Should EB-5 Issuers Register as RIAs with States or the SEC?

Kurt: Let’s discuss federal and state registration as an investment advisor (RIA). An unusual aspect of registration is that you need to determine whether you should be registering with a single state, multiple states or with the SEC (federally).

In some cases, you can register with the SEC, which means you’re exempt from the requirement to register with the states, while in others, you're not allowed to register with the SEC but must register with one or more state agencies.

These choices often depend on the amount of EB5 funds under management or upon each state's specific regulations. Also, where your principal office is located and the states you're doing business in determine which states you need to register in.

To complicate matters further, registration may be required where the fund investors are domiciled. But even that is not clear. There's an argument, "Hey, wait a minute. The investors are coming from China. They're not in any state when they make the investment."

So after they've moved to the US, does it matter if you have a certain number of investors who have moved to Florida? Will that compel an issuer to register in Florida? Remember, the burden is on the issuer to prove that they have an exemption from registration.

Bob, can I throw this in your direction? Would you mind telling us what some of your thoughts?

Bob: First, it's a very complicated issue. I think we can all agree that if you're going to register, you're going to want to be federally registered, if just for the purpose of having flexibility and marketing wherever you want, regulation uniformity, etc.

There are certainly instances where people will want to register with individual states. If you're doing business strictly in a single state or if you don't meet the numbers required for federal registration, then certainly it makes sense.

One issue that often comes up is somebody will say, "I'm an EB5 regional center or I'm a manager in the state of Idaho, but my management entity is incorporated in Delaware. Where do I register?" Well, you’re certainly conducting business in Idaho. The question becomes, for investment advisor registration considerations, are you really conducting business out of Delaware? I generally believe that the fund would be subject to some registration considerations in Idaho, probably not in Delaware.

One interesting thing is what to do when people move from one place to another. I have some experience with this. With one particular state in the south, you do have to keep track of where your investors are in the event that something comes up.

For example, at least in the broker/dealer context, if you have a client that moves from one state to another and then you suddenly say, "Gee, I'm going to have lots of other clients in that state. I'm going to go register with the state as an advisor or broker/dealer,” and the state is going to ask you whether you've actually transacted business in that state before or whether you have any clients in that state, clients being your investors.

Assuming somebody's moved from China to say Florida, you're going to affirmatively answer that question. The question becomes when do the registration requirements actually trigger? There are different answers for every state. You have to be aware of where your clients are moving and what the requirements are.

Cathy: But keep in mind that if you say your client is the fund, it doesn't matter where the investors are moving because they're not your client. It's only if you decide, "I'm actually rendering investment advice to the individual EB5 investors," then you have to worry about where they live.

Bob: That is correct, but there are some rules. One state that comes to mind is New Hampshire. Registration is required before investors can actually be solicited in the state of New Hampshire, which means that there is a pre-preemptive registration requirement. How do you handle the look-through issue with something like that?

Who is actually making the solicitation? Who is actually rendering the advice? It’s unlikely the fund is soliciting the investors. More likely than not, the general partner is or else some agent of the general partner is making the solicitation. The point is that this is a very fact-specific determination and you and your counsel will have to come up with a decision you can live with in terms of how your business activity is conducted.

Cathy: What I would counsel people to do is to be very specific and insert a disclaimer in your offering documents that essentially says, "We're not rendering any investment advice to any individual investors. You should seek your own independent financial advice."

You have an argument that says, "We're not giving investment advice to individual clients. Those are not my clients. We're an issuer. We're taking advantage of the issuer broker/dealer exemption but we're not acting as any individual client's investment advisor."

Chris: I agree that a disclaimer is always in your best interest. I also feel that Bob nailed it on the head; that this is an extremely fact-specific analysis. As a regional center doing multiple projects, you have to look at every single new EB5 project and lay out all the facts. It is imperative to your success.