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Concurrent Reg S and Reg D Offerings


Moderator: KURT REUSS


Jor Law
Homeier & Law

Scott Purcell
Fund America

John Leo
Primary Capital  


Scott Andersen 

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?

Jor Law: Essentially, you can do any concurrent offering where part of the offering relies only on Reg D (506(b) or 506(c)) while the other part of the offering relies only on Reg S.

Reg S is an offshore exemption, a transaction limited to non-US persons. Now, 506(c) is traditionally thought of as a domestic exemption, but it actually isn't. 506(c) is an exemption, period. One could theoretically do a 506(c) offering only to offshore people if they wanted to.

If they wanted to do a Reg S offering offshore and can actually qualify that same offering as a 506(c), not necessarily concurrently as two separate offerings, but as a single offering where every EB5 investor is going to qualify under Reg S and every investor is also going to qualify under 506(c) or 506(b), an issuer theoretically could.

It's not so much that there is any inherent conflict between the two. The conflict only arises in how people use the law. If someone says Reg S can only be used offshore, I'm only going to do Reg S offshore, that's fine, and then domestically I can't use Reg S.

However, if I would like to raise money domestically, I want to use Reg D. Then it is possible to do concurrent offerings. The people offshore receive one set of documents that are Reg S and maybe the website is limited to only those individuals with an international IP address. The people who live domestically receive the Reg D set of documents and they can only access the website from the US. And that’s assuming that it's a 506(c) publicly. If it's a 506(b) offering, it would be only after they've been vetted as accredited investors.

John Leo: Right or wrong, our position is that we would require all investors to meet the 506(c) standard as an accredited investor, whether they're onshore or offshore.

I know there's no such requirement, but taking the position that we're doing a 506(c) offering, at some point that could get audited. I’d like to know how this looks from a broker-dealer compliance perspective.

Addressing the minutia you get hit with from the SEC and FINRA, or if you were the issuer, from the SEC, some investors represent themselves as Reg S and they wind up being a Reg D investor. I assume it's not a requirement, but we would require all investors, whether they're onshore or offshore, to meet the 506(c) requirement.

Jor, would you recommend it or not recommend it? What are your thoughts on that?

Jor Law: I don't think it's necessary; however I do think it's the safer thing to do just because mistakes can happen.

In that case, you actually don't even need the Reg S exemption at all. Other than the fact that if it's relatively free or low-cost to add the Reg S exemption, you might as well have two just in case, but in reality, if you verified every investor to the 506(c) standard, your 506(c) exemption would be sufficient as a standalone exemption for US law purposes.

Scott Purcell: That's exactly the point. If you're going to add the friction to the investment process, then why do a Reg S at all?

John Leo: It would make sense not to do it at all just to do the 506(c).

Scott Andersen: What it does is it gives you a dual argument that, if there's a mistake made, as Jor had indicated, you have the ability to make an argument to a regulator that you met the other exemption. That would be the reason for pursuing a dual approach.

John Leo: On the 506(c) offering, we look at it as a way to expand what I'm seeing as a somewhat of a stagnant market in the EB-5 space. The EB5 capital for a lot of the deals that are out in the market right now is coming in much slower than expected.

Even in what I would call the Tier 1 deals, the results are less successful than they were a year ago, and I'd say much less successful than two years ago in terms of the amount of time it takes to raise money and the effort it takes to get that money.

That's a result of a number of issues, such as the delays with the Chinese in getting a green card, a much larger number of regional centers and a much larger number of quality deals in the market, so more deals are competing for essentially the same amount of dollars and that results in a longer waiting line for Chinese investors.

With the 506(c), I think all issuers would come in contact with a much larger number of investors and can certainly build a pipeline and a following of investors. I find the market in China, and the market in general in the EB-5 business, to be a relationship market. I really doubt someone's going to go online, look at a deal and wire $500,000.

Instead, they'll talk to their attorney or their friends. The bottom line is they're going to want to meet someone. I think you can develop a good pipeline of investors and create awareness about your EB5 project. To come back to what Scott said earlier, even local awareness is helpful if you're looking to do a bridge transaction, which a number of EB-5 transactions are involved with.

I see this as a great mechanism for EB-5 as well as other private placements. I think you do need to create that stickiness with the investor with some kind of hand-holding along the way.

