EB5 Investors Magazine Volume 7, Issue 1 - Page 12

EB5 INVESTORS M AGAZINE 10 ...the EB-5 sponsor could engage an independent third party to review the proposed reinvestment. ” until the last EB-5 investor in their fund is eligible for repayment. If an EB-5 fund does not provide for staggered distributions to EB-5 investors as they become eligible for repayment, the EB-5 sponsor is not authorized to make distributions in that manner. The sponsor could be subject to litigation if some EB-5 investors suffer losses while other EB-5 investors in the same fund do not because they were repaid earlier. Therefore, it may be necessary to amend the applicable corporate documents that were prepared when the issue did not exist to permit the change. Another position that could be taken, depending upon the language of the applicable operating/partnership agreement could be to allow the manager/general partner to amend the agreement to comply with EB-5 Program guidelines. HOW TO REDUCE EB-5 FUND SPONSOR RISKS OF LITIGATION  T h e c o n c e r n s o f E B-5 i n v e s t o r s r e g a r d i n g reinvestment are reasonable. EB-5 fund sponsors must address these concerns if they wish to avoid l it ig at ion a nd a l l of it s at tenda nt e x pense a nd reputational harm. To avoid litigation, EB-5 fund sponsors should adopt the following redeployment practices for the benefit of their EB-5 investors. USE AN INDEPENDENT REVIEW PROCESS & AN INDEPENDENT INVESTMENT ADVISOR TO SELECT THE REINVESTMENT An independent review of the proposed reinvestment is an essential element to establish fairness in the selection process. This is most important in cases where there is any affiliation between the EB-5 fund manager and the parties with economic interests in the project being funded with the reinvestment. If the party making the selection of the reinvestment will receive an economic benefit from the reinvestment in the project chosen, the EB-5 investors would have ample reason to question whether the choice of that project is fair to the investors. For this reason, the EB-5 sponsor could engage an independent third party to review the proposed reinvestment. This independent review should include due diligence on the project, the track record of the owner or developer of the project, the terms of the reinvestment, and any other financing used for the project. The EB-5 fund manager should consider the engagement of an independent registered investment advisor as part of this process. This is because it establishes not only the independence of the process but the qualifications of the reviewer to act as an independent party in the reinvestment process. IF A PROJECT BY THE SAME DEVELOPER AS THE ORIGINAL PROJECT IS AVAILABLE, CONSIDER THE BENEFITS OF THAT INVESTMENT TO THE EB-5 INVESTORS Many EB-5 investors selected their EB-5 investment based on their confidence in the developer of the project in which their capital was originally invested. These EB-5 investors may therefore prefer that their capital be reinvested in a project with the same developer because of their familiarity with the developer, the fact that their original investment was successfully repaid, and the ease of transition from the original investment to a new investment, perhaps with the same forms of investment documents as the original investment. In addition, the fact that the reinvestment is with the same developer may provide some immigration benefits by demonstrating that the reinvestment is “within the scope” of the EB-5 fund’s business. CONSIDER & COMPARE OTHER REINVESTMENT OPPORTUNITIES EB-5 f u nd m a n age r s shou ld con sider w he t her there are other reinvestment opportunities that are reasonably available that would better protect