One of the big attractions of the EB-5 (immigrant investor) program to U.S. middlemen is that it does not operate under the general rules of the financial markets, something never discussed by those in the industry.
The program gives a family-sized set of green cards to alien investors who put up, currently, a minimum $800,000 stake in a Homeland Security-licensed, but not guaranteed, project, usually a pooled investment in urban real estate. Some aspects of the program, over the loud objections of the middlemen, are being changed by DHS to reflect changes made by Congress earlier this year.
In the housing industry, there is the concept of an “arms-length sale” in which buyer and seller are not related to one another, and in which there are no special pressures (such an impending bankruptcy) on either buyer or seller. Only these sales are used to establish the assessed value of houses, for instance.
Similarly, when one buys or sells stocks and bonds on the open market, we are dealing with two parties, each of which has access to the same information about the 100 shares of, say, U.S. Steel. Further, the transaction is an open one, and everyone interested knows where Big Steel closed that day.
The EB-5 program provides perfect examples of non-arms-length transactions, and is thus beloved by middlemen. On one side, there is the developer who is looking for a bargain in the cost of capital, and on the other side is an “investor” who wants, sometimes desperately, another passport, and is using the EB-5 program as the technique to secure such a document.
The real estate middlemen who run the USCIS-licensed regional centers usually have to pay something like 10 percent interest when borrowing money on the open market for something called mezzanine financing (i.e., there is no collateral). However, they can get the same loans for about 1 percent when they are dealing with EB-5 investors because the EB-5 investors' eyes are on the visas, not the rate of return. This is also a market where, unlike the stock market, very little is public.
All of this, for better or worse, is tolerated by our government, and thus is more or less legal, if unattractive.
But a recent EB-5 court case has displayed yet another level of inequity, over and beyond that accepted by the government, a kind of inequity that allows the most unscrupulous of middlemen to exploit the foreign investors.
What we are dealing with here is the imbalance between the smarts and the knowledge of a controversial developer and Chinese EB-5 investors; as in so many of these cases, most of those involved, on both sides, have Chinese names. Routinely, these investors have no ability to read or speak English.
The imbalance between the parties is strikingly obvious even without any detailed knowledge of the case — the foreign investors, saying that they were cheated by the middlemen, sued for damages in a state, not a federal court. I am not a lawyer, but have been writing for years about EB-5 investor cases — many successful — that have been brought in federal courts. The investors sometimes get all of their money back, sometimes just some of it, but it is always in federal courts. EB-5 is, after all, a federal program.
But these 17 hapless Chinese investors and their equally hapless U.S. lawyer wandered into the North Carolina state courts and found a judge who said that nothing that happened took place in her state, and tossed out the suit. Perhaps the 17 will try again at the federal level with, one hopes, a different lawyer.
This seemingly obvious aspect of the case was not mentioned in a Law360 report on the matter. Those sued were Pac Rim Venture LTD, a New York firm, and Gongzhan Wu, who may be a Chinese national.
According to Law360, Wu and the other defendants were accused of planning "carefully orchestrated visits for the investors to check in on the project, which they claimed were designed to dispel plaintiffs' concerns and gloss over any current issues".
Each of the investors, who had put up half a million each, was said to have lost “approximately $1,500 annually between 2015 and 2019". If that is accurate, which appears unlikely, it seems to be an extremely modest sum to take to court.
Presiding in the case is North Carolina Superior Court Judge Julianna Theall Earp. The failed development was on the waterfront in Wilmington, N.C. It was said to have raised $8.5 million from the 17 investors.