. In terms there's lots of law. There's lots of guidance in arguing about what's material.
Kurt Reuss: So an issuer or a regional center should then consult with their securities attorney?
Bob Cornish: Yes. Absolutely. Of course materiality can be a problematic concept in EB-5 simply because of the dichotomy between the return of an investment and getting a Green Card, right? There's always that issue as, well, is it material to the return of capital or it's not really material to the green card, but it is material to the return of investment.
Kurt Reuss: As a broker-dealer representative, my attitude has always been people are making the investment for the return of capital profit potential and an immigration benefit, and if any of those are threatened, that strikes me as being material.
Not all changes are material
[video:approx. 22:08]
Bob Cornish: No, I would agree. There are certain things that evolve and change during the life of the deal. Not everything that changes is material. And I think that's always the biggest fear that issuers and other participants have when they're talking about securities law violations.
Just because my regional center decides to put up aluminum siding on its building is not a material change in the business conduct of that regional center. If my regional center is converting to aluminum siding because they are moving to a trailer park because they don't have enough capital to handle enough to handle client inquiries and maintain the apparatus that they need to monitor the project, then that's probably something that you want to know about. The devil's in the details, of course.
What if a project doesn’t share information?
[video:approx. 23:03]
Kurt Reuss: What's the ramifications if they don't share that kind of information? Let's say your attorney says it's material. You should be sharing this? Well, what's the ramifications?
Bob Cornish: Well, I mean, there's the issue of when the investors aren't truly babes in the woods, so to speak.
Kurt Reuss: Are or aren't?
Bob Cornish: Aren't. But there are these instances where you're dealing with really arcane issues that only people really in the EB-5 industry can kind of understand. Like if there's an erosion of job count.
Because of some really obscure thing that happens because of a zoning preference or a TEA chain or something like that. Those things are certainly material. How do you explain it in a way that somebody doesn't even understand it? And actually do something with that information.
Kurt Reuss: So let's try to give the audience some some concrete advice here So let's say that example which is it's affecting the job creation aspect of the project and now the issuer and the regional center decide, okay, we want to inform and we recognize this might be a complicated question. So what would your advice be?
Risk factors in offering documents
[video:approx. 24:35]
Bob Cornish: You certainly disclose it in some way. Or before you do that, of course go back to your offering documents, make sure that the risk or what’s happened is encompassed within your risk factors
Kurt Reuss: About that for a second. I'm sorry to keep interrupting, but let's say it is in your risk factors. How does that impact your requirements?
Bob Cornish: It affects you because you can actually work, I guess, with the cover of your offering documents to say to have a…
Kurt Reuss: “We pointed this out.”
Bob Cornish: Yeah. We pointed this out that this was a risk. This risk while it hasn't affected the overall success of the project where we don't think it will there is a strong possibility the job count will be less than what we [expected].
Kurt Reuss: Okay, so you've alluded to the risk in your disclosure statement and now the risk has come to bear and you are required that in your mind to disclose that to the investors.
Does a project need to explicitly disclose an issue?
[video: approx. 25:52]
Bob Cornish: I think so. Now, here's the devil in the details, right? How do you disclose it, right? Some people would take the point of view that, well, if I'm submitting financials that show certain things or other documents that show changes that would reflect that but don't necessarily point it out verbatim, then probably I'm doing my job, right?
I've defended cases and brought cases defending cases, a lot of times attorneys are forced to, I don't want to say cobble, but the total… the issuer or the broker-dealer will say, well, of course we disclosed this clearly because we said this, this, this, and this in four different places.
And all of that together remains that, yeah, we disclosed that to somebody. Now, if somebody doesn't read item three, but they read one and two, would they understand what four meant? And this is the shell game, I guess, of securities litigation. Because there are always these chains of information that people tend to rely upon, the more clear that chain is, the easier I think it is to defend anybody who is really disgruntled and wants to go do something further than negotiate with the regional center.
Regional centers must strike balance of what to disclose
[video:approx. 27:20]
Kurt Reuss: So is the balancing act that a regional center has to kind of weigh between what would disclosure do potentially to undermine my deal, as you called it before, a run on the bank, versus do I put myself in a position where if I get sued because I haven't properly disclosed issues to my client, my investors. Now the court's going to hold me to to account for that.
