EB-5 Regional Centers in Project Finance: Using EB-5 Capital in lieu of Mezzanine Financing

By Wassem M. Amin, Esq., MBA

The EB-5 program — which was created in 1990 but has grown in popularity only over the past few years — allows overseas investors to obtain a green card in exchange for providing a minimum of $500,000 in financing for qualified projects.  The explosive growth of the EB-5 program has caught the attention of real estate and project developers nationwide.  Developers have been using the program to establish so-called EB-5 Regional Centers, which are essentially entities, approved by the United States Citizenship and Immigration Service (“USCIS”) that allow a developer to raise capital from foreign immigrant investors for a specific project or projects.  The total capital raised per project has ranged from $1,000,000 to over $300,000,000.  As the use of EB-5 Regional Centers has expanded, the structure of EB-5 Regional Centers and underlying investments has also increased in complexity–which has allowed EB-5 capital to be used in increasingly diverse types of projects.

Of course, at the outset, it is critical to ensure that any contemplated EB-5 financing meet the stringent requirements set out by USCIS for the program.  The details of the program, and the differences between EB-5 financing through a Regional Center, are discussed in prior posts, here and here (each post includes downloadable PDFs, as well).

EB-5 Financing as an Alternative to Real Estate Mezzanine Capital

A potential, and increasingly popular, use of EB-5 funds in Real Estate finance is as a source of capital in lieu of traditional mezzanine loans.  In the context of real estate finance, mezzanine loans are typically used by developers as a source of supplementary financing for development projects.  Unlike a traditional mortgage, real estate mezzanine loans are collateralized by equity (such as stock or other ownership interest) in the development company rather than the property itself.  To account for the higher risk, lenders of mezzanine capital typically charge interest rates and fees that range between 12-20%, a substantial cost for the developer.

This is where EB-5 financing shines –  EB-5 cost of capital is one of the primary reasons the program has become very popular with developers.  EB-5 financing, whether structured in a debt or equity model (more on EB-5 financing structures, here), typically cost around 1-2%.  For example, in a debt model, an EB-5 loan from the foreign investor would carry an interest rate of 1%–significantly lower than traditional mortgage-backed loans, and exponentially lower than the cost of mezzanine financing.

EB-5 Financing as an Alternative to Mezzanine Capital in Leveraged Buyouts

In a leveraged buyout (“LBO”), mezzanine capital may be used in conjunction with other forms of financing and equity as part of the capital stack to fund the purchase price of a company being acquired.  In LBOs, Private Equity firms or an acquiring company often use mezzanine capital to lower the amount of capital invested.  Since Private Equity firms typically have higher target rates of returns than a mezzanine lender, use of mezzanine loans may increase the rate of return on an investment.  EB-5 Financing in the context of LBOs could replace the mezzanine loan in a capital stack and significantly enhance the rate of return on an investment or acquisition.  For example, in an LBO, if the capital stack of a purchase includes $50 million in mezzanine financing, at a cost of 15% to the borrower, using a simple interest rate calculation, the cost of capital to the purchaser is at least $7.5 million.  The significant cost of a mezzanine loan may have the effect of not only reducing the value of an LBO target, but also greatly diminishing the rate of return on an investment.

As in Real Estate finance, use of EB-5 capital in an LBO can have significant advantages.  For example, in the above scenario, if the LBO uses EB-5 capital in lieu of its mezzanine financing, the cost of capital would be around 1-2%, or between $500,000 to $1,000,000 in a $50 million capital raise–that is a savings of over $6,500,000.  In other words, using EB-5 capital just increased the return on the investment by an additional $6,500,000!

Making EB-5 Financing Work: Bridge Loans

Assuming the underlying project meets the requirements of the EB-5 program, many project developers or companies are still reluctant to use EB-5 financing simply because of the length of USCIS processing times.  Although USCIS has made significant strides over the past few years to address that issue, the fact remains that structuring an EB-5 financing takes a significant amount of time.  It may take anywhere from 6 months to 2 years before a developer is able to have funds from an EB-5 financing at its disposal.  The delay in access to these funds can prove fatal to a project.

