SEC Finally Adopts New Regulation D Amendment – Lifting General Solicitation Ban

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On July 10, 2013, the Securities and Exchange Commission (“SEC”) adopted a new rule that lifts the ban on general solicitation of private offerings.  The rule was adopted as a part of the commission’s decision to implement Section 201(a) of the Jumpstart Our Business Startups Act (the JOBS ACT”).     Prior to July 10, Companies who wanted raise capital through a private offering had two options: (1) Register the securities offering with the SEC; or (2) rely on an exemption from registration.  In a separate release, in order to implement Section 926 of the Dodd-Frank Act, the SEC adopted amendments to Rule 506 which disqualified issuers from utilizing Rule 506 if “felons and other bad actors” are participating in the offering.

While the SEC lifted the ban on advertising, they issued a rule proposal for Regulation D that requires issuers to provide a greater amount of information regarding the offerings in order to allow the SEC to regulate the market.  The proposal is aimed to protect victims from fraudsters trying to solicit stocks to inexperienced investors.  The proposed rule would require one who wishes to solicit a private offering to file a Form D before they engage in the advertising.

Potential Impact of New Rule

Lifting the ban on general solicitation will allow startups, venture captilists, EB-5 Regional Centers, and hedge funds to openly advertise that they are raising money in private offerings.  That should make it significantly easier for companies to raise financing and/or expand operations — the Rule still limits solicitation from accredited investors (for now, until the remaining part of the JOBS Act is implemented)

Investment is still limited to accredited investors worth more than $1 million liquid net worth, and fundraisers must take reasonable steps to ensure investors are in fact accredited. To help the SEC collect data on how investment will change, fundraisers have to file a Form D with the SEC at least 15 days before they begin general solicitation, and amend that Form D to state that they’re done soliciting within 30 days of finishing.

However, the lift on the Ban will create a significantly new and large pool of investors.

For more information, including access to the Final Rule and Proposal, please visit the SEC’s website which can be found here.

 

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How will the JOBS Act Impact EB-5 Regional Centers and Immigrant Investors?

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By Wassem Amin, Esq., M.B.A.

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 wassem@dharlawllp.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.

Important Considerations in Developing an EB-5 Immigrant Investor Regional Center

By Wassem Amin, Esq., M.B.A.

Over the past couple of years, the use of EB-5 Regional Centers by project developers to raise capital has been increasing in popularity.  A designation as a Regional Center by United States Citizenship and Immigration Services (“USCIS”) allows a project developer, or an entity on behalf of a project developer, to raise capital from foreign investors seeking an EB-5 Immigrant Investor Visa.

The increased interest in EB-5 investments has been attributed to a combination of factors including: (1) the overhaul of the program by USCIS and the creation of a dedicated EB-5 adjudication department; (2) the decrease in domestic investment capital after the 2008 recession; and (3) the increased political instability in foreign countries leading many high-net worth immigrants to relocate to the United States.

Utilizing Regional Centers as a source of funding for project developments is an attractive option due to the typically low cost of capital to the developer as well as the ability to generate a profitable revenue stream from administrative fees charged to the immigrant investors.  In addition, administrative fees generated from a Regional Center typically offset the up-front costs involved.

Investing through a Regional Center is attractive for foreign investors because the investment is usually held in an irrevocable escrow account pending the approval of their initial application with USCIS (Form I-526).  Upon the approval of the I-526 Application, the funds are released to the developer and the investor is issued conditional permanent residency.  This ensures that, in the unlikely event the foreign investor is denied by USCIS, they are refunded their investment.  As an additional layer of protection, a comprehensive questionnaire is typically used to qualify the foreign investor and determine their eligibility beforehand.  That way, the Regional Center would be able to suggest alternative investments to potential foreign investors who may not be approved by USCIS.

What are Regional Centers?

USCIS defines a Regional Center as “any economic entity, public or private, which is involved in the promotion of economic growth, improved regional productivity, job creation and increased domestic capital investment.”  A Regional Center could be independent of the actual project or created in connection with a specific development.  Regional Centers are set up to act as intermediaries between foreign investors and EB-5 eligible projects in the United States.  To apply for Regional Center designation, a Form I-924 is submitted to USCIS, and processing times are between 4-8 months.

A range of different real estate projects have qualified for regional center status, including shopping malls, hotels, mixed use developments, warehouse distribution centers, manufacturing facilities, and business incubators. Because the key thrust of the Regional Centers is to create jobs, many regional centers are sponsored by or work extensively with local governments in a form of public-private partnership, but this is not a requirement.

