Doing Business in Saudi Arabia: How to Establish a Foreign Company in the Lucrative Construction Sector


wassem amin saudi arabia

By Wassem M. Amin, Esq., MBA

The Kingdom of Saudi Arabia is one of the fastest growing economies in the Middle East.  In 2013, the government increased its budget by more than 20% than the previous year, to approximately 820 Billion Saudi Riyals ($219 Billion).  Additionally, Saudi’s King Abdullah pledged more than $500 billion on social welfare and infrastructure projects over the next few years.  Saudi Arabia’s increased spending is part of its policy to create economic diversification and reform, in turn decreasing their dependence on oil revenue and creating new jobs for the local population.

A large proportion of the Government’s spending, approximately 300 billion Riyals, has been allocated to capital expenditures on investment projects and social infrastructure.  Ambitious plans include building 539 new schools and universities, as well as the development of several new cities in the sprawling desert kingdom.

The biggest beneficiary of this expansionary policy is the construction industry.  Demand in the construction and associated sectors, such as residential and commercial real estate development, will increase exponentially, representing an excellent market opportunity for foreign investors and international corporations seeking to enter the Saudi market.

Applicability of Islamic Finance

Construction projects in Saudi Arabia are typically either public or private.  The governing law which applies to all contracts, including construction, is Shari’a, or Islamic, law.  General principles of Islamic Finance are applicable, such as the duty to act reasonably, in good faith, and to mitigate losses.

In the private sector, within the construction sector specifically, the Islamic Finance principle that applies is the “istisna’a” contract, which is a contract for the sale of an asset that is yet to be constructed or manufactured.  Using this structure, the party providing capital, the financier, enters into a contract with the purchaser of the building to be constructed.  Usually the financier, whether a bank or investor, will then enter into a back-to-back construction contract with a general contractor for the project.   The financier realizes a profit from the spread between the cost of the construction contract and the price of the purchase contract.

Public Works Contracts

However, in the public sector, specific regulations and a complex legal framework govern bidding for public works, as well the interpretation and enforcement of underlying contracts.  While still generally subject to Islamic Law principles, public works contracts are considered administrative contracts and are subject to the Government Bids and Procurement Law, implemented with associated regulations.

Establishing a Foreign Presence in Saudi Arabia

Recent amendments in the law and a shift in policy by the government to attract foreign direct investment have made it easier than ever for a foreign company or investor to establish business operations in Saudi Arabia. Although there are a variety of business organizations in Saudi Arabia, the most commonly used by foreign companies in undertaking construction projects are Limited Liability Companies (LLCs).  That is due to the relative ease of incorporating an LLC (as opposed to, for example, a Joint Stock Company), minimal capitalization requirements, and the requirement of less corporate governance formalities.

The actual procedure of establishing an LLC in Saudi Arabia is typically a two-step process: (1) First, the foreign partner applies to the Saudi Arabian General Investment Authority (SAGIA) for a foreign investment license; (2) Second, once SAGIA issues the license, the partners in the proposed LLC apply to the Ministry of Commerce and Industry in order to incorporate the company.  Once approved, the Ministry will certify the formation documents of the LLC and issue a commercial registration certificate–which permits the LLC to begin operating in the Kingdom legally.

Risks and Opportunities

Although the Kingdom has begun to allow wholly-owned foreign entities to invest in the country, the laws and cultural differences there remain complex and, at times, even frustrating.  In order to effectively operate in Saudi Arabia, foreign investors need to consider a plethora of issues such as: (1) Cultivation of solid business relationship is essential to success; (2) unfamiliar and complex Islamic Finance Laws; (3) risks and incentives in this vast market; and (4) unique cultural and social differences.  Saudi Arabia is a lucrative market for foreign companies and investors.  At a time when the market in the United Arab Emirates is beginning to get stagnant and saturated, Saudi Arabia remains ripe with opportunities.  However, the cultural, political, and legal landscape is complex and varies dramatically from that of countries such as the USA or in Europe.  Unaccustomed foreign companies or investors should seek out advisory or legal firms who are proficient and have expertise in Saudi Arabia.

Dhar Law LLP is uniquely positioned to be able to provide investors with critical insights and advice to support and develop investment and business ventures in the Kingdom.  The Firm’s extensive knowledge is based on decades of first-hand knowledge and experience of the financial, legal, and cultural nuances of the Saudi market.  That, coupled with proven success in the U.S. market, has enabled Dhar Law LLP to provide a wealth of expertise and know-how in sourcing and structuring complex cross-border transactions and investment deals.  Dhar Law’s expert consultants and lawyers, all of whom have a vast legal and consulting background, are able to provide comprehensive solutions that are uniquely tailored to the Middle Eastern market.

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 and is the Vice Chairman of the Middle East Committee as well as the Islamic Finance Committee of the American Bar Association’s International Law Section.  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 Business Immigration (EB-5 Regional Center and Investor Representation) and International Business Transactions.  For more information, please visit the About Us page or http://www.dharlawllp.com. 