However, the growth in EB-5 financing market has the creation of spurred specialized loan companies that address this very issue.  There are now several companies that provide specialized EB-5 bridge loans which allow a developer access to all or some of its anticipated capital.  Moreover, in its latest Policy Memorandum, USCIS has specifically indicated that such financial arrangements are allowed in the EB-5 context.  In a May 20, 2013 Adjudications Policy Memorandum, USCIS stated:

“It is acceptable for the developer or the principal of the new commercial enterprise, either directly or through a separate job-creating entity, to utilize interim, temporary or bridge financing – in the form of either debt or equity – prior to receipt of EB-5 capital. If the project commences based on the bridge financing prior to the receipt of the EB-5 capital and subsequently replaces it with EB-5 capital, the new commercial enterprise still gets credit for the job creation [arguably the main requirement of the EB-5 program] under the regulations….Developers should not be precluded from using EB-5 capital as an alternative source to replace temporary financing simply because it was not contemplated prior to obtaining the bridge or temporary financing.”

The increasing popularity and exponential growth of the EB-5 market has expanded the possibilities in which EB-5 capital can be used.  More than ever before, EB-5 capital can be used in a variety of flexible financing structures to fund increasingly diverse projects.  The key to successfully raising EB-5 capital is proper planning with the assistance of attorneys and professionals who, not only have expertise in Securities, Corporate, Immigration and, if applicable, Real Estate Law, but are also well-versed in the unique requirements the EB-5 program.  Finally, proper and extensive due diligence and risk analysis on the underlying project and the overall financing should also be completed contemporaneously.

If you would like more information about the EB-5 Visa or Regional Center development and investment offerings, please contact Wassem M. Amin, Esq., at wassem@aminconsultingllc.com.

___________________________________________________________________________________________

Wassem M. Amin, Esq., MBA is an Associate Attorney at Dhar Law LLP in Boston, MA, a Managing Director of Amin Consulting LLC 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 in the Middle East region, having worked as a consultant in the area for over 9 years.  Wassem currently concentrates his practice on Corporate Law, Business Immigration and International Business Transactions.  He has advised countless Eb-5 Investors and assisted developers in structuring USCIS-compliant EB-5 Regional Centers.  For more information, please visit the About Us page or request more information on our Contact Us page.

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.

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EB-5 Regional Centers in Project Finance: Using EB-5 Capital in lieu of Mezzanine Financing

By Wassem M. Amin, Esq., MBA

The EB-5 program — which was created in 1990 but has grown in popularity only over the past few years — allows overseas investors to obtain a green card in exchange for providing a minimum of $500,000 in financing for qualified projects.  The explosive growth of the EB-5 program has caught the attention of real estate and project developers nationwide.  Developers have been using the program to establish so-called EB-5 Regional Centers, which are essentially entities, approved by the United States Citizenship and Immigration Service (“USCIS”) that allow a developer to raise capital from foreign immigrant investors for a specific project or projects.  The total capital raised per project has ranged from $1,000,000 to over $300,000,000.  As the use of EB-5 Regional Centers has expanded, the structure of EB-5 Regional Centers and underlying investments has also increased in complexity–which has allowed EB-5 capital to be used in increasingly diverse types of projects.

Of course, at the outset, it is critical to ensure that any contemplated EB-5 financing meet the stringent requirements set out by USCIS for the program.  The details of the program, and the differences between EB-5 financing through a Regional Center, are discussed in prior posts, here and here (each post includes downloadable PDFs, as well).

EB-5 Financing as an Alternative to Real Estate Mezzanine Capital

A potential, and increasingly popular, use of EB-5 funds in Real Estate finance is as a source of capital in lieu of traditional mezzanine loans.  In the context of real estate finance, mezzanine loans are typically used by developers as a source of supplementary financing for development projects.  Unlike a traditional mortgage, real estate mezzanine loans are collateralized by equity (such as stock or other ownership interest) in the development company rather than the property itself.  To account for the higher risk, lenders of mezzanine capital typically charge interest rates and fees that range between 12-20%, a substantial cost for the developer.