In order to obtain approval from USCIS for designation as a Regional Center, the entity has to submit a proposal which must:

  1. Clearly describe how the center focuses on a geographic regions of the United states and how it will promote economic growth through improved regional productivity, job creation, and increased domestic capital investment;
  2. Provide in verifiable detail how jobs will be created indirectly;
  3. Provide a detailed statement regarding the amount and source of capital which has been committed to the Regional Center, as well as a description of the promotional efforts taken and planned by the sponsors of the Regional Center;
  4. Contain a detailed analysis regarding the manner in which the center will have a positive impact on the regional or national economy in general, as reflected by such factors as increased household earnings, greater demand for business services, utilities, maintenance and repair, and construction both within and without the Regional Center; and
  5. Be supported by economically or statistically valid forecasting tools, including, but not limited to, feasibility studies, analyses of foreign and domestic market for the goods or services to be exported, and/or multiplier tables.

The Job Creation Requirement

The EB-5 visa has two different minimum investment requirements, depending on whether the geographic location of the investment is a Targeted Employment Area (“TEA”).  A TEA is an area that is in a rural location (as determined by each specific state) or an area with an unemployment rate of at least 150% of the national average.  If the investment is in a TEA, the minimum amount per each immigrant investor is $500,000.00.  If it is not in a TEA, then the minimum amount is $1,000,000.00.

Each foreign investor must demonstrate that their investment has created (or will create within two years) a minimum of 10 full-time jobs for U.S. persons  (a permanent resident or a citizen).  This requirement is the same whether the investment is within or outside of a TEA—i.e., whether the investment is $500,000 or $1,000,000.  However, if the investment is through a Regional Center, indirect (and induced) jobs may be counted.

To establish that 10 or more indirect or direct jobs will be created by the business, USCIS rules provide that indirect methodologies may be used, which may include multiplier tables, feasibility studies, analyses of foreign and domestic markets for the goods or services to be exported, and other economically or statistically valid forecasting devices which indicate the likelihood that the business will result in increased employment.

For example, if a multitenant shopping center is designated as a regional center, the full-time jobs created by the ownership and management of the shopping center are directly created jobs.  The jobs created by the tenants of the shopping center are indirect jobs. There may be 5 or 10 full-time positions created by operating a property management office, but the jobs created by the tenants of the shopping center could be over 100, and those jobs would all be counted to satisfy the job creation requirement. For these reasons, in a regional center, it is much easier for the investor to meet the employment requirements. Further, if more jobs are counted in the business, more EB-5 investors can participate in the project, resulting in more funding for the developer.

Structuring the Regional Center: Investment Models and Exit Strategies

The creation and management of a Regional Center will require expertise in the following areas: (1) EB-5 process; (2) immigration law; (3) equity fund structuring; (4) transaction due diligence and structuring; (5) economic analysis; and (6) marketing.  Dhar Law LLP is able to assist with all of the above—except the marketing.  In addition, while the economic analysis will be conducted under our supervision, it will be primarily done by an economist within our network who specializes in EB-5 Regional Centers.  An additional requirement is having access to pipeline of foreign investors sufficient to meet the capital requirements of the project.

As for the investment models, EB-5 investments are generally one of two high-level models: an Equity Model or a Debt Model.  In the Equity Model, the investor acquires an ownership interest in the development project, entering as limited partner.  This is a well-established model with a track record of USCIS approvals and is currently the primary strategy for EB-5 investments.  At the end of the specified term (generally five years, but could be less), the EB-5 investor’s interest in the project is sold to other interested parties.  The proceeds from the sale are returned to the investor.  Complications could arise in the sale of the equity, so the return of investments is not guaranteed.

In the Debt Model, the investor also joins as a limited partner, but provides a low-interest term loan to the project developer rather than acquiring a stake in the project.  Repayment of the principal is made either through sale of the project or refinancing of the EB-5 loan at the end of the term (also generally five years).  This model, while it has received approvals from USCIS, is still fairly new and may undergo greater scrutiny.  The issue is whether Debt Model projects guarantee repayment to the investor—which is not allowed under EB-5 regulations because the invested capital must be “at risk.”

