This article features securities attorneys Clem Turner and Jackie Prester, and Kurt Reuss, a registered securities broker working exclusively in EB-5.
This article features securities attorneys Clem Turner and Jackie Prester, and Kurt Reuss, a registered securities broker working exclusively in EB-5.
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 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?
Kurt: Lori, Could you give us your thoughts about the need for a broker-dealer in EB-5 transactions?
Lori: Since I'm the only person on the panel who doesn't work for a broker-dealer, hopefully I'm objective. Let me begin by saying that every deal is different and thus all the facts are different. Obviously, we take that into account when we advise participants in an EB5 offering what they need to do. Generally, however, we believe that participants, whether issuers or regional centers, could have a better outcome if they associate with a broker-dealer, especially in regard to the following topics:
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 EB5 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 in eb5 process; 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.
Scott: There are various kinds of conflicts of interest. The clearest in EB-5 is when an attorney represents the investor and either the regional center or developer.
As a securities attorney, I've focused my career on the securities space; just the idea of representing both the developer and the investor strikes me as difficult.
The number one problem I foresee is the conflict of interest provisions in the various attorney-disciplinary rules that are required to be complied with. Additionally, there are also conflicts of interest which have to be disclosed in the offering documents. The failure to disclose conflicts of interest could be considered to be fraud by various regulators like the Securities and Exchange Commission, when the information is considered to be material.
Kurt: Chris, you mentioned to me that fines for not registering as a registered investment advisor can come in varying tiers, depending on the way you're perceived to have gone about not registering or the circumstances around it.
Fines can range from a lower level when the SEC recognizes that you're doing what you thought you should be doing, but you just didn't do it properly and fines will usually escalate for egregious and repetitive wrongdoings. Any thoughts on how the SEC perceives the issue of fines?
Chris: I think they're going to look at the activities you're actually conducting. In this case, with eb 5 visa requirements being a relatively new area, it's hard to say how they're going to go. I know the state of California structures their fines on a tier system.
Based on first offenses or minor offenses, it's almost a slap on the wrist, if you will. But I've also seen massive disgorgement of profits where some investment advisors have been operating two or three years without registering and they’re continually trying to skirt the rules.
In some cases they do this through the creation of additional companies in an effort to keep their amount under management spread out among multiple entities, but the SEC determines that those entities were integrated. I think it depends on the actual conduct that determines the severity of the fine.
Kurt: Since 2013, when the SEC filed its first enforcement actions related to EB-5, it has been vigorously pursuing and investigating misconduct and abuses.
Last year I estimate there were twenty (20) SEC enforcement actions related to the EB5 program. The actual figure is unknown as the SEC doesn't publish all enforcement actions, however I was able to dig up ten (10) distinct SEC press releases.
Lori, do you have any thoughts about how the SEC approached the EB5 industry last year and how it might approach 2016?
