Categories
Offering documents
Date
Jun 03, 2015
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Author
Kurt Reuss
Kurt Reuss
Kurt Reuss is a registered securities broker who has been specializing in EB-5 since 2012. He offers advice on investment structuring and market conditions related to EB-5 investments.

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Do Senior Lenders Concern Themselves with SEC Compliance of EB-5 Fund Raising Activities?

Q: Do senior lenders concern themselves with SEC compliance regarding EB-5 fund raising activities?

John Tishler: Yes, I have seen it with certain banks. Remember, the senior lender is not involved in the offering of securities; they have nothing to do with it. They’re simply making a senior loan to an operating company that owns the assets, which in the vast majority of cases isn't even the company that's offering the EB5 securities. So, the bank is really no where in the loop of offering these securities. 

So why do they care? Their concerns are about the overall health of their borrower and we've seen banks want to satisfy themselves that the EB5 issuance is being done in accordance with securities laws. Certainly my preference is the banks just diligence it the way they would diligence anything else.

Rohit Kapuria: Just this past week a senior lender working with one of my clients decided to add language into the offering documents requiring certification of ongoing compliance with some of the money laundering regulations.

Such language is wholly prospective and becomes very difficult for many of the New Commercial Enterprises (NCE) and/or regional center managing NCE to comply with every single rule. There is a possibility that if the NCE agrees to such stringent certification, the senior lender could return six months later with evidence demonstrating non-compliance with such requirement vis-à-vis a particular investor and the bank says "You guys didn't comply for this particular investor and therefore we're going to disallow his/her $500,000 tranche.” 

While I can understand the senior lender’s desire to protect itself, this seems quite intrusive and very much a reach on the part of the lender.  

John Tishler:  First of all it's a very good point on it's own and I think it illustrates that these are very complex transactions that we're dealing with. This whole webinar series has been so excellent that Kurt's been putting on which has highlighted how complex the EB5 project aspect is. Things show up every day in EB5 which are quite complex.

Those of us who practice in this area know there's a lot to keep track of and it's changing all the time; market practices are changing and it's a complex area but we're also touching the real world and in the real world there's unbelievable legal complexity associated with doing business in other parts of the world.  

To your example Rohit, we have these money laundering statues and they exist outside of just thinking about source of funds and immigration concerns, and they pop up in other places. So I think people just have to appreciate that you don't simplify anything by introducing EB5 into a deal. Every single complexity in your life still exists and EB5 simply adds another layer because it adds another legal regime on top of all the ones that already apply. 

This isn't a bad thing. People live with it and work with it and deal with it every day and EB 5 visa remains a great source of affordable capital. People just need to be realistic that they have their systems in place to be able to deal with all the real world concerns.

The value of getting a legal opinion on SEC compliance matters

Is there value to a senior lender who requests a legal opinion on SEC compliance? I have heard of banks asking for legal opinions from securities attorneys involved in the deal to give them some assurance and my feeling is that those legal opinions can be difficult to provide because some of these laws don't involve issues that are particularly easy to give a legal opinion on under the legal opinion standards that apply to lawyers.

And not being able to give a legal opinion doesn't mean that there's a problem. The fact that a lawyer might say, "I can't give you a legal opinion on that" does not by any stretch mean that the deal is actually illegal. It just means that under legal opinion standards it's difficult to give the banks what they're asking for because the law is not clear in some areas.

Rohit Kapuria: Of late a few clients have reached out indicating that the senior lender was requesting an immigration legal opinion regarding EB-5 funding. While it is easy enough for me to expound on the history, use and benefit of EB-5 financing, I am in no position to give an opinion on whether the funds will ever materialize. That would be completely speculative. I mean the offering has to be put together, it has to go to market, in many cases an agent needs to pick it up, and investors need to buy into it by funding escrow.

Therefore attempting to put forth a legal opinion, 3-4 months prior to the marketing would be extremely difficult. That being said, such considerations must be weighed against complying with at least some of the senior lenders’ requests since they do play such an important role in the deal. 

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