For example, if a new commercial enterprise’s limited partnership (LP) agreement contains a buy-back agreement (i.e. a redemption clause guaranteeing the return of the investor’s capital investment), then the investor’s capital investment will not be a qualifying “at-risk” investment for EB-5 purposes. Likewise, if the LP agreement requires the payment of fees from the investor’s capital investment to the extent that the investment will be eroded below the qualifying level, preventing the full infusion of the capital into the job creating enterprise, then the investor’s capital investment will not meet the required EB-5 level of investment.

Initial Evidence and Documents Required by USCIS

  1. Location of Regional Center: The Regional Center must focus on a specific geographical area.  This area must be contiguous and clearly identified in the application by providing a detailed map of the proposed geographic area of the Regional Center.
  2. Creation of Jobs:  Each Regional Center must fully explain how at least 10 new full-time jobs will be created by each individual alien investor within the Regional Center either directly or indirectly.  The applicant must provide an economic analysis that relies on statistically valid forecasting tools that shows and describes how jobs will be created for each industrial category of economic activity. The job creation analysis for each economic activity must be supported by a copy of a business plan for an actual or exemplar capital investment project for that category.
  3. Business Plan: A business plan provided in support of a regional center application should contain sufficient detail to provide valid and reasoned inputs into the economic forecasting tools and must demonstrate that the proposed project is feasible under current market and economic conditions.  The form of the EB-5 investment from the commercial enterprise into the job-creating project (equity, debt, etc.) should be identified.  The business plan should also identify any and all fees, profits, surcharges, or other similar remittances that will be paid to the regional center or any of its principals or agents through EB-5 capital investment activities.
  4. Infusion of Capital: The application must be supported by a statement from the principal of the Regional Center that explains the methodologies that the Regional Center will use to track the infusion of each EB-5 alien investor’s capital into the job-creating enterprise, and to allocate the jobs created through the EB-5 investments in the job creating enterprise to each associated alien investor.  The anticipated minimum capital investment threshold (either $1,000,000 or $500,000) for each investor must also be identified.
  5. Operational Plan: The application must be supported by a detailed description of the past, present and future promotional activities for the Regional Center.  It must include a description of the budget for this activity, along with evidence of funds committed to the Regional Center for promotional activities.  The plan of operation must also address how investors will be recruited and how the Regional Center will conduct its due diligence to ensure that all immigrant investor funds affiliated with its capital investment projects will be obtained from lawful sources.
  6. Prospective Economic Impact: The application must be supported by a general prediction of the prospective impact of the capital investment projects sponsored by the Regional Center, regionally or nationally, with respect to increases in household earnings, greater demand for business services, utilities, maintenance and repair; and construction both within and outside the Regional Center.
  7. Organizational Structure: The application must fully describe and document the organizational structure of the regional center.  In addition, it should be accompanied by the capital investment offering documents, business structure, and operating agreements of the proposed commercial enterprise that will be affiliated with the Regional Center is compliant with EB-5 statutory and regulatory requirements, as well as binding EB-5 precedent.  A common business structure is summarized in the chart below.EB
  8. Investment Offering Documents: Documentation of the capital investment offering documents must include, at a minimum, the following:
    • A description and documentation of the business structure of both the regional center and the commercial enterprises that are or will be affiliated with the regional center, such as Articles of Incorporation, Certificate of Incorporation, or legal creation as a partnership or limited liability company (LLC), partnership or LLC agreements, etc.;
    • Draft subscription agreements for investment into the commercial enterprise;
    • Draft escrow agreements and instructions, if any;
    • List of the proposed financial institutions that will serve as the Escrow Agent, if any;
    • Draft of the offering letter, memorandum, private placement memorandum, or similar offering to be made in writing to an immigrant investor offering capital investments through the Regional Center; and
    • Draft memorandum of understanding, interagency agreement, letter of intent, or similar agreement to be entered into with any other party, agency or organization to engage in activities on behalf of the Regional Center.

Regional Center Costs

A properly planned and managed Regional Center with a sustained project and investor pipeline can be completely self-funded, and may even generate a profitable revenue stream, using the fees charged to foreign investors.  These fees, typically labeled “administrative fees” are in addition to the principal investment and may range from $35,000 to $65,000 per foreign investor.  However, the majority of Regional Centers charge $40-45,000.

The costs associated with the set-up and management of a Regional Center vary depending primarily on the scope of the proposed project and the extent to which the Regional Center chooses to market.  In addition to start-up costs listed below, first-year sales, operations, and marketing fees should be accounted for.  However, in the case of Real Estate Investment and Development Firm, a lot of these costs could be defrayed by integrating Regional Center operations with the current Firm operations.

