SEC compliance issues
Aug 06, 2015
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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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Does the Issuer Exemption work in EB5?


The title of today's webinar "The so-called Issuer Exemption," includes the disclaimer “so-called” because the phrase “Issuer Exemption” is not part of the regulations. Nowhere in the Exchange Act is there an actual reference to an “issuer exemption.” The phrase is really a colloquial term which refers to Rule 3(a)(4)-1.

When we talk about broker-dealers in the EB5 context, we're really talking of brokers. Brokers are ones who affect transactions for others. Section 15(a) of ‘The Exchange Act’ says, "It is unlawful for any unregistered broker to effect any transactions in or otherwise engage in the business of purchasing or selling securities.” 

So in order to properly explain “the so-called Issuer Exemption” we need to start by defining what a broker is. Rule 3(a)(4) of The Exchange Act defines a broker as any person engaged in the business of effecting transactions in securities for the accounts of others. The Act also outlines the requirements of brokers to register with the SEC and any states they conduct business and brokers are required to become members of FINRA. Brokers are subject to extensive regulatory requirements and oversight. 

The Issuer Exemption, which is Rule 3(a)(4)-1 is an exemption from the requirement of needing to be registered as a broker-dealer and was adopted by the SEC in July of 1985 to provide a  non-exclusive safe harbor under which persons associated with an issuer of securities who participate in sales of that issuer's securities, will not be considered to be acting as a broker. Accordingly, this person would not be required to register with the Commission, pursuant to Section 15 of the Exchange Act. 

The Commission, in adopting Rule 3(a)(4)-1 provides guidance concerning the applicability of the EB5 broker dealer registration requirement in situations where an issuer chooses to sell its securities through its associated persons.  John, why do you think the SEC in 1985 created this rule? 

BROKER DEALER: I think the SEC, given that their goal is to oversee certain transactions, obviously feels the need to define what those transactions are. The regulation was created to provide some guidelines to issuers and to provide guidelines to finders who are assisting issuers in raising money. I think the rule is up for some interpretation but generally speaking it's fairly clear what they're trying to define: who is a broker, who is not a broker, who has to register and who doesn't. 

Kurt Reuss: Why do you think we need an exemption from that straightforward rule that securities transactions need to be brokered by a broker-dealer? 

BROKER DEALER: The exemption is a good tool for operating companies to avoid a lot of the expenses in fundraising. Typically, the exemption allows for a company to go out and raise money once per year. In my opinion the intent of that rule is specific to an operating company with 'a business,' for example a software business, a steel manufacturer, etc. I don't believe that the exemption applies in many EB5 cases. I believe, in fact, that quite a lot of the EB5 transactions that rely on that rule are actually taking a very broad interpretation of it. They’re essentially stating that, "Hey, we’re an operating company" when, in fact, other than raising capital and issuing securities, they have no other operations or business. By that definition, they’d be considered a broker-dealer.

Ozzie Torres: John raises a really interesting and ultimately, a very complex question. As we look at the typical EB-5 visa structure these days which includes an EB5 loan model, if in that loan model the NCE raises money and then turns around and lends money to the project, what role does that NCE play? What is it's business ultimately? I think that is a complex question and I think it is fact-driven by what that entity actually does. I think John is correct that if the entity’s sole business is raising money, then I think there's a problem. 

If you argue that the business of the entity goes beyond raising money but rather to put together a lending facility to oversee an immigration process and what not, then I think you might be able to take cover under the Issuer Exemption. If you can't find that there is a business of the NCE then we may be talking about having to really collapse the loan model.

BROKER DEALER: The loan model could still exist if they run the transaction through a broker-dealer.  Under the exemption, there are limitations on the sales activities. Generally speaking, one offering per 12 months, soliciting only certain financial institutions, a test of role not involving the general solicitation of investors. I think those areas are easily scrutinized by the SEC and I think difficult to defend in the current model. The transaction can still be done in order to adjust to the larger involvement of running it through a broker-dealer.

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