The EB5 Securities Roundtable is an informal, independent group of EB-5 securities attorneys organized to facilitate best practices in the offerings of EB-5 securities.This roundtable has been working to provide comments to legislation (commonly known as the Integrity Bill) that we expect will be proposed by Congress to improve the integrity of the EB-5 program.

CMB recently published a blog titled EB-5 Due Diligence - Third Party Websites: Considering one of the many independent EB-5 due diligence services? in which they dismiss the notion that investors are served by retaining a due diligence firm before selecting an EB-5 investment.

There are a number of responsibilities involved in supervising the New Commercial Enterprise's (NCE’s) loan to the Job Creating Enterprise (JCE). What are the best practices for ensuring proper supervision and what are the potential issues that can arise?

David Appel: One common issue is when a project starts and there's no money in the budget for supervising and administering the loan to the JCE. 

Lets explore how to structure, manage and monitor a deal so that investors are afforded significant protection against fraud.

Rupy Cheema: The first question we ask when looking at an offering is what is the NCE’s industry knowledge and experience? When I conduct a site visit and meet the NCE management, I want to better understand the manager’s experience with underwriting a loan or investment.

Do they understand the industry and the market they are investing in? Do they have access to the market data they need to prepare cash-flow models? Do they have an investment committee that ultimately makes the investment decisions?

I have always been a big proponent of loan administration as a key EB-5 best practice.

It is essential that for the integrity of the program, given the fact that most EB-5 capital is deployed in a loan model, that loan transaction more closely resemble a traditional loan. It is prudent to provide many of the protections seen in a traditional loan transaction to the EB-5 lending company and its investors.

The Manager of the NCE (EB-5 investors) should consider the following loan administration checklist. 

1. Retain Independent Counsel. The loan documentation should be in accordance with industry standards and consider the EB-5 Immigration program's unique requirements.
2. Undertake the same due diligence as a financial institution.  This includes obtaining a feasibility of current market conditions, appraisers, title reports and potentially title insurance, a survey, zoning and environmental reports.

Kurt: We've had a number of webinars that discuss the potential problems issuers could face from a Regulation S offering, because of its strict rules associated to managing all solicitation and market conditioning to outside the U.S. and its territories. Contrast that to the Regulation D 506(c) rules which open up possibilities for a general solicitation to be conducted anywhere you want, so long as the issuer is committed to verifying each investor's accreditation credentials.

Three issues to consider when using concurrent Reg S and Reg D offerings are:

1. Use separate documents for Reg S and concurrent Reg D Rule 506(c) offerings. That's integral to deciding to doing a concurrent offering.
2. Don't use a website to solicit investors for Reg S offerings.
3. Construct a separate web portal for each offering or else have a generic landing page that directs investors to appropriate content, tailored to each specific exemption.

EB5 Business plan

Kurt: Let's talk about what I find to be the most complicated part of 506(c) and squaring it with Reg S, and that is the issue of concurrent offerings. It seems to me that if you're trying to do a Reg D offering at the same time you're doing a Reg S offering, those two objectives compete with each other.

Let’s say you're doing a general solicitation under 506(c) and simultaniously under Reg S you can't have any contact with people in the US. How can you do a concurrent offering of both Reg S and Reg D?

Kurt: When we look at crowdfunding in eb5 process; we're talking about three rules: Title II, Title III and Title IV.

Title IV, being Reg A+ investment offerings, requires you to register your securities with the SEC, so that's going to bring more responsibility on you.

Title III involves raising no more than $1 million.

So my sense is that Title II, Reg D - Rule 506(c) is probably most applicable to EB-5.

Kurt: As many of you may have seen in the news, the JOBS Act and Crowdfunding rules were finally passed last week. How does the new JOBS Act related to Crowdfunding apply to EB5?

Scott Andersen: What happened approximately a week ago was that Title III finally went live.

People have been talking about crowdfunding and the ability to engage in crowdfunding for a long time, but technical crowdfunding, at least on a federal basis, became live just a week ago and the rule allows issuers to raise $1 million through the use of a funding portal or a securities broker-dealer that can target non-accredited investors.

The reason this has been exciting for the marketplace is that now you have a mechanism that allows you to target exclusively non-accredited investors so that they can participate in your offering.