SEC compliance issues
Oct 08, 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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Is General Communication at Conferences or on Websites Okay Under the Regulation S Exemption?

We have a conference coming up in Dallas, Texas this month where there will be a number of booths talking about their EB5 project offerings. Jackie, would you imagine that all of those booths would be exclusive Reg D offerings, or are they going to be limited to what they can say at the booth?

Jackie Prester: My hope would be that reps in the booth will limit what they say. In the SEC precedent, the word “offer” is construed very, very broadly. It's not going to be limited to "Do you want to buy a security?" It will be much broader in scope; essentially the SEC would view conditioning the market to prepare for an offering of securities as an offer.


To the extent that there will be a conference and booths or what have you, the discussions really ought to be, in general terms, about the projects themselves, and not the offerings of the securities at all. The discussion should not be about investing in a particular project or otherwise geared toward an investor audience. The general projects available out there in the EB5 world are pretty standard.

Arguably, if the SEC were to take a really conservative approach, the marketing of projects themselves could be deemed an offer of securities since they're tied to the actual offering process. To my knowledge the SEC hasn't spoken on that issue.

Kurt Reuss: I recall reading a no action letter with the euromarket that the SEC referred to “arousing interest.” I think they used that in replacement of "an offer", or am I misunderstanding that?

Robert Cornish: No, “arousing interest” are the catch words that the SEC used in the no action letter on Reg S, called that was issued in 2004.

Regarding an offer in Reg S, one vital piece of information that isn’t listed but is really important in EB5 is job creation; “How many jobs are going to be created by this project?” You could easily get into that kind of conversation with people at a seminar or a trade show. The question is by talking about job creation in an EB5 project are you engaging in an activity that the SEC could construe as an offer?

Kurt Reuss: I was just thinking the same thing. Would a discussion on job creation constitute an offering?

Clem Turner: Under Reg S the language specifically talks about directed selling efforts being promotional, i.e. in promotional seminars and promotional efforts. I would think the argument in support of the booths would be that they're not promoting an offering; rather that they're merely informational. They're not talking to any potential investors. They're giving information to fellow EB5 service providers about their respective project. I think that the message needs to be tailored so that it's as “informational” as possible and doesn’t delve into any promotional activity.

That obviously means that there isn't any talk of the offering or the rendering of the building or discussion of jobs. It should be very factual information which would put you at a somewhat safer position. Is it possible to cross the line? Yes, absolutely. It is a gray area, and I don't believe there's any guidance in this particular area. I wouldn't advocate that we shut down informational seminars and conferences, but I would advise people who are participating in those conferences to first vet what they say with their securities attorney.

Robert Cornish: If there's a fiduciary in the middle of this, that does complicate the Reg S analysis. Or if there is an adviser here in the US who is advising somebody of the purchase or placement of a Reg S offering, that gets a little fuzzy. That's a good reason why a lot of EB5 investment vehicles are now using both dealers and investment advisors, because you have that extra layer of protection.

Kurt: Let’s talk a little bit about websites. Obviously, unless you live in certain places in the world, there are very few boundaries to a website. What are some of the restrictions faced by an issuer in the US who is doing a Reg S offering? What do they need to do to make sure that it's not being viewed as an offering to a US person?

Jackie: The SEC actually did issue some guidance on that point, though at 10 years old it’s a bit dated. In that guidance the SEC essentially said if you are a US issuer, and you want to market overseas in a Reg S offering, and you do so over the internet, whether via a website or some other portal, you must take steps to ensure that US people can't access that information. The guidance suggested the US issuer use password protection of the site. Then anyone living overseas interested in the project should be given a password to access the site.

Nowadays, there are other, better ways, to establish control to ensure that a website is accessed only by the people that you want to grant access. It may be that you have effective control from some technology that cannot be accessed within the United States. As long as you have some procedures in place to restrict access within the United States, you're okay. If you put up an offering on a website that anyone in the US can access, that could invalidate the Reg S exemption.

Kurt: What would you feel comfortable putting on your website that was available to the world? Obviously, with a password protected website, you need to create enough interest that the visitor is willing to give you their information. Then you have to be assured that they're not a US resident before you issue them a password. That's a fairly elaborate process, and yet you want to have a website that does attract investors. Can you share with us what an issuer should be comfortable with and willing to put on a website yet not have it be considered an offering available to US persons by the SEC?

Jackie Prester: There are actually two different avenues here. One would be if the website is restricted only to factual information regarding, say, a particular development, and has nothing on it about the offering. Now, from the SEC’s viewpoint, could that be considered arousing interest, or conditioning the market, and therefore construed as an offer? I think there's a real risk of that, but I have seen some folks do that. Potential issuers might create a website for “informational purposes only,” with a big disclaimer that the website is intended for a non-US audience. The problem is that we really haven't seen anything from the SEC that directly says that that's okay.

The other route which seems to make a lot more sense and more and more folks are looking at is what we call the “new” Reg D. The new Reg D allows general solicitation here in the United States as long as you take that extra step to verify that people are accredited investors. If you do a concurrent Reg D that permits advertising in a Reg S, and if you have an unrestricted website, you could take the position that the unrestricted website is permitted under Reg D. The only people who wouldn’t qualify under Reg S then would be the ones that, under Reg D, were verified as accredited investors.

Robert Cornish: From my own audit experience, in alternative investment industries, such as hedge funds, underwriting, etc., I’ve found that the SEC tends to gravitate toward password protection. And a lot of hedge fund managers still utilize the password protection of a website to make sure that they're always in, or at least appear to have some semblance of, compliance with Reg D and all other exemptions.

Clem Turner: In terms of what you can put on a website to motivate somebody to actually ask for the password or admittance, there’s no prohibition on putting up any past projects. You can certainly tout the benefits of the regional center and the regional center principals. You can talk about the EB5 program in general terms, or about the regional center's I-526 approval rate. You can use your website in order to create interest for a potential investor to learn more without giving any particular details about your current project.

Kurt Reuss: That's a very good point. Is there any difference between what you'd feel comfortable with putting on a website, and what you would discuss at a trade show? At a trade show you're going to be talking to people who rergistered, who are likely to be part of the IIUSA membership.

Clem Turner: I think you have to stick to those items that are on your website. You can talk about the website and provide general information about the project, but you don't want to provide any specific information about the offering. And I think that's akin to what really does happen at a trade show. Frankly, I believe if information about your current project wasn't given then the folks on the call would feel a lot more comfortable about the participation in those shows. A simple discussion of the project shouldn’t necessarily blow the Reg S exemption if it's done on a purely informational basis.

Personally, I would be much more uncomfortable putting that information on a website that anybody could access, as opposed to providing that information at a trade show, where there are no potential investors. There, it will only be EB5 service providers, and the limited purpose as to why you have that booth at that show becomes clear. In contrast, putting something up on a website, where the purpose seems much broader, it becomes less clear cut. And certainly it becomes harder to convince the SEC that the website was not meant to serve in any promotional way, but only for informational purposes, especially when potential investors can access the site.

Kurt Reuss: What is the purpose of an EB5 regional center at a trade show if there are no investors there? In other words, who is their target audience?

Clem Turner: There are folks like myself there, securities and immigration lawyers and other professionals and experts in the industry. Regional centers would want to raise the profile of their project.

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