4 Ways that EB-5 Regional Centers will Benefit From SEC’s Lifting of the General Solicitation Ban

120904-The-JOBS-Act-with-SEC-logo

By Wassem M. Amin, Esq. MBA

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.

General Solicitation will Increase Demand for EB-5 Investments

Lifting the ban on general solicitation will allow startups, venture captilists, EB-5 Regional Centers, the EB-5 Program 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)

EB-5 Regional Centers Can Advertise in Publications That Are Read By Potential Investors

Regional Centers now have the ability to advertise in national and international newspapers and media.  In fact, an EB-5 Regional Center from Florida recently placed an Ad in the Wall Street Journal.  The Wall Street Journal and similar publications target the demographic EB-5 Regional Centers are seeking.

EB-5 Regional Centers Can Target the International Student Demographic in the U.S.

There are millions of international students in the United States – many of whom are very wealthy and are looking for options to stay in the country post-graduation.  Advertising to these students through targeted marketing can be very profitable.

The Lift on the Ban Will Create New Service Providers

The lift on the Ban will undoubtedly create a significantly new and large pool of investors.  Additionally, I predict that there will be a new industry which caters specifically to connecting investors with companies looking for capital, a type of investor match-maker of sorts.

Investment is still limited to a requirement that all purchasers in the offering are “accredited investors”.  An “accredited investor” is defined as:

  • An individual with net worth (or joint net worth with a spouse) that exceeds $1million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence; or
  • An individual with an annual income that exceeded $200,000 in each of the two most recent years or a joint annual income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.

Moreover, EB-5 Regional Centers engaging in general solicitation activities will be required to verify through “reasonable steps” that EB-5 investors are accredited.  The SEC has not yet issued guidance on the steps necessary to satisfy the reasonableness requirement, however EB-5 Regional Centers engaging in general solicitation activities should be prepared to obtain guarantees of income requirements for all investors.

ncluding a requirement that all purchasers in the offering are “accredited investors”.  An “accredited investor” is defined as:

  • An individual with net worth (or joint net worth with a spouse) that exceeds $1million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence; or
  • An individual with an annual income that exceeded $200,000 in each of the two most recent years or a joint annual income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.

Moreover, EB-5 Regional Centers engaging in general solicitation activities will be required to verify through “reasonable steps” that EB-5 investors are accredited.  The SEC has not yet issued guidance on the steps necessary to satisfy the reasonableness requirement, however EB-5 Regional Centers engaging in general solicitation activities should be prepared to obtain guarantees of income requirements for all investors.

– See more at: http://connect.wolfsdorf.com/?p=1638#sthash.PJRkxOgN.dpuf

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.

I have previously authored an Article predicting the impact of the JOBS Act on the EB-5 Program, here.

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

Wassem M. Amin, Esq., MBA is an Attorney at Dhar Law, LLP in Boston, MA and is the Vice Chairman of the Middle East Division as well as the Islamic Finance Committee of the American Bar Association’s International Law Section.. 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.

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USCIS and the 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. 

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

images

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. 

Supreme Court Agrees to Hear Gay Marriage Cases

The Supreme Court announced today that it will hear two critical cases involving gay marriage.  The first involved a challenge the Defense of Marriage Act[1] (DOMA).  Passed in 1996, DOMA denies federal recognition of gay couples married in states legalizing gay marriage.  As a result of DOMA, Congress has thus far been able to prevent legally married gay Americans from receiving the same federal benefits heterosexual married couples receive – a violation of the 14th Amendment’s Equal Protection Clause. The Appeals Courts in both Massachusetts and New York have struck down the law as unconstitutional.

The second case involves a challenge to California’s notorious 2008 Proposition 8 law, which was passed after that state’s Supreme Court ruled homosexual couples defined marriage as between a man and a woman. Although it passed as a ballot measure, the constitutional amendment was struck down by the 9th Circuit Court of Appeals.

Gay marriage is legal, or will be soon, in: Connecticut, District of Columbia, Iowa, Maine, Maryland, Massachusetts, New Hampshire, New York, Vermont, Washington.  Although national support for gay marriage has steadily risen over the years, thirty-one states have amended their state’s constitution to ban gay marriage.

The rights of millions of Americans are at stake in this case.  A broadly stated decision in favor of gay marriage could overturn every state constitutional provision and law banning same-sex marriages.  A ruling in support of Proposition 8 and/or DOMA, will be seen as a victory for states’ rights.  However the Court rules, this promises to be the most significant ruling the Court has had since it upheld the Affordable Care Act earlier this year.

Social Impact Bonds Generate Buzz in New York and Massachusetts

New York City and Massachusetts have tapped into capital markets to fund social intervention programs by introducing social impact bonds.  A concept originating from the UK in 2010, Social Impact Bonds (SIBs) are a financing mechanism designed to support the efforts of government agencies that provide social services. In essence, they help transfer some of the risk in crime prevention or homelessness assistance, among many other social services, to private investors. They are just now beginning to gain recognition in the United States with the city of New York and the Commonwealth of Massachusetts bringing recent SIB deals to the market.

At its very core, the program enables the public sector to leverage upfront funding from private investors. Social Impact Bonds are commonly known as “pay for success” contracts, in which the government pays only if the program meets preset goals, resulting in all parties benefiting financially. However, the idea is in its infancy, with only a two-year-old prison program in Peterborough, U.K., serving as a model. “Assessing a nascent market — or one that isn’t clearly defined — is a tricky undertaking,” consultant McKinsey & Co. said in a report.

While “bonds” is a misnomer, SIBs could open doors for new funding mechanisms.  “This does not behave like a traditional municipal bond because of the risk transfer. The government only pays if the program is a success. The issuing entity is not the government, so this does not affect the credit rating of the state,” said Tracy Palandjian, co-founder of Social Finance US.

Philanthropically inclined investors are figured to be an easier initial sell as reaching profit-driven investors won’t come right away. Laura Callanan, a senior expert at McKinsey, said “as the SIB program grows, community development finance institutions and venture funds could repurpose themselves to serve as intermediaries.”

Social impact bonds could also provide new means to gauge performances of government programs. “Government has always been motion without progress. But now you can put people’s feet to the fire and force them to pay attention to metrics,” said Anthony Figliola, vice president of Uniondale, N.Y., lobbying group Empire Government Strategies.