The EB-5 Journey: What Happens When Your Investment and Green Card Are at Risk?

The EB-5 Immigrant Investor Program has long been promoted as a pathway for foreign nationals to gain U.S. permanent residency by investing in American businesses and creating jobs. For many, the allure is twofold: a new life in the United States and the eventual return of their significant capital investment, often with a modest profit. But what happens when the promise sours, and investors find their funds – and sometimes their immigration status – jeopardized by those entrusted with managing their capital?

At Fazio | Micheletti LLP, we've seen firsthand the complexities and frustrations that can arise when EB-5 investments don't go as planned. While many projects succeed, the structure of EB-5 investments can unfortunately open doors to potential mismanagement, leaving investors in a precarious position.

The Typical EB-5 Investment Structure: A Quick Overview

Typically, an EB-5 investor contributes a substantial sum (historically $500,000, plus administrative fees) into a new commercial enterprise. Often, this takes the form of becoming a limited partner in a "Funding Partnership." This Partnership then usually loans the pooled investor capital to a "Developer" who is responsible for executing a specific project (like a real estate development) designed to create the requisite U.S. jobs.

The investor's agreement usually outlines:

• The expected timeline for the investment (e.g., a 5-year loan term).

• The conditions for repayment of their capital (often tied to the loan's maturity and the adjudication of their immigration petitions).

• Any interest or preferred return they are entitled to.

• Limited rights, as management is typically vested in a General Partner associated with the project.

Common Pitfalls: When the System Fails Investors

Drawing from situations we've encountered, here are some common ways EB-5 investors can find their investments improperly handled:

1.     Unending Loan Extensions & Delayed Repayment:

• The Promise: Offering documents typically specify a loan maturity date, by which the Developer should repay the Funding Partnership, enabling the return of capital to investors (assuming immigration requirements are also met). Some agreements allow the Developer a limited, pre-defined option to extend this maturity date (e.g., one or two short extensions).

• The Problem: Investors sometimes find their capital locked up indefinitely as fund managers grant developers numerous extensions far beyond what was originally stipulated, often without investor consent or even proper notification. These extensions can occur even after investors have fulfilled their immigration requirements (like obtaining I-829 petition approval).

2.     Mismanagement by Fund Managers (General Partners):

• Fiduciary Duty: The General Partner of a Funding Partnership owes fiduciary duties to the limited partner investors. This means they must act in the best interests of the investors, with loyalty and care.

• The Problem: Conflicts of interest can arise, especially if the General Partner is affiliated with the Developer or other entities benefiting from the project. We've seen allegations where General Partners:

  • Enter into forbearance agreements with defaulting Developers without investor knowledge or consent, further delaying repayment.

  • Fail to take appropriate action (like litigation) against Developers who default on loan repayments, sometimes claiming a lack of funds for such action – a situation potentially created by their own prior decisions.

  • Misrepresent USCIS rules, such as the "at-risk" requirement, to justify indefinitely holding or re-deploying investor capital even after the sustainment period has passed and immigration petitions are approved.

  • Make significant changes to the loan terms or even the structure of the investment (e.g., converting debt to equity, or changing the Developer’s corporate structure) without the necessary investor approvals, potentially diminishing investor rights and recovery prospects.
    

3.     Lack of Transparency and Communication:

• The Expectation: Investors should be kept reasonably informed about material developments affecting their investment.

• The Problem: Often, crucial decisions are made behind closed doors. Investors may only learn years later that maturity dates were improperly extended, that the Developer is in financial distress, or that their funds have been used in ways not originally contemplated. This lack of transparency can make it incredibly difficult for investors to protect their interests.
  

4.     Developer Default and Insufficient Recourse:

• The Risk: All investments carry risk, and Developer default is a possibility.

• The Problem: When a Developer defaults, the General Partner is responsible for pursuing remedies to recover the loaned funds. However, if the General Partner is conflicted or mismanages the situation, the chances of investors recovering their capital can be severely diminished. Sometimes, the underlying loan agreements themselves are breached by developers who fail to meet repayment obligations despite multiple extensions and favorable terms.

What Can EB-5 Investors Do?

If you are an EB-5 investor and believe your capital is being improperly withheld or your investment is being mismanaged, it's crucial to understand your rights. The Limited Partnership Agreement, Subscription Agreement, and the project's offering documents are key contracts that define the obligations of the fund managers and developers.

Potential legal actions can include:

• Class-action claims for breach of contract.

• Class-action claims for breach of fiduciary duty against the General Partner.

• Shareholder derivative lawsuits brought on behalf of the Funding Partnership against those who harmed it.

• Demands for an accounting of the partnership's finances.

These situations are complex, often involving multiple layers of entities and agreements. Many EB-5 investors may also face language barriers or may be unfamiliar with the U.S. legal system, making it even more daunting to challenge powerful project promoters and fund managers.

Seeking Experienced Counsel

Navigating these disputes requires legal counsel experienced in securities, contract law, partnership disputes, and class action or derivative litigation. An attorney can help you understand your specific situation, assess the viability of legal claims, and work to hold the responsible parties accountable.

Fazio | Micheletti LLP has decades of experience in complex litigation, and it has handled complex EB-5 cases with our co-counsel at the Silicon Valley Office of DeHeng Law Offices, P.C., one of the largest law firms in China.

The EB-5 program is intended to be a mutually beneficial arrangement. When that trust is broken, and investors' capital is put at undue risk or improperly withheld, exploring legal options becomes essential.

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Disclaimer: This blog post is for informational purposes only and does not constitute legal advice. The circumstances of each EB-5 investment are unique, and you should consult with a qualified attorney to discuss your specific situation. Past results do not guarantee future outcomes.