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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.

First Ever SEC Enforcement Action Against an EB-5 Immigrant Investor Regional Center

imagesBy: Wassem M. Amin

Overview of the EB-5 Program

Recently extended by President Obama, the Eb-5 Immigrant Investor Pilot Program provides a pathway to U.S. citizenship for foreign nationals by investing in domestic projects that will create or preserve a minimum number of jobs for U.S. Workers.  The program is administered by the United States Citizenship and Immigration Services (“USCIS”) and provides that foreign nationals may qualify to obtain a green card if the individuals invest $1,000,000 (or at least $500,000 in a “Targeted Employment Area”-i.e., a high unemployment or rural area), creating or preserving at least 10 jobs for U.S. workers, excluding the investor and his or her immediate family.

Under the EB-5 Program, a project developer may apply to be designated as a “Regional Center” by the USCIS.  If approved, this allows the developer to raise capital from foreign nationals while at the same time enabling the foreign investors to obtain permanent residency.  The benefit to the developer, or Regional Center, is usually minimal cost of capital (ROI on these projects are usually negligible) and the ability to charge the investor an “administrative fee.”  Most Regional Center investments are structured as Limited Partnerships, where the investor is sold a limited partnership interest and the developer is the general partner.

The SEC Enforcement Action

In the first-ever enforcement action against an EB-5 Regional Center, the SEC alleged that a Chicago-based Regional Center, through its owner, Anshoo Sethi, fraudulently sold over $145 million in securities and collected an additional $11 million in administrative fees from more than 250 investors.   However, according to the Complaint, the project, purportedly for a hotel development, was non-existent, and the investors (mostly from China) were duped on the basis of false and misleading information from Sethi.

To obtain USCIS approval for the Regional Center, Sethi made “materially false and misleading statements and provided falsified documents” to secure preliminary approval for the project and the investors’ provisional visas.  For example, Sethi forged a document to purport that the Qatar Investment Authority (“QIA”), a sovereign wealth fund, was guaranteeing the funding of the project in the amount of over $340 million–a claim that was denied by the QIA.

By the time the SEC caught up with Sethi, he had spent over 90% of the $11 million collected in administrative fees.  However, the SEC was able to obtain an emergency order freezing all remaining funds.   The foreign investors, of course, never received a visa, and most likely will not be able to recover the administrative fees misappropriated by Sethi.

Having personally worked with several Regional Centers on behalf of foreign investors, most are legitimate and very reputable developers.

Implications

The Association to Invest in the USA (“IIUSA”), a trade group which advocates on the behalf of Regional Centers nationwide, lauded the SEC’s enforcement action.  As the use of EB-5 investment capital continues to rise, the need for oversight is greatly enhanced.  Current FY ’13 forecasts estimate that EB-5 foreign direct investment will account for over $2 Billion.  Since  2005, the program has raised over $6 billion in capital and added over 95,000 U.S. jobs.

It is likely that, due to the growing recognition of the program, dishonest individuals, such as Sethi, will attempt to use it 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 investors usually plays an integral role in this process.  However, unlike a traditional private offering, an attorney evaluating a Regional Center’s offering documents needs to be well-versed in, not only business and securities laws and regulations, but Immigration law as well.  It is a unique intersection of two areas of the law–both with their own complex regulatory and statutory regime.

Below is an outline of the USCIS requirements for a foreign investor to qualify for an EB-5 visa, followed by a list of typical offering documents which I have seen from Regional Centers.

EB-5 Eligibility (Qualification of Foreign Investor)

The EB-5 employment-based immigrant visa is designated for foreign investors in new commercial enterprises.  There are 10,000 annual visas in this category (this quota has never been met).  This category covers two major types of investors: (1) those who invest in targeted employment areas ; and (2) those who invest anywhere else .  A targeted employment area is defined as (1) a rural area; or (2) any area experiencing high unemployment of at least 150% of the national average rate.

Criteria for Qualification:

    1. Investment of at least $500,000 (if in a targeted employment area) or $1,000,000 if any other area;
    1. Required capital must be placed “at risk” for the purpose of generating a return on the capital (Actual commitment of the capital is required);
    2. The enterprise must create full time employment for not less than 10 U.S. workers (includes citizens and permanent residents, but not immediate family members of the investor);
    1. Investment must be in a “new commercial enterprise,” defined as: (1) creating an original business; (2) by buying and reorganizing an existing business; OR (3) investing in an existing “troubled business”, created after November 29, 1990, if the capital infusion will result in, at least 40% increase in net worth or number of employees;
    2. Capital must be obtained through lawful means; and
    3. Investor must be engaged in the management of the enterprise, through either day to day management or policy formulation (inapplicable if through a Regional Center).

