Scott: In dealing with conflicts of interest, investment advisors have a fiduciary duty to do what's in the best interest of their clients. The broker-dealers in the EB5 space has a suitability obligation to assess their clients’ financial circumstances and investment objectives, and here in the EB5 space that would include a desire to get a Green Card, in assessing what specifically is an appropriate investment for a registered broker-dealer to recommend.
I do think that there are various kinds of conflicts of interest. Probably the clearest indication would be in a context of when you look at an attorney. For an attorney who represents, say, both the issuer (or regional center or the developer) and the investor.
As a securities attorney, I've focused my career on the securities space, just the idea of representing both the issuer and the investor strikes me as difficult.
In the context of an attorney, the number one problem I foresee is the conflict of interest provisions in the various attorney-disciplinary rules that are required to be complied with.
Additionally, there are also conflicts of interest which have to be disclosed in the offering documents. The failure to disclose those conflicts of interest could, at times when the information is considered to be material, be considered to be fraud, and could be deemed as fraud by various regulators like the Securities and Exchange Commission.
Kurt: How would you know when you've got sufficient disclosure?
Scott: The rule is you have to disclose all facts that a reasonable investor would want to know. Information is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. You have to put yourself into the investor’s shoes, so to speak.
Investors, usually, are primarily concerned about the safety of their investment and their returns. Of course, in the EB5 space we know there is a higher, more prevailing desire, and that is to get a Green Card.
You have to think in terms of the investor; think about what are the facts that I would want to know about this transaction as an investor? If there are certain things that an investor would reasonably want to know and which make you very uncomfortable disclosing, I would suggest that that may be an inappropriate conflict to try to quickly resolve and at the very least disclose.
Robert: You know the disclosure is sufficient when the party that has the conflict asks, “Do you really have to put that in there?”
Scott: I agree; it can get really uncomfortable at times because if you represent the issuer or the developer as well as the investor, there are sometimes conflicts that rise to the level where you are actually violating your duty as an attorney to both clients simultaneously. For example, in the unfortunate circumstance where a development maybe not working out as anticipated, you may have a duty to alert the investor—whom you have been shepherding through the process—that this may not be the best investment in order to get a Green Card. However, if you're an attorney and you're doing that, and you represent the developer as well, you have what's called the duty of confidentiality. Any information that you learn from your client in the course of legal representation, for purposes of legal representation, is confidential and cannot be shared with any third party. What do you do when you represent somebody else who has an exact contrary interest and you can't share that very critical information?
Omar: I have a slightly different view. I think the issuer's responsibility under securities laws are working in parallel with an immigration attorney's duty to disclose information that they become aware of in the course of their representation. In that case, the attorney can simply say to the developer, if you don't disclose this, you're in violation of securities laws. In the worst case scenario, I'd have to ask who is representing you. I think that's usually enough to get the developer to act in an appropriate manner.
Kurt: Yes, but being in the situation that you're representing both sides of the deal must make it more difficult to vigorously protect one client against the other.
Omar: I think the developer’s obligations under the securities laws and their strong desire not to even step into any possible gray area, makes it easier to manage than you might think. Everybody is aware that the SEC and various regulators are looking into this space more and more. I feel they’re especially targeting the projects where they see that conflicts of interest are apparent. I think issuers are very heavily incentivized to provide full and adequate disclosure at every opportunity and it's not as difficult as some might think to get the attorneys’ and developers’ interests to align, to basically do what's best for the investor. The broker-dealers really have a duty to do so and as such it's not quite as difficult as some might think to manage it.
Kurt: Robert, do you agree with Omar?
Robert: I'm somewhere in the middle of these two. I certainly respect lawyers who choose not to represent any investors in relation to a project where the lawyer has represented the issuer or another party on the developer’s side. I personally don't draw it that tightly. What I do is refuse to have anything to do with an investor choosing any investment. Period.
I'm not a broker or an investment advisor, so I just don't act like one, ever. I wouldn't get involved in representing an investor in relation to their effort to pick an EB5 investment.
My engagement letter with an investor would say, we're not representing you in choosing any investment and we're not representing you in monitoring or protecting your investment. All we're doing is seeking the immigration benefit that is in the common interest of you and the parties who sold you this thing. That's all. If you want any advice or assistance in any of those other things, then go get somebody else to do it.
Mariza: Our take on this issue is more in line with Scott’s. We typically only represent issuers on transactions in this capacity, not investors.
Even still, there are often partnership conflict issues to evaluate because typically both EB5 investors and the manager or general partner of the new commercial enterprise are members of the entity. Inherent in this relationship is a conflict because preparation of the partnership agreement or operating agreement, as the case may be, is not an arms-length endeavor where all the parties get to frame the issues and make the upfront business planning decisions together. It is important to consider adding waiver language to the entity’s operative documents, accompanied by disclosure, to make this issue clear to prospective investors.