Bob Cornish: It’s a problem. You do have to strike a balance. I would agree. I think one of the issues you have, especially in the EB-5 realm is getting information out to people that they actually consume and understand.
Kurt Reuss: Why is that? I mean, if they have a lawyer to help them digest what it means, and I'm sure the first phone call they make after they get that letter is call the lawyer. Why is that difficult for them to understand?
Bob Cornish: It's difficult for them to understand because they're probably being told something else, perhaps by an immigration agent, perhaps by a fellow investor saying that X is guaranteed. This isn't true. So and so talked to another agent and they say that everything's fine.
Kurt Reuss: Sounds to me like you're concerned that the immigration agent is, is potentially going to mislead the investor.
Bob Cornish: I mean, just I've handled a few of these in my lifetime so far. It's really hard to find instances. I mean, there are instances where people have been misleading others. But I don't think it's out of… I don't think misleading people in some of these things has been intentional.
I think people necessarily nobody wants bad news. I think people have some desire to recognize the risk averseness of the people they work with. And there is this culture and language barrier, really, that I think, precludes a lot of frank conversation from actually happening. And that's it.
Investors may not be EB-5 savvy; cultural differences are a factor
[video: approx. 29:54]
That's the challenge that this industry has because we're really providing sophisticated securities, documents, and sophisticated deals to….
Kurt Reuss: Unsophisticated investors.
Bob Cornish: Well, they're financially savvy. I mean, you know in their own world they're very savvy. In this world, they may not be at all, and they're used to, again, doing business on a handshake, doing business on a nod.
[Doing business with ] Somebody you know: you do the deal and get it papered later. The reality is I can't overstate how important the understanding of how business is done culturally in other countries is important for regional centers to understand how people behave.
Regional center responsibilities to foreign investors
[video:approx. 30:49]
Kurt Reuss: Do you think the regional center is responsible to understand the cultural differences and behave differently based on that?
Bob Cornish: I think so. I think it's certainly good risk management.
Michael Harris: They'll translate PPMs. They'll translate parts of the offering or other things and market it to them in their foreign language. They'll go to their country and market to them there.
Bob Cornish: It should.
Kurt Reuss: From an issuer standpoint or a regional center standpoint, aren't they really looking at what's their liability more than what's the best thing for my investor?
Bob Cornish: Well, the liability that they face is ultimately somebody saying, I had no idea that this happened, or they didn't tell me that this happened.
Kurt Reuss: Issuer can say, no, I sent you a letter. I laid it out for you. The fact that your immigration agent gave you a sense that there was no issue here, that you could ignore it [doesn’t matter]. I’ve done my job.
Bob Cornish: Problem is with that is, again, the paper trail. An investor brings an action saying they weren't told X regional center or the project says, well, we told the immigrant we understood that investor a worked with this agent and we communicated with this agent at all times who in another document somewhere they signed we agree to communicate in a reasonable manner with our investors.
Right. So what happens you get into this tug of war, I mean, there's a probably more crude term for it about who said what to whom, when, and when they could find out what was going on in terms of, well I talked to my agent at this time. Did the regional center tell you this?
No.Were you able to talk to talk to your immigration agent? I don't want to be kicking around immigration agents.
Kurt Reuss: No, no, I understand.
Bob Cornish: This is a reality. The reality is that so many people in between that.
Kurt Reuss: Some countries…
Bob Cornish: In some countries that you're going to be dealing with.
And the bigger cases, you're dealing with disclosure issues where things may have been communicated in some obtuse way to somebody, and they're just trying to rely on that to say that everything was communicated clearly to everyone.
Importance of investor attorneys
[video: approx. 33:21]
Michael Harris: I have a question on this and that's, with any offering, Kurt, that you've been involved with, or Bob, that you've structured, from everything I've always seen, the regional center is going to require that the investor have an attorney before they even usually even communicate with them.
So, to me, it seems that the the regional center is doing right by themselves. And of course, by the investor, they’re preventing catastrophe from happening when they do what's the best practice by letting the investor's attorney know, maybe everything's going to be fine. Maybe jobs are going to be created.
Maybe. It's just they're going to not get back all their money, but they're still going to survive at the end of the day with the process. So I think that it all goes back. Yes, they're foreign individuals that are investing in these programs. The one person they're going to look to be able to help them the most is going to be their U.S. attorney. Their first attorney that they're probably in most cases ever hiring. It's an immigration attorney.
