Does the typical NCE qualify for the Issuer Exemption?

Posted by Kurt Reuss on August 01, 2015

Jackie, does the typical EB5 issuer (NCE) qualify for Rule 3(a)4-1 (The Issuer Exemption)?

Jackie Prester: There are two different levels of inquiry. You’ve got this very specific rule which pertains to the ‘Safe Harbor’ status. For that you've basically got to check the box on all the conditions. And if all the conditions are met, because of the ‘safe harbor’ status, you’re not deemed to be a broker-dealer. But even if you don’t meet all of the conditions, you may still not be deemed to be a broker-dealer, however, that is dependent upon the facts and circumstances. 

Would an NCE ever be deemed an issuer or would it be by definition a broker? If we take a step back and ask, "What's the definition of a broker?”; a broker is someone who effects transactions on behalf of others. The NCE, the entity itself, is out there offering securities of the NCE, say of a limited partnership or membership interests.

So by definition the securities being offered and sold are securities of the NCE, as the NCE is the issuer. But where the rub comes is that an entity doesn’t offer and sell securities. Individuals do. 

The individuals who are associated with the NCE, whether directly (if they're an officer of the NCE), or indirectly (if they’re an officer of the general partner or the EB5 regional center) are actually a step or two removed from the NCE. 

So are those individuals who are acting on behalf of the NCE effectively brokers, i.e. acting on behalf of others, or are they really just part of the NCE itself and considered to be part of the issuer? Legally, that's the real inquiry. 

Federal statutes of limitations for claims against EB-5 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. 

Should EB-5 Regional Centers Have Their Employees Register with a Broker Dealer?

Posted by Kurt Reuss on March 23, 2015

Robert Cornish: Having an employee register with an EB5 broker-dealer has its benefits and its drawbacks. Having supervised workers in the past and other registrants from far away, one thing people need to understand is that once your employees register with a broker-dealer firm they have obligations that may not jive with the ones that you have.

For example, email retention. Broker-dealers are required to retain email communications. You're going to have to facilitate some way for the broker-dealer to retain your employee’s emails. Correspondence coming in and out of your office regarding that employee’s business activities needs to be reviewed on a periodic basis. That can be a difficult thing to handle. Clearly there has to be supervision of what that person is doing. 

Implications of starting your own broker-dealer firm

Posted by Kurt Reuss on March 20, 2015

Jackie Prester: After analyzing the broker dealer rules I know that a lot of regional centers start becoming concerned that their traditional activities as an EB5 regional center could potentially result in them being deemed a broker-dealer. And so, the quick answer is, "Okay then, we'll just get licensed as a broker-dealer”, easy enough.

Well the problem is that it's not particularly easy or cost effective to get licensed as a broker dealer firm in the U.S.. It tends to take a good deal of time and money and more importantly in order to be licensed as a broker dealer firm it has to be managed by folks who have taken the requisite broker-dealer licensing tests and have the principal licenses before actually even opening the doors.

Disadvantages of Hiring a Broker-Dealer for an EB-5 Offering

Posted by Kurt Reuss on March 18, 2015

Kurt Reuss (host): What are some of the disadvantages, or even competitive disadvantages, of hiring a broker dealer as a placement agent for an EB5 project offering?

Jackie Prester: Before tackling the question, I'd like to just take 15 seconds to remind folks what the 'competitive advantages' of hiring a broker-dealer are, and then we can pile on the disadvantages. In terms of the competitive advantage of having a broker dealer, I think there's something to be said from an investor's viewpoint of knowing that a broker dealer has gone to the trouble of doing the due diligence necessary to serve in this role. There's a credibility factor that gets added for that issuer.  

There's also a competitive benefit to the issuer when a broker dealer is involved. A broker dealer is in the business of putting together the disclosure documents and pulling together a lot of other materials, of running the time-line.

A broker-dealer has the expertise to help the deal go more smoothly and to make sure it will be marketed in a way that is appealing to EB5 investors. I see those as some of the competitive advantages.

Sources of Guidance re: Disclosures

Posted by Kurt Reuss on March 13, 2015

When dealing with EB-5 offerings, we’re dealing with private placements that are universally intended to be exempt from regulation under Regulation S or Regulation D, with one small exception. In the Regulation D context we don't have any defined information requirements in the SEC rules. And the one small exemption is that if you were to do a Regulation D offering to unaccredited investors then there are extensive information requirements that must be in your offering documents. For that reason, almost nobody deliberately conducts a Regulation D offering to unaccredited investors. 

So as a practical matter we're dealing with a situation where none of the rules I’m about to discuss literally apply to EB-5 offerings. So why are we talking about them?

Faced with an SEC Investigation? Form 1662 is a Great Checklist.

Posted by Kurt Reuss on January 23, 2015

SEC Investigation

An SEC investigation of an EB5 Regional Center or Issuer often starts with either formal service of a Subpoena for documents or a Preservation Notice from the SEC stating that you may have documents in which they might be interested. 

The Preservation Letter puts you on notice to maintain availability of the items listed. This will buy the SEC time to begin a more thorough investigation, which might then branch out to other associated parties.

How SEC Investigations Typically Start and Proceed

Posted by Kurt Reuss on January 22, 2015

Recently the SEC became focused on Regional Centers and Issuer activities related to the offer and sale of securities to foreign investors seeking EB-5 visas which have resulted in SEC investigations as well as a recent Investment Alert, jointly issued by the SEC and USCIS. The SEC's investigation of EB5 Regional Centers, Issuers and other EB-5 players is no different than any of other SEC investigation.

What should I do if I get a 'Preservation Notice' from the SEC?

Posted by Kurt Reuss on January 21, 2015

SEC investigation of an EB-5 Regional Center

An SEC investigation of an EB-5 Regional Center or Issuer often starts with a 'Preservation Letter' from the SEC saying that you may have documents they might be interested in and that you are put on notice to maintain the availability of the data items listed. This essentially buys the SEC time to begin a more thorough investigation which can often branch out to various other associated parties.

But this article talks specifically about the implications, disruptive costs and frankly the potential unfairness that a document preservation request from the SEC will have on your business.

In the Preservation Letter the SEC will list the subject matter of the documents and records an EB-5 regional center needs to preserve. You’re now on notice. The SEC may be in the process of getting documents from other people. Many times the SEC will send this letter to witnesses who they believe may have information relating to another investigation target.