I-526 Insurance; Proper Disclosure is Critical
Kurt Reuss: Proper disclosure is an important issue with this I-526 product, considering it is a new product with no claims paid to date. Doug, how do you approach a product like this, when developing disclosures in the PPM?
Doug Hauer: I think you have to be very careful to, in plain language, describe the mechanics of how this policy is actually working.
An investor who is reviewing the PPM should be able to review the section on the insurance and walk away with an understanding of how mechanically a policy would work and what kinds of claims would result in there being coverage and what kinds of claims would result in a denial of coverage.
I think the trap for an issuer or an EB5 regional center issuing a deal is that the term 'insurance' conveys a safety net, or a risk-free proposition. You have to be careful here if you're an attorney drafting a PPM for a client; you need to spell out in clear terms what the limitations are and what the parameters of the product are.
I think it would be important to alert investors, in a PPM, of the risks with this product.
One area that we see in these policies that leads to some confusion is how 'fraud' is defined. Fraud, in a securities law context, when you're talking about an issuer, can mean many different things.
It's going to be important to calibrate those disclosures, make them clear, put those disclosures in plain language, and ensure that all parties in a deal get protection through understanding what the limitations of the product are.
Marc Difanti: I think we all agree with Doug in that regard. We've worked closely with a number of different people to put together some template language that we provide to our approved projects to help them, at least in the beginning stages.
Certainly we agree that it should be reviewed from an immigration standpoint and from a securities council standpoint. It also needs to be tailored to each individual EB5 project to fit correctly with that project, but we've helped them at least in the beginning stages in providing template offering document language that starts that process off. It outlines the covered exposures and the excluded events and what the policy really provides.
I wholeheartedly agree and believe it's important from a marketing standpoint.
Bruce Rosetto: Folks need to understand that the offering documents are documents regarding risk disclosures. It's not a sales document. We would never say that the insurance protects against any I-526 denial. We would focus on the risks of the insurance and the interpretation of the exclusions so it's clear to someone buying this insurance that there truly are risks here and that there's no guarantee that they're going to get paid just because they have an insurance policy.
You must focus on the Exclusion section of the policy and make sure you understand them. In addition, in the PPM itself the Risk Factors should delineate this risk as well.
Doug Hauer: I would add that while the SEC obviously knows about EB5, they generally look to the gatekeepers to ensure that investors are given fair disclosures.
That means that if you have one of these insurance products in your offering documents, you're going to be really scrutinized later on if you mischaracterized how the coverage works.
Every lawyer operating in this space who's advising a client on a PPM needs to actually understand the mechanics of the policy. That's critical. You can't have robust disclosures if you don't understand how the policy works.
The second thing is that if you are an issuer and you put out a PPM that mischaracterizes this coverage and, as a result investors subscribe, you could find yourself in trouble with the SEC.
I think in the current climate, the EB5 industry is going to be under more and more scrutiny to do things right. It really means that the disclosures have to be fair to the investors and have to let the investors know about the gaps and limitations.
I think the term insurance itself connotes, again, a sense of security and that's where you have to be especially careful. If you run afoul of your obligations as an issuer to disclose and you don't properly disclose this policy, I think you could potentially end up with a 10-b(5) claim by the SEC if investors complain.
I'm sure state regulators would have a field day with a PPM that doesn’t properly explain the risks.