Kurt: From your point of view then, if you were to avoid Reg S offerings altogether and you relied on 506(c), if we're talking about a cost somewhere in the neighborhood of $69 to verify an investor, and Scott Purcell, you asked why bother doing the Reg S if if there’s just added friction. Jor, why would you do a Reg S if everyone came to the conclusion that verifying investors was a reasonable thing to do anyway?

Jor Law: The cost certainly shouldn't be much of a factor if $69 per investor verification is the highest cost paid, and if we get substantially cheaper with bulk purchases.

The reason why someone might choose Reg S simply is because that is what the EB-5 market is used to right now, because you don't, technically, have to verify the investors. Assuming that you're okay with taking that risk, then it's not so much a savings burden, but the burden on the investor or the investor's representatives is less.

In the EB-5 market, you're seeing people that are now starting to use 506(c) more broadly, but that hasn't trickled through the marketplace yet.

For example, in China, you will still get migration agents that don't understand what it is and it requires an education process. Once they understand it and they learn it and they get past the psychological stage of complaining, it turns out that it's probably okay. It's not that much friction, but the initial friction of the psychological desire not to change what they've been doing is really where most of the friction in the EB-5 market comes from right now.

John Leo: In terms of pulling documents for a verification process, that's part of the EB5 process anyway, verifying where the money came from. If some guy in New York puts $500,000 into private placement we do a basic check, but we don't do nearly the amount of work in terms of bank statements and other issues involving EB-5 to verify where his money came from.

For us, I don't see it as a big obstacle for the verification of the funds because that is part of the normal process. I see the 506(c) really as potentially a means to reduce the role of the agent in China. They're always going to be involved, but I think with the 506(c), you'll pick up a lot of investors that normally you may not come in contact with that are here in the US which I'd say is at least 25% of the market.

Jor Law: Yeah, I would agree. I think the 506(c) is extremely powerful when used correctly. The friction is just psychological. I think it's just that people are used to doing things a certain way and they haven’t heard about what 506(c) is.

One thing to be clear about is verification of an accredited investor status is not the same as source of funds.

In EB-5, the investors are already used to this very onerous process where they have to prove their source of funds and they have to provide a lot of information. Adding a little piece of verification whereby you only have to show that you have the money, you don't have to show how you got the money or where the money came from, should be very, very friction-less. It just happens that the market hasn't yet been trained to it, and therefore, you get some people that ask, "What's this new requirement? We're not familiar with it."

It's a new thing. We see in the US as well, many investors are used to investing under 506(b) and then when they're asked to verify, the initial response is, that they’ve invested in five other deals that don't require this. They want to know why they need to do this now? It's really psychological more than anything else.

John Leo: Jor, how do you deal with a student EB-5 applicant under a 506(c)? 

Jor Law: Theoretically, that student, if they were doing a 506(b), still has to certify that they're an accredited investor, and if you have any reason to believe that that certification would not be valid, then you shouldn't just blindly accept their self-certification. That's a question for issuers to consider, even if they aren't doing a 506(c) and they're simply doing a 506(b).

Then, for a 506(c), you go one step further. You actually have to prove that they have that net worth.

For example, parents might have to give their children $500,000 for the EB-5 transaction and an additional $500,000 to bring them up to the accredited investor status, assuming their child has no net worth.

Then the verification test is an at-a-point-in-time type of test. Are they an accredited investor at the time they make the EB5 investment or not?

It's up to the student, and I guess the parent, whether that student keeps that extra money or at a later time returns it to their parent, but it cannot be a loan. If it's a loan, then it would be counted as a liability. It has to be a true gift.

John Leo: Yeah, that's actually the point I was getting at. If we have situations where they do get a gift, as an example, property, you get a letter noting that it's been gifted. Does the actual title of the property have to be transferred or would you issue a letter with that title being moved?

Jor Law: Ultimately, that depends on each reviewing attorney’s discretion. However, if the reviewer has no reason to believe that the letter is false, they probably would accept it.

I could see why they might say, however, that the letter is not good enough. They may not believe you and want to see the actual transfer take place, but theoretically, for example, if someone gets a binding commitment letter from a lender for a line of credit, for the rest of the world, there isn't any question that that person has access to that line of credit.

In this case, following the same logic, I think a lot of reviewers would be comfortable with it, although I could see where if there was anything that might make the reviewer suspicious that it was a sham transaction, then they would definitely want to see more.
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