This is where EB-5 financing shines –  EB-5 cost of capital is one of the primary reasons the program has become very popular with developers.  EB-5 financing, whether structured in a debt or equity model (more on EB-5 financing structures, here), typically cost around 1-2%.  For example, in a debt model, an EB-5 loan from the foreign investor would carry an interest rate of 1%–significantly lower than traditional mortgage-backed loans, and exponentially lower than the cost of mezzanine financing.

EB-5 Financing as an Alternative to Mezzanine Capital in Leveraged Buyouts

In a leveraged buyout (“LBO”), mezzanine capital may be used in conjunction with other forms of financing and equity as part of the capital stack to fund the purchase price of a company being acquired.  In LBOs, Private Equity firms or an acquiring company often use mezzanine capital to lower the amount of capital invested.  Since Private Equity firms typically have higher target rates of returns than a mezzanine lender, use of mezzanine loans may increase the rate of return on an investment.  EB-5 Financing in the context of LBOs could replace the mezzanine loan in a capital stack and significantly enhance the rate of return on an investment or acquisition.  For example, in an LBO, if the capital stack of a purchase includes $50 million in mezzanine financing, at a cost of 15% to the borrower, using a simple interest rate calculation, the cost of capital to the purchaser is at least $7.5 million.  The significant cost of a mezzanine loan may have the effect of not only reducing the value of an LBO target, but also greatly diminishing the rate of return on an investment.

As in Real Estate finance, use of EB-5 capital in an LBO can have significant advantages.  For example, in the above scenario, if the LBO uses EB-5 capital in lieu of its mezzanine financing, the cost of capital would be around 1-2%, or between $500,000 to $1,000,000 in a $50 million capital raise–that is a savings of over $6,500,000.  In other words, using EB-5 capital just increased the return on the investment by an additional $6,500,000!

Making EB-5 Financing Work: Bridge Loans

Assuming the underlying project meets the requirements of the EB-5 program, many project developers or companies are still reluctant to use EB-5 financing simply because of the length of USCIS processing times.  Although USCIS has made significant strides over the past few years to address that issue, the fact remains that structuring an EB-5 financing takes a significant amount of time.  It may take anywhere from 6 months to 2 years before a developer is able to have funds from an EB-5 financing at its disposal.  The delay in access to these funds can prove fatal to a project.

However, the growth in EB-5 financing market has the creation of spurred specialized loan companies that address this very issue.  There are now several companies that provide specialized EB-5 bridge loans which allow a developer access to all or some of its anticipated capital.  Moreover, in its latest Policy Memorandum, USCIS has specifically indicated that such financial arrangements are allowed in the EB-5 context.  In a May 20, 2013 Adjudications Policy Memorandum, USCIS stated:

“It is acceptable for the developer or the principal of the new commercial enterprise, either directly or through a separate job-creating entity, to utilize interim, temporary or bridge financing – in the form of either debt or equity – prior to receipt of EB-5 capital. If the project commences based on the bridge financing prior to the receipt of the EB-5 capital and subsequently replaces it with EB-5 capital, the new commercial enterprise still gets credit for the job creation [arguably the main requirement of the EB-5 program] under the regulations….Developers should not be precluded from using EB-5 capital as an alternative source to replace temporary financing simply because it was not contemplated prior to obtaining the bridge or temporary financing.”

The increasing popularity and exponential growth of the EB-5 market has expanded the possibilities in which EB-5 capital can be used.  More than ever before, EB-5 capital can be used in a variety of flexible financing structures to fund increasingly diverse projects.  The key to successfully raising EB-5 capital is proper planning with the assistance of attorneys and professionals who, not only have expertise in Securities, Corporate, Immigration and, if applicable, Real Estate Law, but are also well-versed in the unique requirements the EB-5 program.  Finally, proper and extensive due diligence and risk analysis on the underlying project and the overall financing should also be completed contemporaneously.

If you would like more information about the EB-5 Visa or Regional Center development and investment offerings, please contact Wassem M. Amin, Esq., at wassem@dharlawllp.com.

