On August 24, 2015, the Securities and Exchange Commission filed suit against Washington (State) based Path America SnoCo Regional Center, its CEO and several related entities for allegedly misappropriating funds and committing fraud with respect to $136 million in EB-5 investments.
In this case, the SEC is attempting to shut down what seems to be a fairly significant bad actor. Among the alleged misdeeds, the Regional Center and the CEO are accused of diverting investor funds to other projects the CEO controlled, withdrawing hundreds of thousands of dollars of cash from casinos in Canada and using investor capital to purchase a private residence.
On the face of it, the case is somewhat unremarkable as the SEC is doing its job to protect investors from issuers engaging in fraud and thievery. It is somewhat notable that this civil action for injunctions and other relief does not come with a parallel criminal action from the US Justice Department. Perhaps that will come later and this action was only meant to immediately stop the continuing harm.
One interesting aspect of the case was the use, in a limited fashion, of escrow accounts. In this case, the investors placed 100% of their capital in escrow accounts, but according to the terms of the subscription agreements (and as described in the PPM), $400,000 of the $500,000 investment was to be released upon the filing of the given investor’s I-526 petition and the balance upon I-526 approval. So in effect, 80% of the investment capital had no true form of protection for any real length of time. For the release of the $400,000, there was no meaningful business or immigration related condition. One could imagine that the sponsor used this extraordinarily weak form of escrow in their marketing to help create a false sense of security on the part of the investors.
The cautionary tale of this case is that investors should do their sponsor diligence and think carefully about the structure of the deal. No matter what the structure or background of the sponsor, investors in all investments (EB-5 and non-EB-5) are vulnerable to a sponsor who has the intent to steal and defraud. Some things to watch out for that can help are whether the sponsor works with top professional service providers (lawyers and accountants). If they use escrow, do they use the strongest form (release only upon I-526 approval, for each investor with respect to his or her capital). While this cannot save an investor from bad deeds after approval, it’s hard to imagine the criminal sort putting in a structure which requires a significant waiting time, like full approval release.
I would like to congratulate the SEC for their hard working in helping ensure the integrity of the US EB-5 program. If anyone would like a copy of the case, simply send me an email to firstname.lastname@example.org.
©2015 Matthew Gordon
Reprinted with permission.
Originally posted at: ILW.COM EB-5 Blog