The 'Reasonable Investor Standard'
The definition of 'material information' is what a reasonable investor would consider important in the total mix of investment information, so attorneys and their issuer clients need to make judgements about whether something has been omitted or whether something was misleading in the context of the total mix of information provided to potential investors.
It’s important to remember that the test is what a reasonable investor, not a particular idiosyncratic investor would think is important. For example, imagine that you have an investor in a foreign country that is considering an investment in a hotel and she is really attracted to the lobby that is shown painted blue; she loves the picture on the front cover of the PPM showing that the lobby is painted blue. And the investor says to her agent "You know what, blue is a good luck color to me and that’s why I really like this project, because the lobby is going to be blue."
Now assume she invests in the project and it turns out that the sponsor had already planned to change the lobby color to yellow before the offering was launched. Would that investor have a claim by saying, "Hey, this was an incredibly material fact to me. I only invested because the lobby was going to be blue and it turns out it was never going to be blue". I think it would be pretty easy to conclude, based on the reasonable investor standard that no, this investor would not have a claim.
While we can accept that a particular investor might care about the lobby color, a reasonable investor would not care about that fact.
On the flip-side, which is more important, is when someone believes that a particular investor would not care about something. That person might be right, but that is not the legal standard that the issuer will be judged against.The issuer will be judged after the fact, if ever something goes wrong, by what the SEC or court thinks a reasonable investor would have cared about. This flip-side can easily come up in EB-5 offerings. One might reasonably say, "No EB-5 investors ever asks about this particular aspect of a project; the investors don't seem to care about it". And that may be true, but if that’s an aspect of the project that ends up causing a serious problem down the road, and if the SEC or a court believes that a reasonable investor would have cared about that fact, then whatever your actual investors cared about will not matter.
Some examples of the facts that a reasonable investor might care about, but that EB-5 investors might not ask about, are the terms of a more senior loan, the terms of an inter-creditor agreement, the material provisions in a franchise agreement, the question of who bears the risk of construction cost overruns and the credit-worthiness of any parties listed as guarantors. These are examples of facts that are not normally included in an EB-5 business plan but are normally considered important to a reasonable investor in a real estate development project.