Kurt Reuss: Michael, you brought this question up originally. And, and tell them, tell us a little bit about like, what was the genesis of your question? What were you trying to understand better?
Michael Harris: Well without, without breaching any confidentiality that I do have between an attorney and a client and, and other things I have had, or I have, I'm going to say it this way, clients that are invested in projects that are having major financial difficulties,
Kurt Reuss: How do you know that?
Michael Harris: The client let me know, or eventually you might hear from others that, hey, did you hear something?
This is a very small market in EB-5. And, and now with Zoom and everything today, it's even smaller, but you hear something eventually that someone says something and then you find out, hey, what's going on with that? You go and ask someone else and you find out and then eventually who do I find out from?
Investors being told not to tell anyone
[video: approx. 35:35]
I have to ask if you have to ask a client, hey, is there something wrong with your project? Oh, yes. They told me, they let me know, but they said, I can't tell anyone else. Can't share it with anyone.
I'm like, well, that's really weird. Why wasn't I informed about it? Why wasn't I given the news good or bad. I want this to be the American dream for my clients.
Kurt Reuss: Bob, can I ask you a question from what Michael just brought up? If a regional center was to notify an investor that we want to share something with you — but you're not allowed to share it with anyone else. Does that. include their attorney?
Bob Cornish: I would argue no. I mean, the attorney is likely a known agent to the regional center and the other participants anyway. They're an agent of that investor. Now it doesn't mean that that client can start just blabbing everything.
Kurt Reuss: Well, that's different. No. But, but it seems to me like to restrict a client, tell a client, here's what I'm gonna tell you. But you're restricted from telling your attorney. That's doesn't seem kosher.
Michael Harris: Or to give that impression to the attorney, to the investor, by giving them notices that say explicitly: You may not share this with anyone else.
‘Sinister tactic’ of a regional center threatening investors with deportation
[video:approx. 36:58]
Bob Cornish: There's also a more sinister tactic that I've seen, and I'm actually offended by it when I see it, is that the regional centers will not only emphasize the confidentiality, but say that if you decide to do anything about this with USCIS, you're going to be deported because you'll be essentially charged with making false statements to the Immigration Service.
And I've seen that a lot.
Kurt Reuss: Wow.
Bob Cornish: And that is probably the most offensive thing that I think a regional center can do. And it's just to threaten their very investors with, with deportation because they're trying to protect themselves and their families.
There's no place, there's no place for that. And I hope as an industry, whoever, whatever law firm's got the bright idea to tell people to do that, just stop it. Because it's just not good form.
Kurt Reuss: So if we're trying to summarize this conversation a couple of things, Michael, you've talked about one question: Am I restricted from participating in the knowledge that my investors are being provided? And it sounds like Bob's saying, you're not, and it'd be nice for investors to know out there that if you do hear something and it says no one can know, it doesn't mean you're lawyer. Fair enough, Bob?
Bob Cornish: Fair enough.
List of all investors for shareholder meetings
[video: approx. 38:41]
Michael Harris: There’s another point I wanted to raise and that's before the RIA, specifically in the I-526. and required by USCIS with any I-526 filing, you had to include the information about all the other investors in the NCE.
And many times you would see in filings from regional centers that they provided you a list of all the investors to date, at least their names, maybe not contact information, but their names were there.
Today, I don't think it's really required in the I-526. You don't have to do this. The question to me is also because I think this really should be something that's standard in offerings is that why should you force an investor to go to the state statute and have to enforce the right to view the books or the right to have that information of who your partners are, who your other “paisans” are in that particular project.
Shouldn't you be able to have those shareholder meetings together? In fact, you're given that that right under the limited partnership agreement or the operating agreement. But we're not going to, cause I don't really see projects that ever do that.
Kurt Reuss: Bob, this must be in your wheelhouse. Do you have situations where you're representing a group of people?
Michael Harris: It, for me as trained as a corporate lawyer, as someone who's been the the child of a parent who's been the victim of securities fraud, to me, it's something that… I don't practice securities laws, but I understand it. And especially for someone coming new to this country.
I mean, my, my father was a highly sophisticated, accredited investor that used to market and sell securities. Before there were broker-dealers, he was one. He was selling stuff. He invested in [something that] turned out to be a Ponzi scheme. It was a horrible, horrible thing. So maybe I have a chip on my shoulder about it a little bit. But yeah, I ask, I do have these questions somewhat generally and for the best interest of the investor, because at the end of the day, my goal is to make sure that they get a Green Card and it means that all these other things have to come to fruition.