Start-up costs and expenses for developing a Regional Center are typically as follows:

  • Economist Fees for: (1) construction and analysis of the econometric model; (2) development and drafting of the EB-5 Business Plan; and (3) development and drafting of the Regional Center Five Year Operating Plan and Budget—$25-55,000.00.
  • Legal and Consulting Fees for: (1) transaction due diligence; (2) equity fund structuring; (3) EB-5 immigration law qualification; (4) securities law diligence and compliance; (5) representation before USCIS for project submission and approval; (6) individual investor preliminary qualification;  (7) drafting application and transactional documents including (i) memorandum of terms, (ii) private placement memorandum, (iii) subscription agreement, (iv) partnership agreement, (v) escrow agreement; and (8) supervision and review of economic impact analysis, operational plan, and business plan to ensure USCIS compliance—$75,000 – $200,000.
  • USCIS Governmental Filing Fees—$6,500.00.

An EB-5 funding model, if carefully planned and structured, could be an excellent and low-cost method of raising capital.  The range of capital raised through EB-5 Regional Centers has individually varied anywhere from $5 Million, on the low end, to $300 Million, on high end.  There has been increased awareness and interest by foreign investors in the EB-5 program, and it is forecasted that a record number of foreign investors will be issued EB-5 visas this year.

Although this is an overview of the process behind setting up a Regional Center, it is important to determine the exact scope of the proposed project to properly assess feasibility.   The first step is to evaluate the underlying project or projects to ensure that they will not only be profitable, but will also meet USCIS requirements of the EB-5 program.  Proper planning and careful due diligence by all parties involved is essential.

_________________________________________________________________________________________

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 wassem@dharlawllp.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.

The EB-5 Immigrant Investor Visa

EB-5 Dhar Law LLP

An Attorney and Service Provider’s Overview of Requirements for Eligibility and Implications under Different Areas of the Law

By: Wassem Amin, Esq., M.B.A.[1]

[NOTE: The following is a preview of a forthcoming Article on the same topic.] Updated with link below.

Click Here for the Full Article in PDF Format.

In 1990, the United States Congress created the employment-based fifth preference (“EB-5”) immigrant visa category for immigrants who invest in and manage U.S. commercial enterprises that benefit the U.S. economy and create jobs. Allotted 10,000 immigrant visas annually, the EB-5 immigrant visa was designed to attract foreign direct investment into projects that would directly impact the economy (i.e., not merely passive investments).

Immigrant investors can apply for an EB-5 visa through two primary routes. The first route is through a direct investment into a qualifying “new commercial enterprise.” The second is through the Regional Center Pilot Program. Created by Congress in 1992, and recently extended by President Obama in the fall of 2012 an additional three years, the Pilot Program allows the United States Citizenship and Immigration Service (“USCIS”) to designate so-called Regional Centers to function as conduits or administrators of large or medium scale projects funded, at least in part, by EB-5 investors.

However, due to inconsistent administration by USCIS primarily caused by lack of proper training for its adjudicators, the Regional Center Pilot Program—as well as the EB-5 visa overall—was relatively under-utilized by practitioners, investors, and developers. For example, in Fiscal Year 2007, USCIS approved only 11 Regional Centers and issued 473 EB-5 Visas—out of the 10,000 available under the quota. In the following years, however, EB-5 visa issuances and Regional Center approvals exponentially increased in number. In FY 2012, EB-5 visas are projected to reach the visa cap for the first time in the program’s history.[2] Furthermore, Regional Center approvals in the same period spiked to an all-time high of 209. The increased interest in EB-5 investments has been attributed to a combination of factors including: (1) the overhaul of the program by USCIS and the creation of a dedicated EB-5 adjudication department; (2) the decrease in domestic investment capital after the 2008 recession; and (3) the increased political instability in foreign countries leading many high-net worth immigrants to relocate to the United States.

Forecasts for FY 2013 estimate that EB-5 capital will account for over $2 Billion in foreign direct investment. Since 2005, the program has injected over $6 billion in capital to the U.S. economy and added over 95,000 U.S. jobs. There have been many EB-5 and Regional Center success stories.

A particularly notable example is the Vermont EB-5 Regional Center. The Vermont EB-5 Regional Center is the only USCIS-designated Regional Center in the United States that is owned, controlled, and supervised directly by a state government. In fact, as Brent Raymond—who is the Director of the Regional Center as well as International Trade and Foreign Investment for the state—noted, the Vermont Regional Center has had a 100% success rate with immigration filings for affiliated alien investors and with investment returns on individual projects.

