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State Regulation of Regulation S Offerings

October 19, 2015

Panelists: JACKIE PRESTER, CLEM TURNER, ROBERT CORNISH
Moderator: KURT REUSS

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Jackie Prester
w/ Baker Donelson

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Robert Cornish
w/ Phillips Lytle

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Kurt Reuss
w/ Primary Capital

With regards to state regulation of Reg S offerings, what should EB-5 issuers be aware of?  Are there any states that have more precarious laws that people might need to be aware?

Jackie Prester: About 20 years or so ago, Congress passed a law that effectively said, If you proceed under Rule 506, then none of the states can impose their state security registration requirements. In other words, it's all federally preempted, though each state can require you to follow a notice filing and pay some nominal fee.

There's not a similar federal preemption under Reg S, so it's important to make sure that the applicable state’s securities laws are being complied with.  The question is, which state securities laws apply since you're talking about investors who are overseas?

At a minimum, it would be the state where the issuer is located. For example, if you have a Delaware formed limited partnership residing in California, arguably both Delaware and California state securities laws might apply. There are some states which clearly have an exact exemption at the state level that's identical to the federal Reg S which says if you comply with federal Reg S you're exempt at the state level.

The State of Washington is one of those states, for example. For a number of states, though, it doesn't fit quite so neatly. They don't have an equivalent Reg S exemption. Your securities counsel really ought to look at the state where the issuer is located to get comfortable that at the state level there is some sort of state securities exemption that can go hand in hand with your federal Reg S exemption. 

Robert Cornish: One thing to remember it that Reg S is an issuer safe harbor. Nothing in Reg S abrogates your obligations to comply with the Securities Exchange Act of '34, or the Investment Advisers Act, which necessarily means that you need to be registered as an adviser in your state, or you need to be federally registered with the SEC.

Reg S does not provide you with safe harbor for that, and Reg S is not a total exemption from state securities laws. There is language in Reg S that says if you are using the safe harbor exemption to evade your obligation to register, your claim of the safe harbor will not be recognized.

There hasn't been any SEC enforcement actions in the EB-5 space on Reg S, but there have been plenty of Reg S enforcement actions. If you're going to avail yourself of this exemption from registration, i.e. use the safe harbor, I would be very careful. I would strongly consider using a 506 Reg D exemption, and clearly have counsel on your side to guide you along this very gray area.

 

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