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State Regulation of Regulation S Offerings

Posted by Kurt Reuss on October 19, 2015

With regards to state regulation of Reg S offerings under eb-5 business plan, 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?

Reg S; Rule 901: The “General Statement”

Posted by Kurt Reuss on October 05, 2015

Rule 901, the 'General Statement' relating to Reg S explains that; 

"If one can demonstrate that no directed selling efforts are made within the U.S. and the sale of securities occurred outside the U.S. then registration requirements will not apply."

Clem, you had suggested that there may be some wiggle room regarding 'no directed selling efforts' being made in the U.S. Can you talk about that?

Clem Turner: When you look at the definition of 'directed sales efforts' in Regulation S, as well as in the preliminary notes, one of the exceptions is the communication with people who are excluded from the definition of a U.S. person. A U.S. person is defined as anyone who is a resident of the United States. This creates a lot of controversy, an issue, when our clients want to pitch to people that are in the United States, but here on temporary visas, such as a student visa, for example. 

Some clarity on the once-every-12-month aspect of the Issuer Exemption

Posted by Kurt Reuss on August 10, 2015

 

Rule 3(a)4-1, often referred to as the 'Issuer Exemption', restricts an issuer from offering its own securities for a period of 12 months following the conclusion of the issuer's previous offering. So if we assume an EB5 investment comes to market and is solicited by the issuer for a period of say 9 months, then the issuer wouldn't be able to begin a new investment offering for 12-months after the first offering is concluded. Is that right?

What is an EB5 Inter-Creditor Agreement?

Posted by Kurt Reuss on June 05, 2015

Inter-Creditor Agreement in concern with EB5 Projects

(Michael Gibson): Generally an intercreditor agreement just defines the terms of the relationship between a senior and a subordinate lender in a transaction. Sometimes if there are multiple lenders in the senior pool you'll see agreements between those lenders as well. With respect to EB5 intercreditor agreements, the EB5 capital is going to be in a subordinate position. 

The first question to ask yourself is whether you need an intercreditor agreement. Intercreditor agreements are often not very favorable to a subordinate lender. The terms may stipulate that if there is a default under the senior loan, the subordinate lender will be asked to do things like forego rights to collect interest or principal payments, to standstill on exercising remedies, or to give up certain rights in a bankruptcy action including rights to object that a subordinate lender would otherwise have including rights to approve certain aspects of a bankruptcy plan. In general, in a subordinate position, the first thing you want to ask yourself is, do I really want an intercreditor agreement?

Federal statutes of limitations for claims against EB5 investments

Posted by Kurt Reuss on May 14, 2015

Federal statutes against EB5 investments

(Steven Kramer): Developers seeking to raise capital by forming (or otherwise utilizing) an EB-5 Regional to sell investment securities to foreign nationals face potential claims under the U.S. and state securities laws. Here we focus on federal securities claims and the various Statutes of Limitations that apply.

Statutes of limitations set the time period during which a government enforcement or private action must be brought.  If not brought before the expiration of the relevant limitations period, a developer who is a defendant in an enforcement proceeding or private claim based on securities laws can assert the statute of limitations as an affirmative defense potentially resulting in dismissal of the claim. 

Redemption and Redeployment of EB-5 Capital

Posted by Kurt Reuss on April 20, 2015

Redeployment of EB-5 Capital

Robert Divine: An important question in an EB-5 project is how investors can 'maintain their investment' in the entity they’re investing in and in the job creating enterprise (JCE), in order to have I-829 approval for permanent green card. To some extent the issue puts the immigration interest at odds with the economic interest of the issuer and the JCE who wants to liquidate as early as possible, pay everybody off and have a profit, and even of the investor, who wants an early exit if possible. 

When Should the PPM Investment documents be Amended and Do Existing Members Need to Sign-Off on the Changes?

Posted by Kurt Reuss on March 17, 2015

PPM Investment document amendments

John Tishler: During our pre-webinar conference call today the panelists all agreed that an EB-5 project issue that comes up frequently in our deals is whether it is appropriate to amend the PPM for every 'material change’ that arises. You certainly have to think about amending the PPM whenever there is any change at all to what’s going on with the deal and what’s been disclosed in your offering documents.

Remember that while you may have finished the documents in March and they’ve been put out into the market, and they were as good as you possibly could make them in March, by the time September rolls around there’s been six months of the world turning and it’s fairly likely that something has changed. 

What is the Impact of a 'Material Change' to Current and Future Investors?

Posted by Kurt Reuss on March 14, 2015

Material Change Under PPM

This question was submitted by Rohit Turkhud of Fakhoury Law Group.

In general, the issuer of securities can be found liable for any omission of material fact or misleading statement of material fact.  This is the Rule 10b-5 standard we discussed at the beginning of the webinar.  Rule 10b-5 is often called the “anti-fraud” rule.  This standard is measured at the time of each offer and sale of securities.  In EB-5, the offers and sales typically take place over time -- sometimes over a year or more.

Accordingly, for sales that take place weeks or months after a PPM is finalized, an issuer can be held accountable for failure to disclose material changes or updates since the date the PPM was finalized, even if the PPM was correct in all material respects at the date it was released.  Issuers must continually monitor their project and consider whether any changes require an update to the offering materials so that the issuer can meet the Rule 10b-5 standard. 

The PPM's Role in Marketing

Posted by Kurt Reuss on March 13, 2015

Usefulness of Private Placement Memorandum (PPM)

Julian Montero: Kurt, one of the things you just mentioned is the usefulness of the Private Placement Memorandum (PPM) and that is the starting point for us when we’re with a client preparing the framework of their deal. We emphasis to our clients that the PPM is perhaps the most significant marketing document that they will have with respect to their project.

It is what the agents will be touching; it is what the investors will be touching; and it will be seen by the marketplace.

As critical as the disclosures are in defining the risk factors, the document has to be useful and it can’t be a race to the bottom in terms of putting all the nasty possibilities out there so that you can limit your potential exposure. You need to make sure that this document is useful and we are regularly in touch with the marketplace, in particular the agents that are driving the EB-5 process in our industry which tends to be ‘China-centric’.

The 'Reasonable Investor Standard'

Posted by Kurt Reuss on March 11, 2015

The definition of material information is what a reasonable investor would consider important in the total mix of 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. 

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".