Broker Dealer: I’m seeing more and more EB5 Agents open up offices in the US. I personally know and have met with a handful of agents who have offices in New York. What’s the implication of these agents now having rep offices in the US?

Robert Cornish: I’m not exactly sure how these people are being compensated or what they’re doing. Suffice it to say, if they are engaged in the offer of placing of securities and they’re doing it for compensation, i.e. transaction-based, then there are issues. If the securities are Reg S exempt, the sales activities going on in the United States are certainly not conducive to claiming a Reg S exemption.

If you’re claiming Reg S, it’s probably a good idea to claim Reg D as well, simply because that gives you a fallback position in the event that you do have marketing activity going on within the US.

John Tishler: I agree. In theory, the SEC could use a means of interstate commerce test to decide who needs to be subject to broker dealer regulation. By that standard, anybody who ever sent an email to the United States would be subject to broker dealer regulation.

The SEC’s approach to determining broker dealer regulation is what’s called a territorial approach, which they adopted in the late 1980s. Under a “territorial approach,” the SEC looks to see whether people are physically present in the United States while they’re conducting activity that would require broker dealer regulation. 

Section 17b from EB 5 investments perspective

John Tishler:  This a specialty issue and while it is not going to apply to some EB-5 marketing materials or EB-5 Investment offerings it will apply to some and I think it’s worth bringing up. In EB-5, Section 17b is relatively unknown. Let me first give you some background on Section 17b which is also known as the “Anti Tout Rule.” 

Just about everyone has received an email or a piece of junk mail that hypes some stock or offering, you know—it’s the next Apple stock or something like that, trading for pennies now, but destined for big bucks.

Now, if you look at the really fine print, it might say, “The person putting out this notice was paid by the issuer,” or, “We were paid $50,000 for mailing this and we received a million and a half warrants in this company.” That’s the disclaimer; it’s there because it’s required by law and that law was designed to get at exactly these kinds of things called tout sheets. With a tout sheet, people are touting a security; they’re not offering the security, per se. 

The rule basically says that if you publish something about a security, not necessarily an offer in and of itself but as it relates to a security and if you are getting compensated for doing that, then that must be disclosed. The person who publishes it has to disclose that they’re being compensated and the exact amount of the compensation. Let’s talk about how that might show up in EB5.

FINRA Rules are only applicable to issuers that have a broker dealer involved in distributing an offering. Bob, as a FINRA expert, do you mind talking a little bit about SEC Rule 2210?

Bob Cornish: First of all, if you’re working with a FINRA registrant, you need to understand that somebody who is a designated principal of the broker dealer is likely going to be reviewing, editing, and approving your sales material. 

For people who are working with broker dealers, this is very important because Rule 2210 forms the basis of what a broker dealer is supposed to do in terms of supervising sales material. It also lays out the responsibilities of the individuals who are registered with the broker dealer and in some cases those who are working with the broker dealer.

For those unfamiliar with the general structure of how funds are distributed in the broker dealer scenario, your typical mutual fund for example, has an entity called the distributor. In EB5 or private placement that entity could be called a distributor or a placement agent but in any event those entities are broker dealers.

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?

We have a conference coming up in Dallas, Texas this month where there will be a number of booths talking about their EB5 project offerings. Jackie, would you imagine that all of those booths would be exclusive Reg D offerings, or are they going to be limited to what they can say at the booth?

Jackie Prester: My hope would be that reps in the booth will limit what they say. In the SEC precedent, the word “offer” is construed very, very broadly. It's not going to be limited to "Do you want to buy a security?" It will be much broader in scope; essentially the SEC would view conditioning the market to prepare for an offering of securities as an offer.

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 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. 

An exemption from registration as a broker dealer under Section 15(a) of the Securities Exchange Act of 1934 is available for persons associated with an issuer and involved in the sale of the issuer’s securities. Understanding the Issuer Exemption plays critical role in EB 5 Visa documentation.

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 EB-5 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?

Jackie, If you meet the guidelines of the Issuer Exemption 3a(4)-1, then you are in the clear as it provides for a non-exclusive safe harbor. Can you give us a sense of what might be deemed outside of that exemption? Is it something along the lines of say, "The speed limit is 60 miles per hour, so I'm not going to recommend that anyone drive 62, even though I think it'd be fine.” Is that the way you approach it?

Jackie Prester: It's a gray area. Unfortunately, if you fall outside the safe harbor, which I think most regional centers and most people that are involved in EB5 offerings do because of the 12-month limitation, then you're stuck with facts and circumstances. The SEC is not going to give you a black line kind of assurance that “yes, you're a broker-dealer” or “no, you're not.” So it becomes really a risk analysis of how can you contain the risk or reduce it.

The title of today's webinar "The so-called Issuer Exemption," includes the disclaimer “so-called” because the phrase “Issuer Exemption” is not part of the regulations. Nowhere in the Exchange Act is there an actual reference to an “issuer exemption.” The phrase is really a colloquial term which refers to Rule 3(a)(4)-1.

When we talk about broker-dealers in the EB5 context, we're really talking of brokers. Brokers are ones who affect transactions for others. Section 15(a) of ‘The Exchange Act’ says, "It is unlawful for any unregistered broker to effect any transactions in or otherwise engage in the business of purchasing or selling securities.” 

So in order to properly explain “the so-called Issuer Exemption” we need to start by defining what a broker is. Rule 3(a)(4) of The Exchange Act defines a broker as any person engaged in the business of effecting transactions in securities for the accounts of others. The Act also outlines the requirements of brokers to register with the SEC and any states they conduct business and brokers are required to become members of FINRA. Brokers are subject to extensive regulatory requirements and oversight.