Record demands from investors
[video: approx. 41:06]
Bob Cornish: It’s interesting, the records demands are always. touchy issues. I think a lot of people see records demands as a precursor to litigation. Somebody's asking for all these documents because they're going to use them against me.
More often than not, when people have honored those document demands, and I actually get to see what's going on with a project, more often than not, the client is actually satisfied with what's being done with the project. They, they get the disclosure. They need to understand the thinking process of every investor in every deal. But somebody could be looking at some figure, or some disclosure or some document that's produced by a records demand.
And suddenly the light goes on and they say, Okay, fine I get it. I understand what's going on. And actually that happens more often than not when people ask.
Some PPMs try to bar record demands
[video: approx. 42:19]
It’s usually the regional centers that and other deal people that make the records demands problematic. And I've actually seen PPMs where they've barred the record demand completely.
Which is… good luck enforcing it. But I mean, how many investors have $50,000 to throw away to go to Delaware Chancery Court to get rid of a clause like that?
Michael Harris: I think it violates EB-5 law because one of the core requirements is that there's some level of management participation or certain rights under the Uniform Limited Partnership Act. That the investors be involved in some way in these partnerships. And if they don't even know who their other partners are, or even have the ability to communicate with them about their feelings or anything….
Bob Cornish: No, it’s a slippery slope for a lot of folks. I mean, clearly someone asked for your shareholder list. There's not a lot of reasons why people ask for that other than to know who else the shareholders are for purposes of litigation. I mean, let's face it, unless there is like an OFAC or something like that, a banned person or Osama bin Laden's among your investor group. There's not a lot that that list can really tell you.
But I mean, it's certainly the law does provide for some transparency in that regard. But again people have the — how do I say this in a diplomatic way? A lot of ways the investor investors do have power to make changes in their deals. They need to be doing those at the outset of investment, not in the middle of it.
Kurt Reuss: Well, can they make changes to an offering that already has investors in it?
Investor shareholder meetings
[video: approx. 44:22]
Bob Cornish: Oh, certainly if they call a vote and follow the procedures of the operating agreement and everything. But again how are you going to get 50?A special meeting of the shareholders is requires 50 percent of the investors, right? Or a lot of times people make it 100 percent because you can do that. How are you going to get 100 percent of the people together for a meeting? How are you going to get 50 percent of them together for a meeting to make that change?
And I think the watchword for all of this is that when you read a document before you invest, an investor has the opportunity to make comments, make changes negotiate terms that are important to them. And this is one of them.
Kurt Reuss: I don't agree with you, Bob. I mean, in most EB-5 investments 'm involved in, if you've got people in, it's a take it or leave it deal. The issuer doesn't want to go through the hassle of any of the stuff that you just mentioned, like calling a shareholder meeting. I mean, what would be the incentive for them to be willing to do that?
Bob Cornish: The incentive for them was would be for, I'm just saying, not necessarily a shareholder, but having a books and records inspection having some clause in a side agreement saying that the investor can inspect the books every year, can inspect this and this and speak with the principles of the project. As a material term of the investment.
Michael Harris: And that's going to happen with the RIA, with the fund administration, or with an auditor, you have to get those reports every year. And I imagine those are going to be fairly detailed or they should.
Do investors have power to negotiate better terms?
[video: approx. 46:09] Bob Cornish: But the idea that I can negotiate, first of all, projects want the money. And if I'm doing something that I should probably be doing or really isn't skin off my teeth to begin with, I'm going to make that accommodation. This is what happens in the hedge fund industry all the time.
Kurt Reuss: Yeah, but that's a different, I mean, we're talking about a whole bunch of people that are not able to really communicate well,
Bob Cornish: No, it's a challenge. And I mean, I don't think, I don't think EB 5 investors understand the power that they actually have.
Kurt Reuss: I don't think they understand how little power they have. I think that they look at these offering documents with a real kind of cursory, “oh, what's this? Oh, that’s guaranteeing me a refund. Oh, they're guaranteeing me construction completion. Oh, they're guaranteeing me this.” [I think], oh, you know the deal because you read the headlines.
