John Reilly: EB-5 a flawed program with poor results - VTDigger

John Reilly: EB-5 a flawed program with poor results

Editor’s note: This commentary is by John Reilly, who is an independent consultant in the field of communications and public relations. He was director of public relations for MFS Investment Management in Boston from 1989 to 2014. Prior to joining MFS he was a reporter for the Burlington Free Press and USA Today. John serves on the board of Vermont Journalism Trust.

Among the many troubling questions raised by the financial disaster that has befallen the Northeast Kingdom since the government has accused the operators of the Jay and Burke ski areas of operating a Ponzi scheme is one aimed at the heart of the entire financing structure:

Why is the government selling immigration visas to foreigners in exchange for substantial investment in economic development programs?

Acknowledged, this is a region long on natural beauty but short on capital necessary for development and job creation. In the face of such needs, government officials often decide to address the issue by creating incentives to attract investment. The record on many such programs is mixed at best, and in the case of the EB-5 program to attract investment to Burke and Jay it is nothing short of disastrous.

For starters, why is a nation like the United States, founded on principles of equal opportunity for all, granting special immigration status to those who are capable of paying for it? Should we now change the wording of the famous Emma Lazarus poem at the Statue of Liberty to read, “… give me your huddled masses, yearning to be free, and willing to drop a half million to help us develop our ski areas …”

Secondly, are incentives like this a good idea in capital formation? Most economists would say no. In a free market economy, capital tends to flow to where it will achieve its highest return. Incentives designed to encourage benefits external to the underlying investment tend to cloud the picture.

In a free market economy, capital tends to flow to where it will achieve its highest return. Incentives designed to encourage benefits external to the underlying investment tend to cloud the picture.


And thirdly, if investors are going to make sound decisions about how to allocate their capital, they need adequate disclosure to help them evaluate the soundness of the investment, how the project managers are doing as stewards of their capital and what type of return they can expect on their investment, beyond the basic incentive in this case of a visa.

This type of disclosure is the province of securities regulators like the federal Securities and Exchange Commission and the Vermont Department of Financial Regulation. Yet in their zeal to attract international investment the architects of the EB-5 program have enabled financiers to solicit investment through private offerings exempt from SEC registration (although the Burke and Jay operators neglected to file for such an exemption as they were supposed to have done). In Vermont the program was overseen not by financial regulators but by economic development officials, at least until improprieties began to surface and the regulators stepped in to straighten out the mess.

While the Vermont case is particularly troubling, it is far from the only case to demonstrate problems in the EB-5 program. Although the regional economic benefit requirement is a modest gain of 10 jobs in exchange for the $500,000 investment demanded, proof of actual direct job creation is inconclusive. A July 2014 Fortune magazine quoted a December 2013 study by the Department of Homeland Security’s inspector general that found that the government “cannot demonstrate that the program is improving the U.S. economy and creating jobs for U.S. citizens.”

Certainly the creation of jobs in the Northeast Kingdom is very much in doubt now, and in fact a number of pre-existing jobs are now in jeopardy as the receiver handling Jay and Burke warns they may need to be shut down imminently due to insufficient assets and cash flow to cover operating expenses.

It’s a lamentable situation. Champions of the program in Vermont like Sen. Patrick Leahy and Gov. Peter Shumlin acknowledge the need for reforms but also defend the oversight, saying it uncovered the problems now being addressed. Too little too late for those who invested in the projects or whose economic livelihood depends on them.

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  • Jay Eshelman

    RE: In a free market economy, capital tends to flow to where it will achieve its highest return. Incentives designed to encourage benefits external to the underlying investment tend to cloud the picture.

    ‘Cloud the picture’ is a euphemism. It’s otherwise characterized as ‘crony capitalism’. In the case of EB-5, it’s been going on for 25 years. A lamentable situation, indeed.

  • I understand your points, but don’t completely agree. There are many more successful projects that would not have happened if not for this creative program. Immigrants also come in all sizes, shapes and economic conditions. If we are to welcome the poor and political refugees, surely we have room for a relatively few who are willing to invest in their American Dream.

