Kurt Reuss: In looking at marketing materials from a number of regional centers there are some common elements we typically see in the larger offerings such as regional centers talking about their experience; the results they’ve gotten from previous projects; the fact that principal has been paid back to investors; the percentage of I-526 and I-829 approvals; the project’s description and highlights.
Sometimes we see marketing material that include information on the budget; loan amounts and both the senior loan and the EB5 loan. Developer equity is often in there; as is job cushion; the rate of return to investors and the term.
Bob, is there anything in that list that strikes you as being something that you’d want to be cautious about?
Bob Cornish: Certainly, results from previous projects and principal paid back to investors is, in my mind, probably the most prominent issue of those on this list, simply because there are so many prohibitions and guidelines regarding how you represent past performance, how you represent what the results may be from a certain strategy.
One of the problems you have in the EB5 context versus traditional investment management vehicles is how do you actually measure performance? Is it the return on the investment? Not really since most investments are not designed to generate monetary return other than the return of principal and the green card. More importantly, how do you measure what a successful result is? If 97% of the people who went into the EB5 program were able to get their green cards, what does that mean? Who measures that and how has it been verified?
Kurt Reuss: Let me be more specific; say it refers to the fact that a regional center has been a promoter of previous offerings and that regional center has raised whatever number they’ve raised from a number of projects. It’s the regional center making this claim so is there anything wrong with that? I mean, it’s not the issuer of this particular offering that’s making a claim.
Bob Cornish: You have to remember that the regional center is essentially the manager of the investment vehicle and, to some degree, there’s obviously some corporate entity in between. In essence, you have to look at what the regional center says, almost in the same context as you would an investment manager for a mutual fund or for a hedge fund. That means, in my mind, that they make the delineation of what the strategy was or is. Is it comparable to previous strategies and what the results are and why?
John Leo: To add to that, I believe that the issuer is responsible for their information and they should sign off on any information that’s going out, whether it’s a PPM or marketing materials. I’ve seen a lot of “murkiness,” for example about the capital stack, where issuers are representing developer equity, but when you dig into the facts, technically they did make an investment but it’s also a tax abatement or some sort of tax advantage, so you have to ask then is that really equity in a deal?
I don’t believe it is but if you’re going to include it, I think you should have a footnote that says “it’s not a $10 million or $5 million investment. It’s a tax break, typically several years down the road, sometimes much longer such as when the project is complete.” You want to look at these materials as Exhibit A. If someone were to scrutinize it in a dispute, you’re going to have to be able to defend it, that’s what it comes down to.
Kurt Reuss: Bob or John Tishler, I’ve got two marketing pieces here that I wanted to share. I don’t think these are egregious. The question is regarding job cushion.
One marketing piece says “130% of required EB5 jobs will be created” and another says “actual jobs approved by USCIS” and it lists a number of jobs. Do either of those give you pause? In my mind, especially as it regards to the latter, any material inferring that jobs cushion was “USCIS-approved” is just asking for trouble.
John Tishler: These are, I think, the epitome of John Leo’s definition of “murkiness.” Those are really great examples to ponder this concept of securities fraud and realize that it doesn’t mean fraud in the way you commonly understand fraud. Let’s take the first one, 130% of required jobs will be created. I’m going to assume in the background there’s an economist report that projects enough jobs to support that 130% number. I’m also going to presume they’re not lying about the economist report, that if they need a thousand jobs, there’s an economist report that projects 1300 jobs.
Is it fraud to make the statement that 130% jobs will be created? I can almost guarantee you the person making that statement certainly did not think of it as a fraudulent statement. They’ll argue that the math checks out; 130% is 1300 over a thousand. As a securities lawyer, though, I would have to respond, “Yeah, but you said, ‘Will be created.’” The economist report doesn’t say “will be created”. It’s full of its own assumptions and says, essentially on the basis of the RIMS II model or IMPLAN or whatever model they’re using, based on all these other assumptions we project this many jobs.
What the report typically says is this; “We project this many jobs on the basis of all of our assumptions.” It doesn’t say they will be created. That would be a comment that we would make as we review those offering materials. We would say, “No, you don’t want to say they will be created.” I mean it would be okay to say that there’s a 30% job cushion on the basis of a report prepared by XYZ Performance Economics. That would be an accurate statement. Then we would also have on the reverse side of the materials that you should always look to the PPM for a full explanation of everything.