Bob Cornish: Oh no. I think it's so true, especially in China right now. The biggest thing right now is understanding that a lien doesn't necessarily mean you get the building because somebody can have a lien that's above you. And now the big question in China, what was my lien? Are we on the top of the lien, or are we in the middle of the lien? And you know, all these questions that people didn't have before.
The cost to enforce investor rights
[video: approx. 47:34]
Kurt Reuss: And what does it cost to enforce your rights to a lien anyway? John Tishler estimated that a million dollars minimum is what it's going to cost a group of EB-5 investors. To sue for their rights to enforce their rights. How are you going to get a whole bunch of investors to put up money against a project that's already failing?
Bob Cornish: Or a project that's rife with cash and can essentially drown these people in fees. I mean, it's a Hobson's choice. Either you're dealing with a bankrupt project or one that's so well heeled that there just comes a moment in time when people just throw their hands up and say, I don't want to do this anymore.
Michael Harris: I would argue that would be a real reason why you would charge investors more like they're doing right now.
Should USCIS do more to enforce investor rights?
[video: approx. 48:25]
Or the charging the projects you have a government agency that could really protect the investors here, not just regulate. $50, 000 a project that they're getting fees for that I think should be enough, in terms of the audits and the other inquiries that USCIS makes, these 5 year audits that they're going to start to do, USCIS is not just the benefits agency, they do act as enforcers.
So I, I think there's good reason to to be proactive about letting investors come together in an annual meeting, just like you would with when you get notified. I get notified by Schwab with the different stocks I'm invested in and that there's a shareholder meeting every year and you got a proxy card in the mail.
Kurt Reuss: The problem I see there is now you're asking you the Immigration Service to start behaving more like the Securities and Exchange Commission
Michael Harris: Right. And many people don't want that. And I probably would rather have lower government fees and just let this be a private action needed. But to answer the question of how's an investor going to come up with a million dollars to start enforcement on a project that's gone south. Well, they're paying into a fund. Then why shouldn't that somehow be able to be used to help them? It's kind of like the situation in Florida here where everyone is now dealing with these reserves that they're required to have for their condominiums because of the problems we have in Surfside where I happen to live where when the building collapsed and they didn't have enough money in the Florida. In their coffers to be able to deal with problems.
Bob Cornish: Well the reality though, is that the EB-5 industry knows that the investors are scattered, they're not unified, they don't have the intestinal fortitude to fight. Generally those that do often start and stop. And there’s pluses and minuses to that for the industry.
Should investors as partners be allowed more open communication?
[video: approx. 50:38]
One, I guess litigation risk is managed in some way by these realities. But on the other hand, if we're truly dealing with investors as partners, we do need to have open channels of communication. And that means even when we have things that are bad going on, and that's why I think it's a great idea for regional centers in deal documents.
I know a lot of people have arbitration clauses, but I think mediation is a really important tool for people to utilize in the EB-5 context when they have disputes or when things are going wrong. Because more often than not, a lot of disputes that people have in terms of what happened. I mean there are bad deal where things where you've got Ponzi's and people stealing money and that, and those people should be litigating; they should be doing good stuff for the rest of the people because we don't want scoundrels in our industry.
Mediation for disputes should be embraced more
[video: approx. 51:41]
But there are business disputes. I mean, this is the way the West works. We resolve disputes judicially in a way. And it's very different from a lot of cultures. And I think mediation is probably the least used tool that the EB-5 industry probably needs to embrace more often.
Kurt Reuss: And we say the industry, you're not talking about necessarily the regional center and the issuers, right? You're talking about the investors?
Bob Cornish: I'm talking about the investors. I'm talking about escrow everybody down, service providers generally .
Kurt Reuss: Why would they care?
Bob Cornish: Why would they come? Because they're usually thrown into the soup when something goes wrong and an enterprising lawyer is trying to find a pocket to recover from.
Kurt Reuss: Yeah, unfortunately, I think there's a lot of projects out there that if a fund administrator said, we would like to see this in the documents, the project would say, okay, we'll get another fund administrator.
Bob Cornish: Well, I can't speak for fund administrators, generally, but a mediation clause before litigation, I think is perfectly acceptable.
Kurt Reuss: I'm just saying, Bob, it seems to me like a lot of these projects, big regional centers, they've gotten used to calling the shots that things are going to be done under our rules.
You want to join in. And by the way, we've been around for X number of years and we're the best at what we do and we got 100 approvals on everything. But when you dig in that that's the stuff that really protects them.
