John, could you talk just a moment, about Section 17b of the Securities Act.
John Tishler: This a specialty issue and while it is not going to apply to some EB5 marketing materials or offerings it will apply to some and I think it’s worth bringing up. In EB5, Section 17b is relatively unknown. Let me first give you some background on Section 17b which is also known as the “Anti Tout Rule.”
Just about everyone has received an email or a piece of junk mail that hypes some stock or offering, you know—it’s the next Apple stock or something like that, trading for pennies now, but destined for big bucks.
Now, if you look at the really fine print, it might say, “The person putting out this notice was paid by the issuer,” or, “We were paid $50,000 for mailing this and we received a million and a half warrants in this company.” That’s the disclaimer; it’s there because it’s required by law and that law was designed to get at exactly these kinds of things called tout sheets. With a tout sheet, people are touting a security; they’re not offering the security, per se.
The rule basically says that if you publish something about a security, not necessarily an offer in and of itself but as it relates to a security and if you are getting compensated for doing that, then that must be disclosed. The person who publishes it has to disclose that they’re being compensated and the exact amount of the compensation. Let’s now talk about how that might show up in EB5.
First, you could have somebody make an endorsement of your project. That’s a big favorite, and a lot of times these endorsements are made by public officials and the like. Everyone’s probably seen something like that, right? You have a letter from a local politician or personality saying, “We’re thrilled to have this new hotel going up,” or some such statement. Presumably, that person’s not getting paid, so there’s no issue with 17b of the Securities Act.
But perhaps that someone who is saying that this security is a good buy is actually getting paid for saying that. If that’s the case, 17b could be implicated, because somebody’s being paid to recommend the security. Probably the bigger concern here is if agents are putting out their own pieces on the offerings they’re marketing and they’re saying, “XYZ Exit Entry Bureau, here’s the project we recommend. It’s for this hotel in downtown Los Angeles.” They slap that onto a brochure and it’s sitting there at a seminar table, or it’s on a website, etc.
I think most of us realize that XYZ Immigration, Exit Entry Bureau, is getting paid. They’re going to earn a commission for every investor they bring in and if they don’t say explain that they are receiving compensation, they potentially have a problem under this statute.
I don’t think this is widely known in EB5. It’s quite possible that if those activities are conducted entirely offshore, with no nexus to means of US interstate commerce, that the SEC would have no jurisdiction. But it is also possible that the SEC could have jurisdiction.
What people need to be mindful of is that if anybody is getting paid for endorsing a project or for publishing marketing materials then they are required to disclose that payment and amount.
Kurt Reuss: Bob, do you have any thoughts about the jurisdictional defense of marketing materials?
Bob Cornish: I think if you’re relying on a Reg S offering exemption, you certainly need to be concerned that your marketing materials are in compliance. In my mind, that means that the materials are only to be used offshore. They may well be prepared offshore. They may be in a foreign language. You’ve taken steps to monitor the distribution of those materials. You’ve taken the proper steps to limit access to them by others within your firm.
When you’re in the throes of a securities related litigation where somebody is looking to get their money back and say that all these things went wrong, typically what you will see are 10b-5 claims and potentially Section 17 claims.
Kurt Reuss: So, basically, the agents need to disclose the amount that they’re earning in the document that they’re distributing. On the flip side, though, there may be some coverage if everything’s being done offshore. Arguably, however, any email or marketing of these materials to or through someone in the US means that that defense goes away. Is that correct?
John Tishler: That’s correct.