Kurt: Let’s discuss federal and state registration as an investment advisor (RIA). An unusual aspect of registration is that you need to determine whether you should be registering with a single state, multiple states or with the SEC (federally).

In some cases, you can register with the SEC, which means you’re exempt from the requirement to register with the states, while in others, you're not allowed to register with the SEC but must register with one or more state agencies.

These choices often depend on the amount of EB5 funds under management or upon each state's specific regulations. Also, where your principal office is located and the states you're doing business in determine which states you need to register in.

To complicate matters further, registration may be required where the fund investors are domiciled. But even that is not clear. There's an argument, "Hey, wait a minute. The investors are coming from China. They're not in any state when they make the investment."

Kurt: Let’s start with a very simple question. Who is advising the EB5 investment vehicle entity? Lori, when we say entity, what do we mean?

Lori: It's typically an entity or a person, but generally the entity is acting as a general partner or the managing member of a limited partnership or a limited liability company which is investing in something that could be considered an underlying security.

That general partner or managing member might be considered to be an investment advisor by the SEC or certain states, if that person is providing investment advice, picking the security or supervisory services of the security with regard to the funds, (the limited partnership or the limited liability company).

Kurt: Cathy, could you talk a little bit about ‘regular and continuous supervisory or management services’ as stipulated in the regulations?

Cathy: Believe it or not, this is a key issue because it impacts whether or not a general partner or managing member are going to be subject to SEC registration rules or, alternatively, be subject to their state's investment advisor registration rules.

Bob Ahrenholz offered the following questions regarding the Integrity Act of 2015: 

"Section 1.3 of the Integrity Bill would require each regional center to supervise all offers and sales of securities. How does this impact broker dealer laws? Would this require regional centers to be registered as a broker dealer, if they do supervise sales of securities? What impact would this have on regional centers supervising foreign broker dealers? Same question regarding investment advisor supervision."

Greg: I think that goes back to my point that the ‘34 Act (Securities Exchange Act of 1934) laws are about broker dealers. I agree with Ronnie that we have to distinguish those provisions from the ‘33 Act (Securities Act of 1933) which is related to the sale of securities.

Those laws govern people who are defined as broker dealers, people who are affecting transactions in securities as a business. I think that if you look at the obligations being placed on the regional center they are being stuck with issuer liability.

Kurt: Certifications in the Integrity Act of 2015 require EB5 regional centers to have policies and procedures in place to monitor New Commercial Entities (NCE) and the Job-Creating Enterprises (JCE) to ensure they comply with all immigration laws, all federal securities laws, all applicable state securities laws and to describe their due diligence procedures. Greg, could you talk a little about the implications of this bill.

Greg: What the bill does, without getting too far into the weeds, is address a “new view” of how to regulate the EB5 industry. That is, without relying on the New Commercial Enterprise (NCE) as the only entity responsible for compliance, due diligence and meeting the terms of the EB5 program.

For that matter, the securities laws are also not going to rely on the JCE or the developer because these entities are not, strictly speaking, "the issuers” of the securities being offered to foreign investors. The concept is, from a USCIS standpoint, that we've given a license to the regional center. So USCIS is saying to the regional centers “We need you to be the sheriff. We're going to put these responsibilities on you.

We're going to require you to achieve compliance, to do due diligence, to certify compliance and actually to tell us when people are not complying.”

Kurt: Within the 'Integrity Act of 2015', regional centers are being asked to file annual statements which include providing bona fides and background checks on principals of the regional center, the new commercial enterprise, and the job-creating entity.

The regional center needs to provide written agreements with each of its affiliates prescribing rules and standards. Ronnie, can you talk a little bit about some of the EB5 requirements that regional centers are being asked to certify on an annual basis?

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.

Rohit Kapuria: I’ve got a question for the economists regarding the issue of 2007 data versus 2010 data. Now that the BEA has indicated that they’re going to update the numbers later this year, and afterward the methodology they’re proposing, do you foresee a significant difference in terms of what the new data is going to be for job creation? From my perspective, 2007 has usually resulted in more jobs, but I have always been worried about a deal that uses 2007 data because, at this point it’s eight years old versus 2010 multipliers. For 2015, what are your expectations in terms of how that’s going to impact the job count?

Rupy Cheema.: What should we look for when reviewing a TEA (targeted employment area) letter?

Michael Kester.: As an economist, when reviewing the project to see if it’s TEA eligible, especially since it is such a make or break issue, it’s very important that we see that the TEA letter is current. USCIS has specifically mentioned outdated TEA letters as being a persistent problem with applications, so that’s the very first thing we check and recommend that the project get an updated letter.

The TEA letter really comes into play at the time when the investor makes an investment and when the I-526 is filed. Where it becomes difficult is when you’re trying to figure out if your project is located within a TEA long before the investors come on board. We’ll look at the date, then we’ll look at the census tracts or census block groups that are listed in the letter and I’ll just plot them on a map myself just to make sure that they are actually contiguous.

Rupy C.: What are the most common RFEs you’re seeing these days on economic studies?

Michael K.: The most common include the business plan and the econometric study not matching up, and it’s just kind of automatic that USCIS isn’t going to trust either document if the numbers aren’t matching. Another red flag is lack of support for the inputs that are being used in the economic model, and the lack of verification and support for construction expenditures and/or operational revenues. These seem to be some of the big ticket ones we’ve been seeing.

Kevin W.: I would agree with that. The majority of the RFEs comes down to the verification of the inputs, and then oftentimes there is confusion between different versions of the business plan and the economic studies. We see a little bit more lately on the year of the data (2007 v. 2010), but still that’s minor in comparison to the number of RFEs based on a lack of verification of inputs.

Michael, I had mentioned in the introduction that your firm uses RIMS II. Can you talk about the different economic models available to you and why you choose to use RIMS II?

Michael Kester: Kurt, as you mentioned, there are a number of models that are accepted under USCIS EB5, so if you’re looking at having an economic impact study done, it’ll likely be done in RIMS II, IMPLAN, REMI, REDYN and possibly even iRIMS, though I’m not sure if anyone has seen one of those studies or not.