For over a generation, the United States government hasbeen encouraging high net worth investors andentrepreneurs to earn conditional permanent residencystatus (which may lead to eventual U.S. citizenship)through the EB-5 Investor Visa Program (the “EB-5Program”) by investing at risk capital in the United Statesthat leads to the creation of jobs. To further enhance theEB-5 Program, Congress established a pilot projectallowing immigrant investors to link their investmentcapital with a regional center (each a “Regional Center”)which has been approved by the U.S. Citizenship andImmigration Services (“USCIS”) for the promotion ofeconomic growth in a targeted area. Despite theestablishment of the Regional Center project, few foreigninvestors took advantage of the EB-5 Program during theprogram’s first 15 years. For example, in 2005 only 332visas were issued under the EB-5 Program, even thoughup to 10,000 visas are reserved for issuance each yearunder the program. The U.S. government took steps tostreamline this process in 2008 as a response to thefinancial collapse, and their results were successful. Thenumber of visas issued under the EB-5 Program rose byover 30 times in less than 10 years. As a result, on August23, 2014, the number of visas granted under the EB-5Program in a single fiscal year reached the 10,000 visalimit. For the first time in the history of the EB-5Program, USCIS had to turn away prospective foreigninvestors (all of the affected applicants resided in Chinawhere a disproportionate number of EB-5 Programapplicants are located); these individuals were notallowed to apply for a visa under the EB-5 Program untilthe start of the U.S. federal government’s next fiscal year.

The number of regional centers established under the EB-5 Program also exploded. In 2009, there were 90 regionalcenters operating in 34 states. As of March 2, 2015,USCIS has approved nearly 641 regional centers that,collectively, are located in every state in the U.S. (exceptfor Wyoming) as well as in Guam, Puerto Rico, theMarianas Islands, the District of Columbia and the U.S.Virgin Islands.

Unfortunately, certain individuals and enterprises havetaken advantage of the remarkable pace of growth of theEB-5 Program in general (and of the Regional Centerpilot project in particular) to defraud both foreigninvestors looking to obtain conditional permanentresidence status in the U.S. and the regional economiesthat are relying upon the investment capital provided bythese foreign investors. This nefarious activity has caughtthe attention of the Enforcement Division of the UnitedStates Securities and Exchange Commission (the “SEC”)which has filed three civil actions in U.S. federal courtand initiated two administrative proceedings againstpromoters looking to take advantage of innocent foreigninvestors who were willing to risk their hard earnedsavings in the hopes of attaining a path to U.S. citizenship.This article will briefly discuss the developmentsassociated with two of these enforcement actions.

A Chicago Convention Centre, LLCOn February 6, 2013, the SEC commenced an action inIllinois federal court alleging that from November 2011through February 2013, Anshoo Sethi, a managingmember of Intercontinental Regional Center Trust ofChicago, LLC (“IRCTC”), used IRCTC’s status as aregional center approved by USCIS to convince over 250Chinese nationals to invest at least US $500,000 (plus payan “administrative fee” equal to US $41,500) in anIRCTC project to build the “World’s First Zero CarbonEmission Platinum LEED certified” hotel and conferencecenter. However, in soliciting investors, the SEC allegedthat Mr. Sethi made false claims such as: (i) Starwood,Intercontinental and Hyatt have executed franchiseagreements to manage the property, (ii) IRCTC willcontribute land valued at over US $177 million, and (iii)the hotel project is likely to generate over 8,000 jobs,meaning that up to 800 foreign investors would qualifyfor conditional permanent residence status under the EB-5 Program. According to the SEC, the money invested bythe foreign nationals (totaling US $145 million) was notused to build a hotel; rather it remained in escrow despite

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April 2015

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Business LawA Path to U.S. Citizenship May Lead Straight into a Minefield

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Mr. Sethi’s attempts to have all or a portion of this amountreleased to him and/or entities he controls. The SECasserted that Mr. Sethi and/or entities he controlsmisappropriated nearly $10 million in administrative feesfrom foreign investors as a result of this scheme. OnMarch 17, 2014, the defendants in the case settled thismatter without admitting or denying the SEC’sallegations. As a result of this settlement, the defendantswill have to pay over US $11.5 million in disgorgement ofill-gotten proceeds and a civil penalty of nearly US $4million, as well as be barred for a period of 20 years fromundertaking certain securities related activity. On August27, 2014, a federal grand jury in Chicago charged AnshooSethi with 8 counts of wire fraud and 2 counts of makingfalse statements as a result of his participation in thisscheme. This criminal matter is currently subject to pre-trial motions. If convicted of all charges, Mr. Sethi couldface a maximum of 170 years in prison and a total fine ofUS $2.5 million or more.

