On Thursday, April 13, the SEC announced fraud charges and an asset freeze against seven EB-5 offerings associated with the Jay Peak ski resort project in Vermont. The projects are alleged to have misused more than $200M of investor funds (out of a total $350M raised), and at least $50M is alleged to have been misappropriated for personal use. At least one EB-5 offering associated with Jay Peak is believed to be a complete fraud.

The SEC complaint also alleges that funds were shifted between project accounts to disguise the financial shortfalls resulting from these misappropriations. The complaint alleges that little is left in this or any of the other projects’ accounts, despite the fact that few are near completion. The complaint charges that the project’s developers violated sections Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.The full SEC complaint can be found here.

The project has also been under additional scrutiny from the state of Vermont, which has sought “a clear understanding of the monies that have moved through the project account and what the balance is.” As a result of the state’s concerns, progress on the projects has been repeatedly delayed as officials have sought clarity as to the use of investor funds.

State officials have also expressed concern over release of escrowed funds, and have expressed frustration with a lack of documentation provided. State records indicate that officials requested “a full written explanation as to the raising and disburse ment of the capital.”

As the EB-5 program has grown, regulatory scrutiny has increased; isolated fraud incidents such as these only increase regulatory and market pressure for secure, transparent, and compliant third party oversight and administration for EB-5 funds. To avoid a EB-5 project such as Jay Peak has done, working with a third-party administrator experienced in EB-5 is the only surefire way to demonstrate appropriate controls to prospective investors. It is also the only way to develop a comprehensive audit trail should a regulatory investigation take place.

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