Legal Intelligencer: When the American Dream Stalls: Litigation Strategies for EB-5 Investors Seeking the Return of Their Capital

The most significant trend over the past few years has been the migration of EB-5 disputes away from purely contractual or immigration-adjacent claims and toward federal and state securities fraud theories. This shift is driven by several factors.

First, EB-5 interests are securities. The Securities and Exchange Commission confirmed this years ago, and federal courts have consistently agreed. That means the full arsenal of Section 10(b), Rule 10b-5, and Section 12(a)(2) of the Securities Act of 1933 is available to investors who can plead misrepresentation or omission with the requisite particularity. State blue-sky statutes—including in Pennsylvania, New Jersey, Delaware, and New York, where many EB-5 sponsors operate or solicit—provide additional, and sometimes more forgiving, avenues.

Second, the SEC has been increasingly active in EB-5 enforcement, and its filings frequently provide a roadmap for private litigation. Recent enforcement actions have targeted regional center principals for misappropriating investor funds, commingling capital across unrelated projects, paying undisclosed commissions to unregistered finders abroad, and inflating job-creation projections in private placement memoranda (PPMs). When the SEC files, private plaintiffs often follow—and the SEC’s complaint, while not admissible as proof, can supply the factual scaffolding needed to clear the heightened pleading bar of the Private Securities Litigation Reform Act.

Third, courts have grown more receptive to claims that sponsors and their affiliates owe fiduciary duties to investors notwithstanding contractual disclaimers. Delaware courts, in particular, have been willing to permit breach of fiduciary duty claims to proceed against general partners and managing members of EB-5 NCEs where self-dealing or gross mismanagement is plausibly alleged. Given that a substantial share of EB-5 entities is organized under Delaware law, this trend in case law has outsized practical importance.

Where the Money Goes—and How to Follow It

A defining feature of EB-5 disputes is the structural distance between the investor and the actual use of capital. In a typical structure, the investor’s funds flow into the NCE, which, in turn, loans or contributes capital to a job-creating entity (JCE). The JCE may be controlled by entirely different principals, may pledge collateral to senior lenders who stand ahead of EB-5 capital, and may be a single entity in a sprawling web of affiliates. When the project fails, investors often discover that the NCE’s only meaningful asset is an unsecured or deeply subordinated claim against a JCE that is already in bankruptcy or has no recoverable assets.

For plaintiffs counsel, this means that suing only the NCE is rarely sufficient. The most effective recent cases have named, where the facts support it, the regional center and its principals, the JCE and its developers, affiliated management companies that collected fees, migration agents who received undisclosed commissions, and, in appropriate cases, escrow agents and broker-dealers who facilitated the offering. The goal is to identify every actor who participated in the alleged misconduct and who has the financial capacity to satisfy a judgment.

This is where the strategic considerations regarding when to name individuals as defendants come into play. In EB-5 cases involving egregious or systemic fraud, naming individual principals is often essential. Investors are typically sophisticated enough to understand that they were not dealing with an impersonal corporate machine but with specific individuals who solicited their investment, often face-to-face or through carefully orchestrated overseas presentations. Where those individuals diverted capital, paid themselves undisclosed fees, or knowingly misrepresented the project’s prospects, juries (and judges) are far more receptive to imposing personal liability than in a routine commercial dispute.

The Immigration Overlay: A Strategic Complication

Perhaps the most distinctive feature of EB-5 litigation is the immigration overlay. Many investors are caught in a difficult position: they want their money back, but they also want to preserve their immigration status or that of their family members. Filing suit can complicate both objectives. If the litigation is framed as an attempt to extract capital prematurely, USCIS may take the position that the capital is no longer “at risk” and deny or revoke the underlying petition. Conversely, if the project has demonstrably failed and the investor’s I-829 petition has already been denied, the immigration calculus changes dramatically, and recovery of capital becomes the paramount concern.

Counsel must therefore coordinate closely with immigration counsel from the outset. The timing of filing, the relief sought, and even the choice of forum can have direct immigration consequences. The RIA’s provisions concerning material change, project failure, and investor protection in the event of regional center termination have created new pathways for investors to preserve their petitions even when projects collapse—but these pathways must be navigated carefully and in parallel with a civil litigation strategy.

Class Actions, Mass Arbitrations and the Forum Question

EB-5 offerings frequently include mandatory arbitration provisions, class action waivers, and forum selection clauses pointing to Delaware, New York, or the sponsor’s home jurisdiction. The enforceability of these provisions has become a contested battleground. Some courts have enforced arbitration clauses in EB-5 subscription agreements; others have declined to do so where the clause was buried in voluminous offering materials presented to non-English-speaking investors with limited opportunity for negotiation or independent review.

The recent trend has been toward consolidated proceedings—whether as class actions, mass actions, or coordinated individual suits—because EB-5 investors in a given project are typically similarly situated, having received the same PPM and signed substantially identical subscription documents. Common questions of misrepresentation, breach of fiduciary duty, and damages predominate. For plaintiffs counsel evaluating an EB-5 matter, the question of whether to pursue an individual action, a class action, or coordinated mass arbitration is a critical early decision that will shape every later step.

Practical Guidance for Plaintiffs Counsel

For practitioners evaluating potential EB-5 cases, several principles emerge from recent experience. First, conduct rigorous early diligence on the capital flow. Obtain and analyze the PPM, subscription agreement, escrow agreement, loan documents between the NCE and JCE, and any available financial statements. The story of where the money actually went is usually the heart of the case.