Although the EB-5 Immigrant Investor Visa has been around for almost 2 decades, it has only started gaining traction over the last few years. Discussed in detail in previous posts, in summary, the EB-5 Investor Visa allows foreign investors to obtain permanent residency in the United States if they invest a minimum of $1,000,000 (or $500,000 in a high unemployment or rural area). The permanent residency is conditioned on the success of the investment after two years and, in particular, whether the investment creates a minimum of 10 full-time jobs for American workers.
A United States Citizenship and Immigration Services (“USCIS”) Pilot Program allows the creation of so-called “Regional Centers” for the sole purpose of structuring, administering, and marketing typically medium to large scale projects funded through the pooling of EB-5 investments. After receiving approval from USCIS, a Regional Center could then solicit foreign investors for capital. The benefit to the foreign investor is, of course, the ability to gain permanent residence in the United States. Likewise, the benefit to the Regional Center is the low cost of capital in comparison to conventional financing methods.
The increased popularity of Regional Centers has also increased the Securities and Exchange Commission’s scrutiny of how the investments are solicited and marketed. In a recent joint conference call with USCIS, the SEC made it clear that virtually all Regional Center investment solicitation will trigger regulation under federal securities laws. Regional Centers are considered “issuers” of securities because they are transacting in investment interests. Although Regional Centers are usually exempt from registering with the SEC, they are not exempt from regulation by the SEC.
Offerings of securities by Regional Centers are still subject to anti-fraud provisions which prohibit general solicitation and advertising, among other restrictions. That prohibition is so broad that it includes internet posts, local newspapers, and everything in between.
Changes Under the JOBS Act
On April 5, 2012, the President signed the Jumpstart Our Business Startups (“JOBS”) Act. The main purpose of the Act is to stimulate the growth of small to medium sized companies through facilitated access to capital and reduced regulatory reporting requirements. Although not yet implemented, the SEC’s proposed rules under the JOBS Act will positively impact EB-5 investment offerings. Regional Centers will have significantly more latitude with respect to general solicitations and general advertisements. In combination with the proposed immigration reform bill, the opportunities for Regional Centers to raise capital will significantly increase.
The Securities Act of 1933 requires that all offerings of securities be registered unless there is an applicable exemption from registration. Regulation D is an exemption used for small private offerings with, among others, limits the size of the offering and the number of investors. Title II of the JOBS Act requires the SEC to eliminate its ban on general solicitation and advertising in offerings that are exempt from registration under Rule 506 of Regulation D if all investors are accredited or under Rule 144A so long as all investors are qualified institutional buyers. However, proof of “reasonable steps” must be taken and documented to verify accredited investor status before a Regional Center can claim the exemption.
What Does This Mean to a Regional Center?
EB-5 Issuers such as Regional Centers, will now be able to advertise via website advertisements, newspapers, radio, internet posts, and even email. However, to take advantage of the relaxed rules, Regional Centers must now take “reasonable steps” to verify that the purchasers are in fact accredited investors. It will no longer be sufficient for an issuer to rely on a questionnaire to establish whether an investor qualifies as an accredited investor.
The extent of “reasonable steps” a Regional Center will depend on: (i) the type of accredited investor the investor claims to be; (ii) the type of information the Regional Center has about the investor; (iii) the manner in which the investor was solicited; and (iv) the size of the offering and minimum investment amount. For example, if the EB-5 foreign investors are solicited through a publicly accessible website, a mass email, or a Facebook page, the Regional Center will be obligated to take greater measures to verify accredited investor status. Conversely, if the minimum amount of investment is high (for example, $1million instead of $500,000), the SEC indicated that it may be reasonable for the issuer (the Regional Center) to take fewer steps to verify accredited investor status.
Catch-22: the Regulation S Exemption
Many Regional Centers also rely on the SEC’s Regulation S to exempt them from registration. However, Regulation S, known as the “offshore exemption”, prohibits any “directed selling efforts” within the United States. Any general solicitation, particularly using the Internet, may be deemed to be directed selling efforts. In the case of a Regional Center, this may include information on the offering that is on its website.
Therefore, for example, if the website is accessible to people in the United States, a Regional Center will not be in compliance with Regulation S–even though it might be in compliance with the revised Rule 506 of Regulation D. In other words, taking advantage of the opportunity to conduct general advertisements and solicitations under the proposed rules of Regulation D may eliminate a Regional Center’s ability to rely on Regulation S.
In the process of developing an operational and marketing plan, a Regional Center must consult with an experienced securities attorney to assist it with navigating the complex federal securities regime. With the increased popularity of the EB-5 program, the SEC has been significantly stepping up its oversight and scrutiny – even leading to a notorious enforcement action against a Regional Center in Chicago.
Finally, it is important to note that the new Regulation D rules under the JOBS Act have not been enacted by the SEC yet. Until that happens, the ban on general solicitation and advertisement is still in effect. _________________________________________________
Wassem M. Amin, Esq., MBA is an Attorney at Dhar Law, LLP in Boston, MA. Wassem has extensive experience as a business advisor and consultant, domestically and abroad (in the Middle East region), having worked as a consultant for over 9 years. Wassem currently focuses his practice on Corporate Law, Business Immigration Law, and International Business Transactions; where he works with Firm Partners Vilas S. Dhar and Vikas Dhar to advise Regional Centers and individual investors on EB-5 Visa matters. For more information, please visit http://www.dharlawllp.com and email Wassem at email@example.com.
Disclaimer: These materials have been prepared by Dhar Law, LLP for informational purposes only and do not constitute legal advice. This article is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel. This material may be considered advertising according to the rules of the Supreme Judicial Court in the Commonwealth of Massachusetts. Reproduction or distribution without prior consent of the author is prohibited.