02 Nov The INs & OUTs of EB5 Admin Fees Osvaldo ‘Ozzie’ Torres
How an EB-5 Developer can use Administrative Fees (and what they can’t do) with attorney Osvaldo Torres
The complex program that is EB-5 can confound investors, lawyers, and developers alike. Today Osvaldo ‘Ozzie’ Torres, a sought-after EB-5 expert, joins Mark and Mona to discuss the ins and outs of administrative fees, explaining how they function to defray offering expenses and the requirements around disclosing how much of the fee is devoted to broker commission. They cover the role played by offering documents, alternatives to the full-blown PPM appropriate for small deals, and the integrity issues addressed by new legislative proposals.
Securities laws ensure the disclosure of material information so that investors can make informed decisions. In fact, if an investor’s mind might be changed based on facts that are omitted or misrepresented, that’s the essence of securities fraud. Yet, the increasingly high price of administrative fees is known to befuddle investors. Where does the fee go? Does any portion of it pay the agent’s commission? Is there any situation in which the administrative fee might not be necessary?
Osvaldo ‘Ozzie’ Torres is uniquely qualified to address these issues, as he regularly speaks at EB-5 conferences on securities issues as well as other aspects of the EB-5 practice. He has enjoyed a 30-year career negotiating complex corporate transactions, including securities offerings, mergers and acquisitions, and other sophisticated deals. He has focused on EB-5 since 2011, working on various EB-5 offerings such as hotel development, multifamily residential construction, senior independent living complexes, healthcare and medical device companies, restaurants and franchises.
Today he joins Mona and Mark in addressing the difficult issues around administrative fees, from their use in defraying offering expenses to the required disclosure of broker commission. He speaks to the salesman’s stake, the necessity of offering documents any time solicitation is involved, and how disclosure documents function to protect all parties concerned. Listen in to understand why integrity issues are at the core of new legislative proposals.
Why Projects Charge an Administrative Fee
- Regional Center projects charge an administrative fee of $50K to $75K on top of the $500K capital investment. The capital investment must be at-risk at all times, so no expenses can be deducted from that amount.
- Administrative fees defray offering expenses, and agent commissions or finder’s fees qualify as an offering expense. In the world of securities law, only individuals licensed as broker dealers are eligible to receive a commission; real estate brokers do not qualify.
- In most cases, offerings should be uniform. It is not proper to charge investors different fees unless offering documents disclose this possibility.
- Securities laws require full disclosure around how much of the administrative fee goes to brokers because it is considered a material item. If an investor’s mind would be changed because of some fact that has been omitted or misrepresented, that is the essence of securities fraud.
Potential Exceptions to the Administrative Fee Rules
- If a small developer is raising money for her own project, she should not use any of the administrative fee for personal expenses, as that goes beyond the bounds of expected use. Administrative fees should be used for offering expenses only, unless the offering documents specify otherwise.
- A scenario with no administrative fee would be highly unlikely. Someone needs to prepare the necessary legal documents associated with an offering.
- When associates decide to form a company together, it could be argued that no one party is soliciting the other. In this rare case, offering documents would not be necessary. Whenever there is solicitation, offering documents are essential.
- While disclosure documents do increase the overall cost of the transaction, sponsors should be more concerned with protecting themselves against any allegations. If you are concerned about the economics of a small deal, there is an alternative to a full-blown PPM called an access letter.
- Disclosure documents protect developers and investors alike. USCIS is used to seeing these documents, and the agency is likely to reject any petition that is lacking.
The Protections in Proposed Legislation
- Integrity issues are at the core of the new legislative proposals. The industry as a whole is supportive of such integrity reform.
- Most deals gone bad involve affiliated party transactions in which the project or developer and the EB-5 fund are managed by the same control person. Proposed legislation would impose regulations to ensure more transparency and financial controls in the form of third party oversight.