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How Do EB-5 Issuers Register as Investment Advisors?

March 03, 2016

Panelists: LORI PATTERSON, CATHERINE DEBONO HOLMES, ROBERT CORNISH, CHRISTOPHER GABBARD

Moderator: KURT REUSS

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Lori Patterson
Baker Donelson

Catherine-DeBono-Holmes_120x150_BW

Catherine DeBono Holmes
JMBM

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Robert Cornish
Phillips Lytle

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Christopher Gabbard
Greenberg Traurig

Kurt: Form ADV is the form that, to a large extent, represents what registration as an investment advisor looks like. Is that right Lori?

Lori: Form ADV is your general form that the SEC uses and which the individual states use to register an investment advisor. You would also use Form ADV to provide notifications to the SEC of an exemption.

If you are an investment advisor, or if you're someone that might be deemed an investment advisor but you believe you may be subject to an exemption from registration, you can use Form ADV to document that exemption and notify the SEC.

This is an important point because even if you do fall under the $150 million private fund exemption, you must still fill out that particular portion of the Form ADV. Of course, if exempt, you don't have the extra requirements that we talked about earlier.

The instructions to Form ADV are really quite helpful in that it provides a great deal of easily understandable terms and definitions that will expand upon the topics we're discussing.

Kurt: I've pulled out some areas here to give you sense of what is going to be asked on the 46-page Form ADV. SEE WEBINAR SLIDES. One thing certain is that a great deal of effort is generally needed to complete this form.

Issuers are almost universally required to file Form ADV. If you’re doing an SEC registration, then you’ll have to complete the form in full. A state registration may require the filing of an abbreviated version of Form ADV. And if you're claiming an exemption from registration as an RIA (registered investment advisor) you’ll still have to notify the SEC using a section of Form ADV.

Bob: One thing to remember is that the completed Form ADV generally becomes public knowledge. The document is downloaded by the SEC and made available on the SEC website in a section called “Check Out Your Advisor.” Unlike many other documents that are filed with the SEC, Form ADV is generally not subject to confidential treatment.

Kurt: Can any of this give me an example where an EB5 issuer would not have to file a Form ADV. Is there any reason that an issuer could say, "I don’t need to fill this form out at all?"

Cathy: If the EB5 fund doesn't actually invest in securities. For example, if the fund invested directly in real estate.

Lori: There could also be other investments aside from real estate that wouldn't be deemed as securities.

Bob: In the EB5 context, the issue is that the funds that are structured as an investment vehicle are funding a lending entity that is providing money. That money is ultimately going to be repaid in a form that somebody's got a partnership interest in.

It's pretty hard to argue that, if you're using that kind of model, that the interests that people are ultimately holding, even though they reflect the loan, are not securities.

This is the other reason you want counsel to guide you specifically on your fund structure and what you're doing, because probably all of us would have different answers, for very different reasons perhaps, as to why a traditional EB5 structure may not be a 3(c)5 structure. That, of course, drives your registration requirements.

Cathy: You're alluding to the fact that the SEC's regulation that adopted the exemption for private fund advisors doesn't say anything about 3(c)5.  

It says, "A private qualifying fund is one that is exempt under 3(c)1 or 3(c)7 of the Investment Company Act." It doesn't refer to 3(c)5 specifically but I've had a discussion with the SEC about that issue and asked, "Why did you leave out 3(c)5? Does that mean that if your exemption under the Investment Company Act is 3(c)5 then, automatically, the Investment Advisors Act doesn't apply?"

The examiner told me, "No. That wasn't the intention. You still have to look at the underlying investments that are made to determine whether or not they're securities.”

For that purpose, you can only look to cases, including US Supreme Court cases, because there is no statutory definition under Federal law of the word “securities.” You have to make an independent determination, looking at the case law or whether you think your general partner or manager of your EB5 fund is, in fact, managing securities or not.

Lori: I think that's an important point. It's going to be factually different, depending on how it's set up. For participants who are thinking about this from an immigration standpoint, we're not saying that the purchase of the limited partnership interest or the membership interest is not a security.

It could very well be a security and qualify for an investment for purchases in EB5. But if what the partnership or the company is investing in is not a security or if it's direct real estate or a note that does not quality as a security, then that changes whether the general partner or the managing member is acting as an investment advisor.

It's two different inquiries that you look at as to whether a security is based on those cases you were just discussing. I would say the interest purchased by the investor is definitely a security but what is owned by the partnership may not be a security.

Cathy: Agreed. 

Kurt: Cathy, how frequently do you use the 3(c)5 designation? 

Cathy: We always look at it, especially if the fund has over 100 investors because it's really more of an issue under the Investment Company Act.

I've been told by the SEC that it doesn't really matter whether you're 3(c)5 or not for purposes of the investment advisors rule. As such, I've come to the conclusion that whether I'm relying on 3(C)5 under the Investment Company Act is not going to be the sole determinant as to whether or not the exemption from the Investment Advisors Act is available. 

Kurt: Chris, you mentioned earlier that your firm focuses on keeping offerings to 99 or fewer investors. Then you typically would use 3(c)1 or 3(c)7, right? 

Chris: I wouldn't say typically but more often than not, that's the general direction that we go. If only because it's getting harder and harder to raise money. 

Kurt: I think we've done a good job communicating the message that getting registered as an investment advisor may be something to think about. If you don't think you need to get registered, then you certainly want to notify the SEC through the Form ADV.

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