US Jurisdiction of EB5 Offerings
Ron Klasko asked: Does the (Grassley Leahy) bill purport to give the DHS (Department of Homeland Security) and the SEC jurisdiction over foreign agents selling a US security who acts completely overseas? Do the registration requirements and compensation requirements in this bill seem to you to apply to overseas agents operating purely overseas?
Ozzie Torres: I don't know that there's a clear answer to that from the provision in the bill regarding Regulation S. Obviously they're trying to impose some kind of jurisdiction which one could argue, or at least on the face of it seems like it would eradicate the Reg S exemption, but I really don't think that that's where it's going.
John Tishler: The provision that I think Ozzie is referring and that I think was in Ron’s question is on page 29 of the bill and it's entitled “Jurisdiction”. Like so many things I can't speak for exactly what was intended because I don't know, but when I look at it, it's got the qualifier, the jurisdictional enabler, which may refer to an action filed by the SEC.
What this looks like to me is a response to some case law that's developed over the last six or seven years. It’s not that difficult for the SEC to get jurisdiction over a foreign individual involved in an offering that has U.S. ties. In most cases they will succeed in getting that jurisdiction. However in some cases over the last six or seven years, they have not succeeded in establishing that there were sufficient contacts to the United States in order to get that jurisdiction and this seems to be an item on somebody's wish list, probably SEC enforcement, for them not to have to worry about that issue anymore and to be able to simply say, if it ties to an EB5 program we can certainly get jurisdiction.
It's important to realize that there are limitations to that. First of all, I don't think that it means regulation S isn't available. The SEC has always had jurisdiction over regulation S and they do continue to have jurisdiction over regulation S. There's an important qualifier in regulation S that says that all of the laws about anti-fraud activity and everything else apply to regulation S offerings. Regulation S is only an exclusion from the registration requirements of an offering. Everything else applies and the SEC has jurisdiction.
I understand the concern about this and I certainly hope that this is clarified if anything like this bill is passed, we wouldn't want any ambiguity about regulation S being able to apply, but I don't think that, that is what was intended here.
Let me also answer your other question as to what extent this law applies to people that are operating overseas. I think it's clearly intended to apply and the mechanism that they're using for that is to apply requirements on people here in the U.S. with respect to their interactions with people overseas. There are a number of requirements in the statue that requires certification of all your promoters and that's certainly not limited to promoters in the U.S.. None of them are bad actors for example, and all of them are in compliance with securities laws.
There's also the provision about promoters in general where USCIS is directed to enact regulations requiring the registration of promoters and rules for conducting their investment activity. It seems to me and the context of those are clearly intended to get at overseas migration agents whether or not they have any contact with the U.S.
Ozzie Torres: But John, you're still dealing with an issuer and there's always jurisdiction over that U.S. issuer, so obviously the SEC could always take action against the issuer.
John Tishler: Very important point Ozzie. That's why I have not worried about the Jurisdiction clause as much as some of the other items in the bill, because in my experience I think anyone who goes into the EB5 business assuming that the SEC can't get to them is mistaken. I think that that is not a good way to go into this business.
Now if somebody gets in trouble and they want to make the argument that the SEC shouldn't be able to get to them, I have a department here at Sheppard Mullin that's very active in this practice and we’ll be happy to mount a defense and maybe we'd even win.
But certainly for people who are actively engaged in the EB5 business, you should assume that the SEC and every single investor in your offering will find a happy home in a U.S. court to go after you.
It will be the rule and not the exception even without this legislation.