Jackie, does the typical EB5 issuer (NCE) qualify for Rule 3(a)4-1 (The Issuer Exemption)?
Jackie Prester: There are two different levels of inquiry. You’ve got this very specific rule which pertains to the ‘Safe Harbor’ status. For that you've basically got to check the box on all the conditions. And if all the conditions are met, because of the ‘safe harbor’ status, you’re not deemed to be a broker-dealer. But even if you don’t meet all of the conditions, you may still not be deemed to be a broker-dealer, however, that is dependent upon the facts and circumstances.
Would an NCE ever be deemed an issuer or would it be by definition a broker? If we take a step back and ask, "What's the definition of a broker?”; a broker is someone who effects transactions on behalf of others. The NCE, the entity itself, is out there offering securities of the NCE, say of a limited partnership or membership interests.
So by definition the securities being offered and sold are securities of the NCE, as the NCE is the issuer. But where the rub comes is that an entity doesn’t offer and sell securities. Individuals do.
The individuals who are associated with the NCE, whether directly (if they're an officer of the NCE), or indirectly (if they’re an officer of the general partner or the regional center) are actually a step or two removed from the NCE.
So are those individuals who are acting on behalf of the NCE effectively brokers, i.e. acting on behalf of others, or are they really just part of the NCE itself and considered to be part of the issuer? Legally, that's the real inquiry.
Ronnie Fieldstone: First of all, I think there are arguably quite a number of scenarios under which the NCE could qualify for the Issuer Exemption. I think the SEC has taken the position that the NCE, its sponsor (which could be the regional center), or the party that forms the NCE, does qualify for the Issuer Exemption. Accordingly, they are able to justify receiving monies and collecting administrative fees, as long as they don't pay any commissions to unlicensed individuals.
There are a lot of variations to that. There are three ways that a regional center which forms an NCE could possibly avoid broker-dealer issues:
- If they are, in fact, an issuer, they can claim the Issuer Exemption.
- Provided that their fees and compensation are not related to being a broker-dealer but rather for the provision of services related to the offering.
- Though, I think it's a bit of a gray area, under the once-every-12-months rule you can only participate in one offering every 12 months. Now, while that’s where safe harbor goes away it doesn’t necessarily mean you're not exempt.
Kurt Reuss: Ozzie, would you mind talking a little bit about some of the nuances related to direct and indirect compensation paid by the issuer to associated persons?
Ozzie Torres: Sure. We know that the hallmark of a broker-dealer is getting paid commissions. Once you establish that, I think it's going to be a hard battle to find your way out of this maze. But what companies try to do is see if they can structure compensation packages that take into account some of this activity. Of course, we advise each and every client that they cannot give any sort of compensation or bonus which is directly or indirectly tied to the finding of investors to any associate, officer or director of the company, or any other key person involved in the offering. It is so important to make sure that your clients understand that there’s no creative way to provide compensation tied to investor procurement that wouldn’t trip up that particular rule.
(Kurt): Frankly, I think a fundamental question issuers should consider before looking at the conditions of the 3(a)4-1 exemption is whether an NCE who's sole business is raising money could possibly qualify for the issuer exemption since raising money to invest in another business, in this case the JCE, is what broker-dealer firms do.