Advocacy groups have also had a strong positive impact in promoting the EB-5 Visa. The Association to Invest in the USA (“IIUSA”) is non-profit trade association that lobbies on behalf of Regional Centers nationwide. Led by Director Peter Joseph, it was founded in 2005 and represents over 80 Regional Centers, accounting for approximately 95% of all EB-5 capital.

Unfortunately, due to the growing popularity of the program, unscrupulous individuals and entities in the United States, as well as so-called “visa consultants” abroad, have attempted to use the EB-5 visa to defraud foreign investors. Foreign investors need to be diligent in their research and vetting process of such projects. Not surprisingly, counsel for the foreign investor or a Regional Center usually plays an integral role in this process. Unlike a traditional private offering, however, an attorney advising on an EB-5 visa, whether on behalf of the alien investor or the investment soliciting funds, needs to be well-versed in, not only also immigration law, but also corporate law, securities laws and regulations, tax law, international law, real estate law, and estate-planning—in addition to a fundamental understanding of business and economic forecasting models. It is a unique intersection of several areas of the law–each with their own complex regulatory and statutory regime.

Click Here for the Full Article in PDF Format.


[1] 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 wassem@dharlawllp.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.

USCIS and SEC Stakeholder Engagement: EB-5 Investments and Implications under Federal Securities Law

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By Wassem M. Amin, Esq.

On April 3, 2013, USCIS and the SEC held a joint conference call to discuss what aspects of federal securities law are implicated by EB-5 Investments, as it relates to both the issuer and the investor.  As a disclaimer, I am an avid supporter of the EB-5 Investment Visa, and have discussed it 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.

In the early 1990s, USCIS implemented a pilot program, recently extended through September 2013, which allows the creation of a so-called “Regional Center.”  The purpose of the Regional Center is to structure, administer, and market a project primarily funded through the pooling of EB-5 investments.  In many cases, the Regional Center is also the project developer, but can be a third party as well.  Each EB-5 Regional Center must be individually approved by USCIS. For example, a project developer who is developing a ski resort could form a Regional Center to solicit EB-5 investors.  Typically, the investments are structured as a Limited Partnership interests, where the developer is the General Partner and the investors are Limited Partners.  Garnering little attention at first, primarily due to inconsistent administration by USCIS, the pilot program recently took off after a complete overhaul of how it is administered and, specifically, the creation of a separate division in USCIS solely for adjudication of EB-5 visas.

Overview of Stakeholder Conference Call

The joint USCIS/SEC conference was primarily concerned on how Regional Centers, as well as those who solicit investments, may by subject to SEC Regulations.  At the outset, the USCIS noted that the Director of the agency has been focused on enhancing regulation and cooperation with federal agencies in the EB-5 Program.  The SEC was represented by senior staff members from the following four departments: Division of Corporation Finance, Trading and Markets Division, Investment Management Division, and the Division of Enforcement.

Division of Corporation Finance

The SEC noted that the principle issue that may arise for EB-5 Regional Center is whether they trigger regulation under federal securities laws.  The answer will, in virtually all cases, be yes.  A threshold issue is whether the Regional Center is “transacting in securities.”  The definition of securities, as the SEC stressed, is very broad and includes any investment interest.  The second factor, offering or selling securities in interstate commerce, is also very easily triggered–particularly considering the target investor.

What happens if an issuer of securities is “transacting in securities”? That triggers the SEC’s federal registration requirements – a complex penumbra of laws that is most commonly known as “going public” or filing an IPO.  There are exemptions from registration which are used by Regional Centers–Private Placement exemption, Regulation D, and Regulation S.  Generally speaking, these various regulations are designed for relatively small offerings or offerings made overseas.

This allows most Regional Center exemption from registering with the SEC, but does not exempt them from regulation by the SEC.  This key point was reiterated several times throughout the conference call.  Therefore, Offerings of investments through Regional Centers are still subject to the anti-fraud provisions of federal securities laws.  Additionally, they are subject to the prohibition against general solicitation and advertising. That prohibitions is so broad that includes internet posts, local newspaper articles, and everything in between.  (NOTE: the JOBS ACT, enacted last year, changes the law to allow general solicitation and advertising for exempt issuers.  However, the SEC noted that, while they have drafted proposed rules, none have been implemented yet.)