    • Jay Eshelman

      Mr. Pardo: If there are so many successful EB-5 projects, why then did Forbes, a respected business magazine, report as follows back in 2015?
      According to a statement made today by Senator Grassley on the floor of the Senate, last June, Congress heard the following from a whistleblower in a Senate committee hearing:
      “EB-5 applicants from China, Russia, Pakistan and Malaysia had been approved in as little as 16 days and in less than a month in most. The files lacked the basic and necessary law enforcement queries… I could not identify how USCIS was holding each regional center accountable. I was also unable to verify how an applicant was tracked once he or she entered the country…During the course of my investigation it became very clear that the EB-5 program has serious security challenges.”
      Fortune magazine reported how one man cheated potential immigrants out of $147 million dollars for a make-believe building project he never intended to finish. The article explains how the trickster claimed the project would create over 8,000 jobs. In reality, some 290 foreigners were tricked out of their cash.

      I’m not saying that it’s impossible for a government bureaucracy to manage business finances…anything is ‘possible’. I’m saying that I’ve never seen it happen – and EB-5 appears to be yet another example of the bureaucracy’s incompetence.

      • William Hays

        “…Forbes, a respected business magazine…” is now Japanese-owned. Maybe they have their own ox to gore. At least the situation in Canada is more straightforward: “Bring (lots of) money and you can become a citizen”. Most of the shops in Banff (National Park), AB are bi-lingual (Japanese and English. No Francophones!).

        • Actually Forbes is majority owned by Integrated Whale Media, owned by Chinese, not Japanese investors, and headquartered in British Virgin Islands, a tax haven. They have defaulted on part of their payments to the Forbes family and are being sued.

          • Jay Eshelman

            Sure…shoot the messenger.

            I guess this explains why the article is critical of Chinese investors.

            Where in the world is Chicken Little?

  • Howard Ires

    I’ll add – Where are our USA “job creators” who have benefited from ever lower tax rates on investment? Where are the banks too big to fail who we bailed out when they failed? Banks who can borrow from the Fed at 0%. Where are the corporations flush with cash? What happened to OUR capital markets? If these investments are sound why do we need to take the money of people desperate for green cards? The EB-5 program is a poor substitute for the bank loans or investor financing that should be easily available for good projects.

    • Gary Murdock

      “The EB-5 program is a poor substitute for the bank loans or investor financing that should be easily available for good projects.”

      You are right, it is a poor substitute. Which leaves only the obvious: they are not good projects. American investors don’t need a green card as a return on their investment, so their not going to invest in projects with no or very small returns. EB-5 to the rescue of projects that are financial duds.

    • Mary Reed

      Excellent point, Mr. Ires! The EB-5 program is, in large part, the result of the inability (or unwillingness) of ‘our’ capital markets to invest in ventures such as Sugarbush ski area/ resort growth and Meigs (DR) in Vergennes. Both of these relatively small enterprises could not get much-needed capital through US markets, but they did get it through the EB-5 program. Mr. Reilly’s claims notwithstanding, it appears that everyone – investors, business owners, employees, and VT communities did benefit. I think Mr. Reilly tars EB-5 with far too fast and broad a brush. There certainly was not adequate oversight (as sadly demonstrated by the Kingdom con) but that has been more true of our capital markets for countless decades, and the financial disasters and consequences to US citizens and taxpayers have been far greater.

      • Willem Post

        So EB-5 is a welfare program to finance projects no smart lender would touch with a ten foot pole?
        No wonder cronyism and insider dealing runs rampant.
        They are playing with other people’s money.

  • For Vermonters to debate the underlying logic of this method of capital creation is a waste of time. The main problem here in Q-Vermont is the state grossly underestimated the attractiveness of the program to foreign investors. This created an environment where Mr. Quiros, with Mr. Stenger’s able bodied assistance, was incentivized to create more and more projects of lower and lower quality to soak up the available funds. Put yourself in the shoes of a foreign investor and it is easy to see why many found these investments attractive. Presented with the opportunity to hedge political and currency risk in their home countries, gain a green card to the US, AND get a return on their investment, many voted with their pocketbooks and decided the EB-5 program was an excellent investment. The imprimatur of the Vermont state government promising “oversight” of the projects was the icing on the cake which steered many investors to the Vermont program. We all know what happened next.

    • John Klar

      Nicely put, Mr. Loucks…

  • Patrick Zachary

    A little late to the table…..

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