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.
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:
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 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.
Kurt: Under Regulation D, 506(c) reasonable steps must be taken to verify that investors are accredited. An accredited investor is any individual who, alone or jointly with a spouse, has a net worth at least $1 million, not including their primary residence, or any individual with adjusted gross income of $200,000, or with their spouse $300,000, over the past two years. Generally, in EB-5 this is not an issue, but it's something that has to be verified.
Jor, you've built a tool that helps verify accredited investors. Can you talk a little bit about that?
IMPORTANT DISCLOSURE – PLEASE READ: EB5 Diligence and its principals have provided the information herein in connection with the research services offered for private placements and other similarly structured investment vehicles claiming exemption from registration from the Securities Act of 1933 through Regulation D, each of which was created for the purpose of facilitating specific immigration objectives of potential investors (“EB-5 Investments”). Neither EB5 Diligence nor its principals and agents, including but not limited to any broker-dealer with which principals of EB5 Diligence are associated under the rules of the Financial Industry Regulatory Authority (FINRA), are offering, recommending, selling or placing, nor intending to offer, recommend, sell or place EB-5 Investments through making known the availability of research on such EB-5 Investments on this website. EB-5 Investments may only be offered or placed through use of a suitable offering document by senior management of the issuer or through others who are appropriately registered with a broker-dealer provided to an appropriately accredited or qualified investor as provided by law. Due Diligence Reports provided by EB-5 Diligence are not annexes or supplements to any offering documents of EB-5 Investments, nor may they be construed as such. Notwithstanding, EB-5 Diligence and/or its principals may be compensated by issuers, prospective investors or others affiliated with EB-5 Investments in consideration for the provision of Due Diligence Reports on EB-5 Investments. EB5 Diligence will disclose its compensation from issuers of EB-5 Investments to those utilizing its Due Diligence Reports upon request. As such, investors and others should be aware that there is an inherent conflict of interest between EB5 Diligence, its principals and issuers on the one hand, and investors on the other hand, given the nature of compensation paid to EB5 Diligence and/or its principals and the perceived objectivity of Due Diligence Reports on EB-5 Investments under such circumstances. Neither EB5 Diligence nor its principals and agents make any express or implied warranties whatsoever on this website regarding the suitability of EB-5 Investments. Usages of any references to laws or regulations by EB5 Diligence on this website are for informational purposes only and are not intended in any manner whatsoever to state or imply that EB-5 Investments are warranted in any manner by any governmental body of any kind. EB-5 Investments may differ from customary investments in that their primary goal may not be driven by investment returns but instead stated immigration objectives. As such, EB-5 Investments bear substantial financial and legal risks, including the loss of principal and/or immigration opportunities. Investors are directed to refer to the specific risk disclosures provided to them in connection with the EB-5 Investments under consideration, as well as guidance from independently retained accounting, legal and financial services providers.