Justin Moongyu Lee et. al.On September 3, 2014, in a coordinated action, the U.S.Federal Bureau of Investigation obtained an indictmentand the SEC filed a complaint against Justin MoongyuLee, a former lawyer who practiced in the Los Angelesarea. The indictment charges Mr. Lee with 9 counts ofwire fraud and alleges that he unlawfully took US $47million from 94 foreign investors. The SEC’s complaintaccuses Mr. Lee, his wife, Thomas Edward Kent (anotherformer lawyer who practiced in California) and fivecompanies controlled by Mr. Lee of misappropriatingnearly US $11.5 million from 24 foreign investors. Eachfederal action claimed that investors were told that theirmoney would be used to construct an ethanol plant inWestern Kansas which would generate a sufficientnumber of jobs to allow them to qualify for conditionalpermanent residency status in the United States. In fact,no ethanol plant was ever built, no jobs were ever createdand most of the money raised was used to finance anunrelated project in the Philippines to extract iron orefrom sand and to repay investors in other, unrelatedinvestments offered by Mr. Lee. At the time the federal

actions were filed, Mr. Lee was held in detention in Koreaon charges related to the alleged EB-5 visa scheme.Currently, with respect to the SEC action, a defaultjudgment has been effected against the five companiescontrolled by Mr. Lee and an administrative proceedingwas commenced against Mr. Kent. The criminal action isstill pending; if convicted of all charges, Mr. Lee couldface a maximum of 180 years in prison.

Alert to Foreign InvestorsAs a result of these cases and other recent, documentedfraudulent activity targeting foreign investors, the SECand the USCIS took the unprecedented step of jointlyissuing an alert warning foreign investors not to be thevictim of unscrupulous promoters looking to solicitinvestments in fake or fraudulent projects that arepurportedly sanctioned under the EB-5 Program. The twoU.S. federal agencies urged prospective foreign investorsto take these steps prior to making any investment thatthey believe would qualify under the EB-5 Program.

• Confirm that the Purported Regional Center hasbeen Designated by USCIS – A list of all designatedRegional Centers may be found at www.uscis.gov.Foreign investors should be aware that USCIS doesnot endorse the Regional Centers listed on its websiteor any of the investments offered by any such RegionalCenter.

• Ask the Purported Regional Center to ProvideCopies of Documents that it Filed with the USCIS –Regional Centers should be able to provide foreigninvestors with copies of the initial application it filedto obtain Regional Center status on Form I-924 and ofthe supplements it must file annually on Form I-924Aas well as all supporting documentation.

• Request the Purported Regional Center to ProvideInformation about the Proposed Investment inWriting – The regional center should be able toproduce a copy of the offering memorandum from theissuer of the securities and be able to answer anyreasonable questions that foreign investors may have.

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• Ask about the Compensation Structure for all thosePromoting the Investment – Foreign investorsshould ask how much money or what type of benefitsthose people who appear to be independent but arerelated to the purported regional center, such asconsultants, lawyers or agencies, expect to receive inconnection with recommending the investment.

• Seek Independent Verification about the ProposedInvestment – Legitimate investment opportunitiesshould generate verifiable corroboration. If theinvestment is in commercial real estate development,there should be construction permits and property taxassessments available at the municipal or countyrecords office. If the proposed investment involves atransaction with one or more arms’ length third parties,foreign investors should approach these companies forconfirmation.

• Examine Structural Risk - If the funds from theproposed investment is to be used to loan funds todevelop projects, foreign investors should carefullyexamine the loan documents and offering statementsto determine if the loan is secured by any collateralpledged to investors.