___________________________________________________________________________________________

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 Division 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 concentrates his practice on Corporate Law, Business Immigration and International Business Transactions.  He has advised countless Eb-5 Investors and assisted developers in structuring USCIS-compliant EB-5 Regional Centers.  For more information, please visit the About Us page or request more information on our Contact Us page.

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.

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

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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.

USCIS Continues Positive Reform of the EB-5 Immigrant Investor Program In Policy Memo

imagesBy Wassem Amin, Esq.

On May 30, 2013, USCIS issued the final version of its EB-5 Adjudications Policy.  Although it has been around since 1990, the EB-5 Visa, also known as the Immigrant Investor Visa, has been rising in popularity over the past couple of years.  Summarily speaking, the EB-5 Program is based on three main elements: (1) the immigrant’s investment of capital; (2) in a new commercial enterprise; (3) that creates jobs.

This article summarizes the main changes in USCIS’s adjudications of EB-5 investor and regional center applications.  A complete overview of the EB-5 Visa can be found in previous posts.

  • USCIS explicitly mentioned, for the first time, that administration of the program is done “with the utmost vigilance to program integrity” and that fraudulent applications are referred to appropriate law enforcement and regulatory authorities.  This is perhaps due to the recent high profile fraudulent EB-5 Regional Center in Chicago.
  • Ability to diversify investment:  USCIS clarified that the capital invested may be deployed into a portfolio of wholly-owned businesses, so long as all capital is deployed through a single commercial enterprise.  In other words, an immigrant investor’s capital, whether through a direct investment or regional center, can create a holding company that would receive the funds and distribute them to different businesses – so long as one or more of the portfolio of businesses or projects can create the required number of jobs.
  • Pooled Investments in Non-Regional Center Cases: In a direct investment context, USCIS indicated that the new commercial enterprise can consist of pooled investments OR can have owners who are not applying under the EB-5 program.
  • Geographic Scope of a Regional Center: In adjudicating Regional Center applications, the geographic scope of a Regional Center will be determined on a case-by-case basis.  The Memorandum noted that “the reasonableness of the proposed regional center geographic boundaries may be demonstrated through evidence that the proposed area is contributing significantly to the supply chain, as well as the labor pool, of the proposed projects.”
  • Removal of Conditions on Permanent Resident Status:  USCIS reiterated that the EB-5 Program allows an immigrant investor to become a lawful permanent resident, without conditions, if the immigrant investor has established a new commercial enterprise, substantially met the capital requirements, and can be expected to create within a reasonable time the required number of jobs.  Of particular significance is the fact that all of these requirements need not have been fully realized before the removal of conditions.  It is sufficient that evidence submitted establishes that “it is more likely than not” that the investor is in substantial compliance with the program and job creation will result within a “reasonable time.”  “Reasonable time” is a fact-specific determination, but USCIS indicated that, in most cases, the maximum ceiling allowed will be a one year extension after the original two years.
  • Impact of Regional Center’s change of Plans on Investors: A particularly laudable shift in policy is USCIS’s announcement in the memorandum that it will no longer deny investors’ petitions to remove conditions solely bases on failure to adhere to the plan contained in the Form I-526 (the initial immigrant investor application) OR to pursue business opportunities within an industry category previously approved for the Regional Center.  This will allow Regional Centers significant leeway in pursuing different options if their initial proposed investment fails, which also increases the likelihood of a successful exit for the investor. However, there is a draw back, USCIS noted that:

“it recognizes the fluidity of the business world and therefore allows for material changes to a petitioner’s business plan made after the petitioner has obtained lawful permanent resident status.  However, immigrant investors, and the regional center with whom they associate, should understand that availing themselves of this flexibility does decrease the degree of predictability they will enjoy if they instead adhere to the initial plan that is presented to and approved by USCIS.”

USCIS continues to make positive changes to the EB-5 Immigrant Investor Program.  With many practitioners hopeful that the visa quota will be increased if the new immigration bill passes, the EB-5 Program will most likely to continue to gain popularity among foreign investors as well as an attractive capital source for developers stateside.

__________________________________________

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.

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.