When do you need a broker dealer in EB-5?

Posted by Kurt Reuss on July 14, 2016

Role of EB-5 Broker Dealer

Kurt: Lori, Could you give us your thoughts about the need for a broker-dealer in EB-5 transactions?

Lori: Since I'm the only person on the panel who doesn't work for a broker-dealer, hopefully I'm objective. Let me begin by saying that every deal is different and thus all the facts are different. Obviously, we take that into account when we advise participants in an EB5 offering what they need to do. Generally, however, we believe that participants, whether issuers or regional centers, could have a better outcome if they associate with a broker-dealer, especially in regard to the following topics:

EB-5 loan administration is critical

Posted by Kurt Reuss on July 13, 2016

I have always been a big proponent of loan administration as a key EB-5 process best practice.

It is essential that for the integrity of the program, given the fact that most EB-5 capital is deployed in a loan model, that loan transaction more closely resemble a traditional loan. It is prudent to provide many of the protections seen in a traditional loan transaction to the EB-5 lending company and its investors.

Could Reg D 506(c) Offerings Replace Reg S Offerings in EB-5?

Posted by Kurt Reuss on June 21, 2016

Kurt: We've had a number of webinars that discuss the potential problems issuers could face from a Regulation S offering, because of its strict rules associated to managing all solicitation and market conditioning to outside the U.S. and its territories. Contrast that to the Regulation D 506(c) rules which open up possibilities for a general solicitation to be conducted anywhere you want, so long as the issuer is committed to verifying each EB5 investor's accreditation credentials.

Three issues to consider when using concurrent Reg S and Reg D offerings are:

  1. Use separate documents for Reg S and concurrent Reg D Rule 506(c) offerings. That's integral to deciding to doing a concurrent offering.
  2. Don't use a website to solicit investors for Reg S offerings.
  3. Construct a separate web portal for each offering or else have a generic landing page that directs investors to appropriate content, tailored to each specific exemption.

Concurrent Reg-S and Reg-D offerings in EB-5

Posted by Kurt Reuss on June 17, 2016

EB5 Business plan

Kurt: Let's talk about what I find to be the most complicated part of 506(c) and squaring it with Reg S, and that is the issue of concurrent offerings. It seems to me that if you're trying to do a Reg D offering at the same time you're doing a Reg S offering, those two objectives compete with each other.

Let’s say you're doing a general solicitation under 506(c) and simultaniously under Reg S you can't have any contact with people in the US. How can you do a concurrent offering of both Reg S and Reg D?

Combining EB-5 and crowdfunding

Posted by Kurt Reuss on June 15, 2016

Kurt: When we look at crowdfunding in eb5 process; we're talking about three rules: Title II, Title III and Title IV.

Title IV, being Reg A+ investment offerings, requires you to register your securities with the SEC, so that's going to bring more responsibility on you.

Title III involves raising no more than $1 million.

So my sense is that Title II, Reg D - Rule 506(c) is probably most applicable to EB-5.

Crowdfunding v. "Crowdfunding"

Posted by Kurt Reuss on June 13, 2016

Kurt: As many of you may have seen in the news, the JOBS Act and Crowdfunding rules were finally passed last week. How does the new JOBS Act related to Crowdfunding apply to EB5?

Scott Andersen: What happened approximately a week ago was that Title III finally went live.

People have been talking about crowdfunding and the ability to engage in crowdfunding for a long time, but technical crowdfunding, at least on a federal basis, became live just a week ago and the rule allows issuers to raise $1 million through the use of a funding portal or a securities broker-dealer that can target non-accredited investors.

The reason this has been exciting for the marketplace is that now you have a mechanism that allows you to target exclusively non-accredited investors so that they can participate in your offering.

Crowdfunding in EB-5; Verifying Accredited Investors Under 506(c)

Posted by Kurt Reuss on June 07, 2016

 

Kurt: Under Regulation D, 506(c) reasonable steps must be taken to verify that investors are accredited. An accredited investor is any individual who, alone or jointly with a spouse, has a net worth at least  $1 million, not including their primary residence, or any individual with adjusted gross income of $200,000, or with their spouse $300,000, over the past two years. Generally, in EB-5 visa process this is not an issue, but it's something that has to be verified.

Jor, you've built a tool that helps verify accredited investors. Can you talk a little bit about that?

Conflicts of interest in EB-5

Posted by Kurt Reuss on May 05, 2016

Scott: There are various kinds of conflicts of interest. The clearest in EB-5 is when an attorney represents the investor and either the regional center or developer.

As a securities attorney, I've focused my career on the securities space; just the idea of representing both the developer and the investor strikes me as difficult.

The number one problem I foresee is the conflict of interest provisions in the various attorney-disciplinary rules that are required to be complied with. Additionally, there are also conflicts of interest which have to be disclosed in the offering documents. The failure to disclose conflicts of interest could be considered to be fraud by various regulators like the Securities and Exchange Commission, when the information is considered to be material.

Challenge of Valuing Equity Contributions When Self-Dealing

Posted by Kurt Reuss on May 03, 2016

Kurt: Robert, do you have a particular conflict of interest in EB5 that you think regional centers and attorneys should be careful of?

Robert: One which did occur to me is the interests of a party which sells something into the job-creation enterprise (JCE), like a land-owner which may be related to the developer or the regional center owners or the manager of the NCE or all of the above.

There's an important challenge to validate or confirm the value that is put on whatever it is that is being sold into the entity and to disclose who is getting paid for it.

Kurt: Does that need to be disclosed in a prominent way to say, "this is what I'm valuing my property at and this is the equity contribution I'm making to this deal"? Is that how you disclose that conflict?

Robert: Yes, and "this is how we came to that value which is tied to the land."

I-526 Insurance; Proper Disclosure is Critical

Posted by Kurt Reuss on April 20, 2016

Kurt Reuss: Proper disclosure is an important issue with this I-526 product, considering it is a new product with no claims paid to date. Doug, how do you approach a product like this, when developing disclosures in the PPM?

Doug Hauer: I think you have to be very careful to, in plain language, describe the mechanics of how this policy is actually working.

An investor who is reviewing the PPM should be able to review the section on the insurance and walk away with an understanding of how mechanically a policy would work and what kinds of claims would result in there being coverage and what kinds of claims would result in a denial of coverage.

I think the trap for an issuer or an EB5 regional center issuing a deal is that the term 'insurance' conveys a safety net, or a risk-free proposition. You have to be careful here if you're an attorney drafting a PPM for a client; you need to spell out in clear terms what the limitations are and what the parameters of the product are.

I think it would be important to alert investors, in a PPM, of the risks with this product.

One area that we see in these policies that leads to some confusion is how 'fraud' is defined. Fraud, in a securities law context, when you're talking about an issuer, can mean many different things.

It's going to be important to calibrate those disclosures, make them clear, put those disclosures in plain language, and ensure that all parties in a deal get protection through understanding what the limitations of the product are.