• Consider the Purported Regional Center’sIncentives – The financial incentives of the principalsof the purported regional center, and of the developersof the project that will receive the investmentproceeds, should be the same as the incentives for theforeign investors. In short, each of them should have“skin in the game”. If they don’t, then the foreigninvestors should stop considering the prospectiveinvestment.

• Look for Warning Signs of Fraud – Foreigninvestors are cautioned not to invest in a prospectiveinvestment managed or sponsored by a purportedregional center if they spot one or more of thefollowing:

° Guarantees or promises of obtaining permanentresidency status through the proposed investment –Investing through a regional center makes you

eligible to apply for permanent residence status aftera two-year period of maintaining conditionalpermanent residence status, there are no guaranteesthat any immigration status will be obtained as aresult of any investment under the EB-5 Program;

° Guarantees of minimum investment returns or noinvestment risk – Money invested with a regionalcenter is required by law to be “at risk”. There are noguarantees with at risk investments;

° Overly consistent high returns on investment – Atrisk investments tend to fluctuate. Foreign investorsshould avoid any investment that provides overlyconsistent above market returns, it may be a warningsign that the investment is really a fraudulentscheme;

° Unregistered Investments – Those that issue and/orpromote securities that are registered in the U.S.have to provide prospective investors with asignificant amount of information about theinvestment and the company that is spearheading theinvestment. However, if the securities offered are notregistered, the amount of information that isavailable to investors declines significantly;

° Unlicensed Sellers – Principals of regional centersand any of their affiliated agents most often need tohave a license to sell securities, even if thosesecurities are not registered. Foreign investorsshould stay away from any securities offered or soldby unlicensed sales personnel; and

° Layers of Companies Run by the Same Individuals –Investments using complex corporate structures mayhide real or potential conflicts of interest. Foreigninvestors should demand that the purported regionalcenter fully disclose and minimize any suchconflicts.

Foreign investors who wish to participate in the EB-5Program are strongly advised to consult with legalcounsel who are familiar with U.S. immigration andsecurities laws before they invest in any project whetherthrough a regional center or otherwise. They should not

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This article provides information of a general nature only and should not be relied upon as professional advice in any particular context.For more information about Business Law, contact a member of our Business Law Practice at 905.273.3300.If you would prefer to receive your bulletins by email, visit www.pallettvalo.com/signup or send an email to marketing@pallettvalo.com.

let the prospect of permanent residency status in the U.S.,and the subsequent hope of journeying down the path toU.S. citizenship, lead themselves down a dead-end road tofinancial heartache.

If you would like to know about the EB-5 Program orabout other important issues in U.S. securities law, pleasecontact Bill Kitay at (905) 273-3022, ext. 291 or atbkitay@pallettvalo.com.

Bill Kitay, Senior Counsel at the law firm of Pallett ValoLLP, is one of the few lawyers located in Southern Ontariowho is qualified to provide legal advice and counsel inboth Canadian and U.S. law. Specializing in securitiesand corporate law, Bill’s goal is to make Canada moreaccessible to U.S. businesses and make the U.S. moreaccessible to Canadian businesses.

Pallett Valo LLP Business Law PracticeStructuring your business, and business proposals, for success requires the rightpartnerships and specialized expertise. At Pallett Valo, we represent both growthbusinesses and established enterprises in all sectors. Our specific legal knowledge andwide-ranging experience will empower your business decisions - enabling you to actwith confidence and decisiveness to take advantage of all opportunities. We bring ararely-found enthusiasm, creativity and cost-effectiveness to both your day-to-day legalrequirements and more complex strategic legal needs.

Contact Members of our Business Law PracticeMurray Box mbox@pallettvalo.com Andréa Brinston abrinston@pallettvalo.comDirect Dial: 905.273.3022 Ext. 240 Direct Dial: 905.273.3022 Ext. 219

Joe Conte jconte@pallettvalo.com Olivia Gismondi ogismondi@pallettvalo.comDirect Dial: 905.273.3022 Ext. 217 Direct Dial: 905.273.3022 Ext. 209

Murray Gottheil gottheil@pallettvalo.com Bill Kitay bkitay@pallettvalo.comDirect Dial: 905.273.3022 Ext. 245 Direct Dial: 905.273.3022 Ext. 291

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Bill Kitay is amember of theBusiness LawPractice.