Then we’d be making an accurate, not a murky, statement. I can appreciate that a person who’s just speaking in plain language might say it the way you said it, Kurt. However, as soon as you write that in the marketing materials, you all of a sudden created liability when those jobs are not actually created down the road. And you created liability that you didn’t need to create, because you could have said it my way, that we have this cushion on the basis of a report from XYZ Economics. That wouldn’t be misleading at all. That would be a true statement
I’m not sure why but a practice has developed amongst a lot of people in the EB-5 industry that they’ll pay a good law firm to write their PPM and to make these kinds of language distinctions in that document. The lawyer delivers the final PPM and they’re done. The issuer never talks to that lawyer again.
Then they start writing up their marketing materials and they do stuff that the lawyer would have never let them do which goes out in the marketplace. What they don’t realize is that they’ve undermined all the work the lawyer did. At this point, it won’t matter that the PPM was right, because you’re going to be equally as responsible for the marketing materials being wrong.
In a sense, quite a lot of money was wasted. A lot of very necessary work was undertaken by the lawyers but you’ve undermined the protections that you paid for by taking the lawyers out and not having them review the rest of the package to ensure the same standards that were applied when they reviewed the PPM and the other documents.
Kurt Reuss: John, how often do you find that a client will not engage a broker dealer and also not engage your firm to review the marketing document? How frequently does that kind of thing happen?
John Tishler: I have to answer the question this way. I know it happens frequently in the industry. It actually doesn’t happen with my firm because we structure our engagements around reviewing all of the work. When we quote the work, we indicate that delivery of the PPM doesn’t mean the end of our job. There’s going to be other streams of work that we’re going to have to do. Just because of the way we do things, I’m pretty aggressive about trying to make sure it doesn’t happen.
Now, of course, I don’t send private detectives around to my clients. If they’re hell bent on doing things without telling me, then I won’t know about it. But, knowing how much liability there potentially is for these marketing materials if we don’t review them, we very strongly emphasize that they need to regard that as part of our engagement.
Now I’m not saying that as that’s some sort of legal standard of care. I think clients are within their rights to ask for a particular assignment to be undertaken by a lawyer and it is undertaken in exactly that manner. However, I would just encourage issuers in regional centers to understand the possible consequences of doing that.
I think that any of the lawyers who do stop their work at that point will fully explain the consequences of doing that. You’re much more likely to see your marketing materials as the exhibits in litigation or as the things referenced in an SEC enforcement action than you are the PPM. That’s because of their nature; they’re actually more dangerous, so cutting off your legal help is just, in my mind, tremendously unwise.
Kurt Reuss: John, let’s say you have a client that says, “We’re developing our marketing materials in China. They’ll be distributed in China. They’re going to be presented in China. They’re not going to be coming into the US and we’ve relied on the agents to control that message.” What would you say to a client like that?
John Tishler: I would say, “Maybe that works but it would depend on a lot of different considerations. Once you’re sued, and after you’ve spent a $1,000,000 or so defending this litigation, we might actually prevail on that argument.” Maybe or maybe not; the fact is there are a lot of potential weaknesses to that argument.
Kurt Reuss: That’s not a litigation you would want to be involved in.
John Tishler: Exactly. Now, I’m not going to say that in every case where you do things offshore that there is US jurisdiction for litigation positions. Of course, there is a defense potentially available to people in the US that things conducted offshore are not subject to US law. The caveat is that it’s only potentially available and moreover, it’s an extremely complex discussion which still has no clarity under the law as to what is and what is not subject to US jurisdiction.
What I tell people who are operating in the real business world, who are trying to conduct an offering and control their expenses and their liability is this, “You’ve got to assume that you can get in trouble over this stuff, whether you or your agent wrote it.” I mean that’s just the safe assumption.
If you end up getting in trouble, we’ll defend you and, hopefully, you’ve got a litigation budget. But for now, let’s try to avoid getting in trouble. And that means writing your marketing materials consistent with the standard of clarity; that is the same standard of clarity we have for the offering materials.
I’m not saying that marketing material should be 85 pages of tiny print with very few pictures. They shouldn’t. That’s not their purpose. Their purpose is to be marketing materials intended for a specific audience, and that is a legitimate purpose. I am perfectly fine with marketing materials having wonderful pictures of whatever it is that’s going to be built. I’m perfectly fine with them emphasizing the positive. They just need to be measured and accurate when they emphasize the positive.
If they make a statement, it needs to be an accurate statement. And if it is more complicated than the quick summary, then it needs to include a footnote. If we just have a pie chart that shows 20% sponsor equity, you might see that in marketing materials, and that’s fine but if a part of that equity is tax credits and things like that then that should be annotated with a footnote. It needs to state, “See the offering materials for a description of the sources of sponsor equity.” Then the offering materials will say what those are.