EB-5 fund administrators NES Financial/JTC asked due diligence expert Rupy Cheema why a third-party evaluation of a redeployment investment can be beneficial to the EB-5 Manager and fund. Independent evidence of fairness of process and price/terms can be a major advantage to protect against future litigation. Further, an independent report can provide the full and fair disclosure required for a properly conducted investor vote.
Redeployment is a relatively new but challenging issue in EB-5. It is the act of reinvesting EB-5 investor capital that has been returned to the New Commercial Enterprise (NCE) prior to the investor completing his or her two-year conditional residency period. As an investor’s capital must be “at risk” for the entirety of conditional permanent residency, in such a case that capital must be reinvested.
NES Financial/JTC, EB-5 fund administration leaders, spoke with EB-5 due diligence expert Rupy Cheema about why a third-party evaluation of a proposed redeployment option is vital.
One of the fundamental issues at the heart of redeployment is that an EB-5 fund Manager is not an investment advisor, but it must still make a very critical investment decision. This task is compounded by the need to balance investors goals that may not align with developer needs, as well as conflicts of interest.
Engaging a registered investment advisor (RIA) can provide a much-needed independent evaluation of the investment, conflicts of interest, ways to deal with such conflicts, exit scenarios, and other high-risk issues.
In the case of future litigation, such independent analysis can provide the evidence fairness of process and price/terms. While such analysis will always strengthen a fund Manager’s defense, it is especially critical in the common scenario where the Manager has a conflict of interest: managing the EB-5 fund’s investment while also having an interest in the investment. Such a situation could lead a court to use the “Entire Fairness Standard” to determine if fair process and price/terms were employed by the Manager.
Without such an independent evaluation, how can a Manager properly defend an allegation of breach of fiduciary duty? And even if a Manager has waved fiduciary duties in the organization documents, it still must uphold the duty of good faith to the fund — a duty that can still be legally challenged.
Cheema states that the best defense is protection from the onset: ”With EB-5 investors becoming increasingly litigious over redeployment decisions, a fund Manager will need protection from the very start. This redeployment advisory service is as close to a bulletproof vest as they will find. “
Such a vote requires the full disclosure of all material facts; a failure to provide this disclosure can later strip away the protection such a vote would have otherwise provided. Again, an independent evaluation is the best way to provide such disclosure.
NES asks Cheema for her views on why independent fund administration is another best practice for redeployment. The issues of transparency and mitigating conflicts of interest are once again paramount. An independent entity, such as NES Financial/JTC, can properly monitor fund transfers and give investors the reporting, sometimes in real time, that they need to be informed and confident.
Transparency and third-party expertise are always vital to both investors and stakeholders in the entire EB-5 process, and especially so in the redeployment of investor capital.
See the NES Financial/JTC article “EB-5 Expert Discusses how Fund Managers can Avoid Investor Challenges from Redeployment Decisions”
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