Bob Cornish: One thing I’ve seen issuers put too much reliance on is the fact that they’ll provide the investor with the marketing materials at the same time that they provide the PPM, which actually is very good, however, giving out the PPM doesn’t shield you from any potential liability from misstatements made in the marketing materials.
There are dozens of SEC and FINRA enforcement actions where people have been brought to task for the distribution and use of misleading marketing materials on everything from basic stocks to mutual funds. If you go to the SEC website, these mutual funds have more disclosure than anything you’d ever see. These things need to be handled with care.
Kurt Reuss: John, could you talk a little about some of the more surprising situations that you’ve come across in EB5 which were related to marketing materials?
John Leo: Giving up complete control to your partner in China. I think they should be viewed as a partner, whereby you’re both on the same page. We’ve been involved in transactions where we’ve had conference calls with the agent and the issuer and they acted as partners, they followed the same procedures. With other clients however, we’ve been told, “Do not contact the agent. Do not get involved in this relationship.”
There’s a big divergence in what the issuers find acceptable or what the agents find acceptable and ultimately it’s going to fall on the issuer. They need to control their information. They need to control the process. If they take that position, they’ll stay away from any problems. Once you give up control and allow in a third party that’s not familiar with these regulations and with US law and the SEC, that’s got the potential to be a major problem. The bottom line is you don’t want to give up control of the information.
If you don’t have a broker dealer, have your attorney review it. If you work with a broker dealer, we review it. If you don’t let us review it, we give you a form to fill out that basically states that, though it was recommended, we didn’t provide this service and you’re agreeing to that. Or it’s part of our engagement and you’ve agreed that we’re not providing certain services because we know that there’s a liability and we don’t want to be a party to it.
Kurt Reuss: Bob, you once mentioned that the majority of SEC actions relate to marketing materials. What struck a chord with me is how important it is for us to ensure we understand what they’re saying with regards to the marketing materials, that they’re saying exactly what we want them to say, and that they’ve been properly vetted
John Tishler: I agree. Marketing materials have to be taken very, very seriously. The notion that they are somehow protected because they are done in China and by third parties is not one I’d be comfortable with. I would advise people not to rely on that and to treat them with the care that we’ve all encouraged them to treat them with.
Kurt Reuss: This is not a liability you can pawn off on a third party.
John Tishler: I just wouldn’t be comfortable that that will ultimately work. Anything can happen in litigation. Regardless of what anybody’s done in the past, the future is in front of us. We can do things right in the future and there’s absolutely no question that the issuer should be involved in all aspects of the marketing materials, including their translation by making sure that they’re translated accurately and making sure that they get legal review. As lawyers, we have the ability to see things in ways that business people don’t. That’s why you pay us.
One last point, I think one of the saddest things is that it’s not expensive to have us review marketing materials. It doesn’t cost nearly as much as preparing an 85 page PPM. We can do it quickly. Now, you might not like what we have to say; that’s an entirely different issue but it’s not expensive. In my mind, it’s the epitome of penny wise and pound foolish to prepare marketing materials without legal review.
Kurt Reuss: I’ll second that. I plan to be a part of this industry for a long time as I know all of you do. I know many of us feel that a lot of the opportunity of these deals is being consumed or driven by the Chinese market right now. Some people may feel that you can’t afford to do things right. I think the opposite; you can’t afford to do things wrong. As far as getting things done, whether it be marketing materials reviewed or getting a broker dealer involved, if we do come together and do and structure things right, it will help both issuers and investors in the long run and it will provide more protections. We’ll have less fraud cases. We’ll have less stings happening to our industry, all of which is going to hurt us all. It essentially is not going to cost issuers anymore because frankly, whatever they could be giving up, they are giving up.