Ponzi schemes are prohibited and illegal

Because of the recent fraud charges against several individuals operating EB-5 regional centers, the Security and Exchange Commission has issued alerts to EB-5 investors about Ponzi schemes.  Ponzi schemes are prohibited and illegal.

What is a Ponzi scheme?

Normal investments typically pay investors a return from any profit that is earned.  In a Ponzi scheme, the managers may not have any profit to pay its investors and instead will take funds from newer investors to pay a “return” to earlier investors.  The Ponzi scheme is perpetuated when the managers continue to attract new investors in order to continue paying earlier, existing investors a “return”.

Why do Ponzi schemes collapse?

If the investment scheme has little or no actual earnings, once the managers of an investment run out of new investors, the money dries up and earlier investors who believe they are still invested in a legitimate fund will no longer receive any “returns”.  The same can also be true if a large number of existing investors leave the investment and deplete the available pool of funds from which “returns” are drawn.

How did Ponzi schemes get their name?

Charles Ponzi defrauded thousands of New England investors in the 1920s in the U.S. by promising high returns in a short period of time on postage stamp speculation schemes.

What are some of the red flags of a Ponzi scheme?

The SEC provides a list of “red flags” that may signal potential issues in which an EB-5 investor should conduct more research before making an investment.  The red flags are quoted below:

  1. High investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any "guaranteed" investment opportunity.
  2. Overly consistent returns. Investment values tend to go up and down over time, especially those offering potentially high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.
  3. Unregistered investments. Ponzi schemes typically involve investments that have not been registered with the SEC or with state regulators. Registration is important because it provides investors with access to key information about the company's management, products, services, and finances.
  4. Unlicensed sellers. Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
  5. Secretive and/or complex strategies. Avoiding investments you do not understand, or for which you cannot get complete information, is a good rule of thumb.
  6. Issues with paperwork. Do not accept excuses regarding why you cannot review information about an investment in writing. Also, account statement errors and inconsistencies may be signs that funds are not being invested as promised.
  7. Difficulty receiving payments. Be suspicious if you do not receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters routinely encourage participants to "roll over" investments and sometimes promise returns offering even higher returns on the amount rolled over.

What can EB-5 investors do to avoid a Ponzi scheme?

First and foremost, EB-5 investors should make an independent evaluation of every investment before wiring any funds.  Are the individuals with whom you are dealing licensed as securities brokers or possess other types of federal or state licensure?  Are they registered with the SEC?  Do they need to be?  Do you have a clear understanding of how the investment structure works and what your risks are?

Partnering with experienced financial advisors who can provide an independent evaluation of specific EB-5 projects is an important step towards the path to an EB-5 visa.  Want more information?

At Jatoi & de Kirby, A.P.C., we know how important it is for you and your family to get the most up-to-date information on the EB-5 Program.  If you need a referral to a skilled financial advisor experienced in evaluating EB-5 investments, we can help. Our attorneys can refer you to a skilled financial advisor, as well advise you about the requirements of an EB-5 visa.  Contact us for more information.

Vaughan de Kirby
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San Francisco California EB-5 Investment Immigration Attorney
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