A practical guide to compliance with U.S. securities broker-dealer laws for regional centers and project developers using EB-5 financing

by Jeffer Mangels Butler & Mitchell LLP
Contact

Are regional centers really required to register as broker-dealers under U.S. securities laws?

Recent articles have suggested that every United States Citizenship and Immigration Services (“USCIS”)-approved regional center which pools foreign investor funds for EB-5 investment offerings sold to foreign investors may be required to register as securities broker-dealers under U.S. securities laws. In addition, it has been suggested that the principals or employees of regional centers must be registered as licensed “associated persons” of a securities broker-dealer under U.S. securities laws.

We agree that it is extremely important to conduct EB-5 investment offerings in compliance with all applicable securities laws, but we believe there are better ways of complying without registration as a broker-dealer. In this article, we will answer some of the most frequently asked questions we receive from our clients using EB-5 financing for their projects, and offer some practical guidelines for regional centers and project developers to conduct EB-5 investment offerings in compliance with the regulations and policies of the Securities and Exchange Commission (“SEC”).

Do broker-dealer registration requirements apply to EB-5 offerings that are exempt from U.S. securities laws?

Yes. Many people do not realize that even if the offering of EB-5 investment securities is exempt from registration under U.S. securities laws, every person who sells EB-5 investments is still subject to the requirements for broker-dealer registration or exemption. In this article, we are focused on the SEC registration requirements and exemptions that apply to people engaged in the sale of EB-5 investments, whether they are selling here in the U.S. or outside the U.S. There are also state laws that apply to registration of broker-dealers, but for securities offerings that take place in more than one state, federal laws and regulations are primary, and we therefore focus on federal requirements in this article.

Why does it matter to a regional center or a project developer whether or not the people selling EB-5 offerings are registered or not?

Regional center operators should be very concerned, because they will not want to be subject to regulatory enforcement actions by the SEC or private actions by unhappy investors seeking rescission. Regulatory action by the SEC could in turn lead the USCIS to revoke approval status for regional centers who are found to be in violation of U.S. securities laws. It is also possible that the SEC could issue regulatory orders requiring EB-5 offerings to be terminated if they are being conducted in violation of U.S. securities laws. Project developers should be concerned because even if they do not themselves violate securities laws, the EB-5 offering for their project could be terminated without funding. Even if the offering is successfully closed, EB-5 investors in some states may have rights to rescind their purchase of an EB-5 investment and receive their money back. In that case, EB-5 investors could make claims against both the regional center and the project developer who receives the funds raised by the regional center. Therefore, all parties involved in the EB-5 financing process have a stake in making sure that EB-5 offerings are conducted in compliance with the securities broker-dealer registration laws and regulations.

Aren’t most EB-5 offerings sold outside the U.S. to non-U.S. persons?

Yes, the EB-5 investment program is, by design, a program that targets investment by non-U.S. persons in U.S.- based businesses. Because EB-5 investments (usually in the form of limited partnership or limited liability company interests) are aimed at non-U.S. persons seeking visas to enter the U.S., EB-5 investments are almost always sold outside the U.S.

The usual practice is to engage one or more non-U.S. marketing agents in the country in which the EB-5 investments are being sold. They solicit investors and organize meetings with potential subscribers in EB-5 investments. However, some regional centers or project owners may engage U.S.-based companies to assist in selling EB-5 investments in foreign countries, and this is a problem under U.S. securities laws.

In addition, some regional centers send their own personnel to abroad to assist in marketing EB-5 investments to non-U.S. persons, and this is one reason that some commentators believe that regional centers may be required to register as broker-dealers under U.S. securities laws.

Who is required to register as a broker-dealer to conduct an EB-5 offering outside the U.S.?

The SEC approaches the issue with a territorial approach in applying the U.S. broker-dealer registration requirements to the international operations of broker-dealers. Under this approach, the SEC has rules for non-U.S. persons (such as foreign broker-dealers) and U.S. persons selling offerings of U.S. securities inside or outside the U.S. In general, the SEC’s approach is as follows for each category of offering:

1. Non-U.S. persons may sell securities entirely outside the U.S. to non-U.S. buyers without registration as a broker-dealer under U.S. Securities laws.