Immigration Filing Requirements:

Amount of Capital Invested – To show that the petitioner is in the process of investing $1million or $500,000 (targeted area), petition must be accompanied with:

    1. Bank Statements showing amounts deposited in the United States business accounts for the enterprise (or held in an irrevocable escrow account);
    2. Evidence of all the assets purchased in the United States;
    1. Evidence of all property transferred from abroad for use in the US enterprise, including applicable commercial entry documents and fair market valuations; or
    1. Evidence of Monies transferred to the new commercial enterprise in exchange for shares of stock (voting or nonvoting, common or preferred) or convertible debentures.

Lawful Means Evidence – to prove the investor’s funds are derived from a lawful source, the investor must show evidence such as:

    1. Foreign business registration records;
    1. Corporate, Partnership, and personal tax returns;
    1. Evidence identifying any other source of capital; OR
    1. Certified copies of judgments or evidence of all pending civil or criminal actions involving monetary judgments against the petitioner.

Job Creation Evidence Required – to show that the new commercial enterprise will create not less than 10 full time positions for qualifying employees, the petition must be accompanied by:

    1. Documentation consisting of photocopies of Form I-9, tax records, or other similar documents for 10 employees (if already hired); OR
    2. A Copy of a comprehensive business plan showing that, due to the nature and projected size of the new commercial enterprise, the need for not fewer than 10 employees will result, including approximate dates, within the next two years, when such employees will be hired.

Management – Evidence that a petitioner is or will be engaged in management (day to day or policy formulation), the petition must be accompanied by:

    1. A statement of the position title that the petitioner has or will have in the new enterprise, and a complete description of his duties;
    2. Evidence that the petitioner is a corporate officer or holds a seat on a corporate board of directors; OR
    3. If the new entity is a partnership, evidence that the petitioner is involved in management or policy-making.

Targeted Employment Area

    1. Evidence that the metropolitan statistical area, a specific county within such an area, or a county in which a city or town with a population of 20,000 or more is located, has experienced an average unemployment rate of 150% of the national average rate; or
    2. A letter from an authorized body of the government or political subdivision of the metro statistical area, or of the city or town with a population of 20,000 or more in which the enterprise is principally doing business, has been designated a high unemployment area.

Typical EB-5 Regional Center Offering Documents:

    1. Project Summary Sheet
    1. Memorandum of Terms (Term Sheet)
    1. Private Placement Memorandum
    1. Partnership Agreement
    1. Subscription Agreement
    1. Targeted Employment Area Designation
    1. Business Plan(s)
    1. Approved Economic Impact Report
    1. Escrow Agreements for Subscription Fees & Capital Contribution
    1. Completion or Performance Bond
    1. Payment Bonds
    1. USCIS Regional Center Approval Letter
    1. Investor Qualification Questionnaire
    1. Brochure(s) and other marketing material

 

Disclaimer: This article is for informational purposes only and it is not intended as legal advice.  Their are many other factors that may impact an applicant’s eligibility.  Consultation with a knowledgeable Immigration and Corporate Attorney is important.  For more information, please contact Wassem M. Amin.

M&A: Meso Scale v. Roche: Reverse Triangular Mergers May Trigger Anti-Assignment Provisions in a Target’s Contracts.

By Wassem M. Amin

Reverse triangular mergers are a popular deal structure used to acquire all of the outstanding equity interests of a target company. In a reverse triangular merger, the acquirer forms a subsidiary which is merged with and into the target company with the target company surviving the merger, and the target stockholders receive cash, acquirer stock, or a combination of cash and stock. The end result is the same as a pure stock purchase, but reverse triangular mergers offer the advantage of requiring only the approval of a majority in interest of stockholders (unless a higher percentage is required by the target company’s governing documents), subject to statutory appraisal and dissenter’s rights, instead of the approval of all stockholders (or at least a sufficient amount of shares to qualify for a follow-on short-form merger).

M&A attorneys have long believed that a reverse triangular merger, like a stock purchase, does not involve an assignment of the target company’s assets and, therefore, does not trigger anti-assignment provisions in the target company’s contracts that restrict an “assignment by operation of law.”

However, in a case of first impression, the Delaware Court of  Chancery, in Meso Scale Diagnostics LLC v. Roche Diagnostics GMBH, concluded that there was ambiguity regarding whether such a provision should apply in the context of a reverse triangular merger and denied defendants’ motion to dismiss, thus calling into question this long-held belief.

Good resources:

Shannon D. Kung, The Reverse Triangular Merger Loophole and Enforcing Anti-Assignment Clauses, 103 Nw. U. L. Rev. 1037, 1052 (2009).

H. Justine Pace, Anti-Assignment Provisions, Copyright Licenses, and Intra-Group Mergers: The Effect of Cincom v. Novellis, 9 Nw. J. Tech. & Intell. Prop. 263 (2010).

Elaine D. Ziff, The Effect of Corporate Acquisitions on the Target Company’s License Rights, 57 Bus. Law. 767, 785 (2002).

Kingsley L. Taft, Introduction to Patents and M&A, 931 Pli/Pat 211, 222 (2008).