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Underwriting the NCE's loan to the JCE

Posted by Kurt Reuss on July 27, 2016

Examining EB5 Loan for Job creation

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?

When Do You Need A Broker Dealer in EB-5?

Posted by Kurt Reuss on July 14, 2016

Role of EB-5 Broker Dealer

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:

Could Reg D 506(c) Offerings Replace Reg S Offerings in EB-5?

Posted by Kurt Reuss on June 21, 2016

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:

  1. Use separate documents for Reg S and concurrent Reg D Rule 506(c) offerings. That's integral to deciding to doing a concurrent offering.
  2. Don't use a website to solicit investors for Reg S offerings.
  3. Construct a separate web portal for each offering or else have a generic landing page that directs investors to appropriate content, tailored to each specific exemption.

Concurrent Reg S and Reg D Offerings

Posted by Kurt Reuss on June 17, 2016

EB5 Business plan

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?

Crowdfunding v. "Crowdfunding"

Posted by Kurt Reuss on June 13, 2016

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.

Consequences of Not Registering as an RIA

Posted by Kurt Reuss on March 17, 2016

Registered Investment Advisor

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.

SEC Enforcement Actions and Exam Priorities

Posted by Kurt Reuss on January 27, 2016

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?

The SEC’s Territorial Approach

Posted by Kurt Reuss on November 05, 2015

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. 

Consider Section 17b of the Securities Act When Marketing an EB-5 Offering

Posted by Kurt Reuss on October 29, 2015

Section 17b from EB 5 investments perspective

John, could you talk just a moment, about Section 17b of the Securities Act.

John Tishler: This a specialty issue and while it is not going to apply to some EB5 marketing materials or EB-5 Investment offerings it will apply to some and I think it’s worth bringing up. In EB5, 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 now talk about how that might show up in EB5.

SEC Rule 2210 in EB-5

Posted by Kurt Reuss on October 27, 2015

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.