2. Non-U.S. persons who sell securities to buyers inside the U.S., other than foreign persons temporarily within the U.S., are required to register or have an exemption from registration as a broker-dealer under U.S. securities laws.

3. U.S. persons who sell securities to non U.S. buyers inside or outside the U.S. are required to register or have an exemption from registration as a broker-dealer under U.S. securities laws.

Therefore, any person or company based in the U.S., including a regional center or “marketing agent,” who solicits or sells EB-5 investments inside or outside the U.S. will either be required to register as a securities broker-dealer or have an exemption from registration under U.S. securities laws.

How does a regional center qualify for an exemption from registration as a securities broker-dealer?

Regional centers typically act as the general partner or manager of the entity that is selling EB-5 investments, and when that is the case, the officers, directors and employees (generically referred to as “associated persons”) of the regional center will primarily rely upon SEC Rule 3a-4. It provides several possible ways to comply with the exemption, two of which are relevant to EB-5 offerings. One way is for associated persons of the regional center who have substantial regular duties for the regional center other than solicitation of EB-5 investments, who are not associated persons of a broker or dealer and are not compensated for their solicitation activities, to participate in no more than one EB-5 offering every 12 months. These conditions do not restrict the manner in which the associated persons may participate in solicitations, as long as they are not paid based on the amount of investments they sell, and they do not participate in more than one offering each year.

However, for regional centers that sponsor more than one offering per year, those conditions will not be met. In that case, the best way for a regional center to comply with the Rule 3a-4 exemption is to limit the activities of its associated persons to preparing or delivering written (not oral) communications regarding the offering, and/or responding to inquiries of potential purchasers in communications initiated by potential purchasers, using information contained in the offering documents provided to investors in the EB-5 offering. In that case, it is necessary for the regional center to engage either a U.S. securities broker-dealer or a non-U.S. broker to solicit EB-5 investments, and have regional center personnel play a more limited role.

What are some of the other securities broker-dealer issues related to EB-5 offerings?

Complying with U.S. securities broker-dealer laws and their exemptions can be challenging for some regional centers, particularly those that conduct more than one offering every 12 months. To avoid potential claims by regulators or investors, it is important that all regional centers have systems and procedures in place to address these issues and others, including the following:

• Is it possible to structure a consulting arrangement with a U.S. based company that would not violate broker-dealer laws?

• Is it legal to pay finder’s fees to U.S. persons for investors in EB-5 offerings?

• Can a regional center or project developer accept referrals of investors from U.S. persons such as immigration attorneys?

Every regional center should examine how it currently conducts its EB-5 offerings, and make any changes necessary to comply with the securities broker-dealer exemption requirements. Project developers seeking EB-5 financing should ask the regional center they are working with to verify that their selling procedures are in compliance with U.S. securities laws.

Would it be easier or better for the regional center to register as a broker-dealer rather than try to avoid registration?

Generally no, because broker-dealer registration requires that every person who engages in solicitation activities take and pass difficult examinations on U.S. and state securities laws. In addition, registered broker-dealers are required to comply with extensive supervisory and record keeping procedures, and are subject to regulatory inspections by FINRA (the self-regulatory organization that all broker-dealers are required to join). FINRA will generally require that a new broker-dealer have one or more management level persons who have previously been licensed and have several years’ of prior experience in the U.S. securities business before it will allow a new broker-dealer to join FINRA – and membership is generally a requirement for registration with the SEC. Many regional centers will not have the ability to undertake compliance with all of these requirements. Therefore, compliance with the exemptions from broker-dealer registration will be the likely choice of most regional centers.

What is the best way to assure compliance with the requirements for exemption from broker-dealer registration?

We have described the general guidelines in this article for compliance with these requirements. We would recommend that every regional center review its practices for sales of EB-5 investments with securities counsel to verify their compliance with these requirements. We also believe it is important to have documentation of the efforts made to comply with the requirements, so that in the event of an inquiry from the SEC or an investor, the regional center has evidence of the steps it has taken to comply with the securities laws.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Jeffer Mangels Butler & Mitchell LLP | Attorney Advertising

Written by:

Jeffer Mangels Butler & Mitchell LLP
Contact
more
less

Jeffer Mangels Butler & Mitchell LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!