Investors retaining security lawyers to look at offering documents
[video: approx. 53:22]
Bob Cornish: And that, again, is why securities lawyers are increasingly becoming involved with immigration lawyers and looking at EB-5 deals. I get retained regularly by investors just to look at offering documents and to render, just give them an opinion.
Kurt Reuss: You scare them off of deals?
Bob Cornish: I have,
Kurt Reuss: Yeah, I'll bet!
Waiver of fiduciary duties
[video: approx. 53:59]
Bob Cornish: One of the bigger things I know it's been a topic of discussion in the securities roundtable is the waiver of fiduciary duties.
And there are some people out there who have very, very broad waivers. I'll tell them, frankly you're giving up your fiduciary duty. You can have a manager who's subject to a fiduciary duty or you could have one that isn’t. Which one are you going to choose?
I'm going to tell them that, I mean, I'd be silly to tell them not to choose the one unless the deal is totally bad. I mean, I'm not making evaluations on the merits of the deal per se.
Kurt Reuss: No, it's hard for me to imagine that an immigration lawyer who introduces their client to you to kind of understand what the risks are is going to do it twice just because….
Bob Cornish: Oh no, the investor, the investors, usually it's investors taking the initiative to call
Kurt Reuss: Nice. That's great.
Bob Cornish: And they and they're working with somebody like Michael; they have options, they're trying to make sense of it, and, ask, I'd like for you to look at these documents from a legal standpoint. What do I need to know?
Kurt Reuss: I love that. I think that that's really what's missing because you've got a security attorney representing the project and they're drafting documents that are one sided and investors are given a yay or nay option. Do you want to, do you want to join or you not want to join? I don't see a lot of negotiation in my experience.
Bob Cornish: I don't know what to negotiate for, frankly.
Should immigration attorneys be given power of attorney?
[video:approx. 55:40]
The one thing that I think we didn't talk about and it's been on the tip of my tongue actually is why I don't see this very often, but immigration attorneys generally aren't given power of attorney by the investors to speak with the regional centers, per se, right? They should, shouldn't they?
Michael Harris:,My agreements do say that I will engage in communications with the regional center on their behalf. I may not be analyzing, able to make recommendations, but I can make requests for documents from them on their behalf. But, yeah, there's maybe more explicit power that someone could give.
Bob Cornish: I'm going to China next week and I'll be dealing with people who just, frankly, they bring in a stack of documents, and they have no idea what they did. I mean, they really have no clue, and I'm trying….
Kurt Reuss: You've got the hardest job in EB-5, Bob.
Listen guys. Michael, did you get a good answer to your question?
Michael Harris: Yes, I believe so. I think that it's a, it's a really helpful discussion to have.
Kurt Reuss: You tell me what the what you take away after this conversation? How did this question of yours get answered today?
Summary: Investors have the right to information; more transparency is needed
[video: approx. 57:19]
Michael Harris: Well I'm more confident that that my investors have the right to information about certain aspects of the project. There should be, I think, more transparency in these projects. I think that it’s very helpful. Not all attorneys are going to look over the business plans and the source documents that are developed to justify the business plan. But I'd like to see that more. Sometimes in some of these projects, they give you a lot of a lot of colorful documents, no pun intended there. But projects are going to, I think, only improve when they're willing to have these difficult conversations with investors.
I've had investors that are when things go bad, they're, they're grateful to me. They know that I'm there, I'm there trying to protect them, trying to fight them as best as I reasonably can. If you, if you see something, say something is kind of the analogy that applies here as well.
And unfortunately some regional centers if something happens, if they see something, they stick their head in the ground and they don't want to do anything that's maybe sufficient.
Bob Cornish: Investor trust is not necessarily trust in that a deal is going to go a certain way. Investor trust is an investor trusting that you're going to be truthful with them throughout the relationship. And it's a very different thing for people to be involved in a deal that's failing. Because nobody wants to be in a failed deal.
But when things do go wrong, you've got to, industry people have to know, again, it's a risk we're running. Everyone’s running businesses, they're managing risk, but they're managing relationships too. And hopefully they find the happy medium where people get the information they need, solutions are had, and people can get on with their lives because nobody wants to be fighting if they can help it.
Kurt Reuss: Right. Guys, thank you very much. It's been great having you both.