Trading and Markets Division

The SEC’s Trading and Market Division is primarily responsible for administering the Securities Exchange Act of 1934 (the “34 Act”).  Within the context of EB-5 investments, it is focused on the status of individuals involved in the sale and offering of these investments, commonly known as Broker-Dealers.  The bottom line here is that, if someone is engaged in the activity of soliciting foreign investors, it is highly likely that they are engaging in brokerage activities, therefore triggering the requirements of Broker-Dealers.  The SEC noted that the commission has “approached registration on a territorial basis.”  Therefore, the seller or solicitor of investors will be subject to the 34 Act even if they exclusively solicit foreign investors.

What are the activities that trigger Broker-Dealer registration?  Two main tests: (1) if the person is directly soliciting the investment; or (2) if the person is indirectly advertising the investment.  The question in the latter situation focuses on the remuneration or compensation of the individual.  If that person’s compensation is tied to the number of investments, then that will be sufficient to trigger registration. The only exception here applies to natural persons (not an entity) associated with the issuer (which, in EB-5 context, is usually the developer).  Even then, that person may not solicit investments if they have been a broker-dealer in the recent past or are subject to various statutory disqualifications.

Investment Management Division

The SEC’s Investment Management Division regulates two main federal statutory laws: the Investment Advisers Act, and the Investment Company Act.  Whether an EB-5 Investment triggers either Act depends on how the investment is structured.  Most critically, these two acts usually work as a residual catch-all for federal regulation.  In other words, if an entity or natural person is not a Broker-Dealer, they will most likely be an investment adviser or an investment company.

Investment companies are those commonly known as mutual funds — they pool securities and sell ownership interests in the pool to investors.  Investment advisers are just what they sound like – anyone who is in the business of providing investment advice for compensation, unless they are a Broker-Dealer.

This comprehensive regulatory scheme virtually guarantees that an EB-5 investment will be triggered by one or more of the various federal securities laws.  A Regional Center, for example, may be considered an Investment Company if they meet this definition: An Issuer that holds, invests, or trades in securities.  If the EB-5 investment is structured in a way where multiple investors hold a share in the investment pool of funds, which is then used to finance an underlying project that the Regional Center also owns a share in, then they are an Investment Company.  Triggering the provisions of either, the Investment Company Act or the Investment Advisors Act, requires that the adviser or company register with the SEC.  There is a fiduciary duty owed by the investment advisor – i.e., they must disclose conflicts of interests, any self interest in the project, and avoid self dealing.

As you might have guessed, there are limited exclusions from registration with SEC, but not from regulation by the SEC. The major exclusionary category is the so-called Professional Exclusion.  This exclusion covers most attorneys, accountants, and teachers – if the advise provided is incidental to the services provided.  This is a very important, but limited, exception that applies to many EB-5 providers of ancillary services, such as legal advice.

Division of Enforcement

The final part of the SEC’s presentation was from the SEC’s Division of Enforcement – who I like to call the “muscle” of the SEC.  Fresh off the heels of its first major EB-5 related enforcement action, the Division’s message could be summed up as this: if you run afoul of any of the first three divisions, you will deal with this, and we are usually not a fun time.  The SEC staff member summarized the facts, allegations, and potential consequences (trial is still ongoing) of their Enforcement Action against a formerly Chicago-based Regional Center; which was basically a ponzi scheme that run out of fresh investors. (More details in this previous post).

Conclusion

The EB-5 Investor Visa program, particularly investments through Regional Centers, has skyrocketed in the past couple of years.  In prior years, out of the 10,000 annual visas allotted by USCIS to the program, no more than usually 3-4,000 were used.  However, in FY ’12, it is predicted that well over 9,000 will be utilized, perhaps even meeting the cap for the first time!

As the popularity of these investments increases, so will the potential for abuse by fraudulent individuals, which, in turn, will draw increasing regulatory scrutiny to all parties involved.  Although, for a developer, use of a Regional Center to raise EB-5 funds might be very tempting, it is critical to consult with an experienced Securities Lawyer, in addition to an Immigration Lawyer.

Disclaimer: These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice.  The material posted on this web site 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.

Wassem M. Amin, Esq., MBA is an Associate Attorney at Dhar Law LLP in Boston, MA.  Wassem has extensive experience in the Middle East region, having worked as a consultant in the area for over 9 years.  Wassem currently focuses his practice on Corporate Law, Immigration Law, and International Business Transactions.  For more information, please visit the About Us page or http://www.dharlawllp.com.