EB-5 and U.S. Securities Law

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The employment-creation immigrant visa category (EB-5) has become the flavor of the month for U.S. immigration for wealthy foreign nationals.

Many laud the EB-5 regional center pilot program, in particular, as a clean and simple means to both invest in the US and to obtain a green card. However, prospective EB-5 investors should pay close attention to the demands of Federal and state securities laws. When a regional center forms a limited partnership or limited liability company the regional center is offering a security and, accordingly, regional centers must comply with Federal and state laws.

The EB-5 visa requires no anchor relative in the United States to petition on the immigrant’s behalf. It requires no claim of extraordinary or exceptional ability. It also does not require a showing of fear of persecution in the homeland.

This visa category instead allows conditional and permanent resident status by investing lawfully acquired funds (at least $500,000 within a rural area or one of high unemployment and $1 million anywhere else) in a regional center approved by the U.S. Citizenship and Immigration Services (USCIS).

The investor is provided a private placement memorandum and is asked to sign a subscription agreement. He will then be asked to deposit money into an escrow account.

Foreign investors often have no idea that state and Federal securities laws exist to protect them by providing accurate information and to punish persons or entities that violate these laws. For instance, EB-5 investors must be told that not every investment is safe and not every investment in a regional center will result in green card status, let alone produce a profit.

The Securities Act of 1933, as amended (the “Securities Act”), defines “security” as any note, stock, bond, “investment contract” or any interest or instrument commonly known as a “security.” The U.S. Securities and Exchange Commission (“SEC”) has determined that interests in a limited partnership are an investment contract, and therefore, a security.

The SEC has also ruled that limited liability company interests are securities. In fact, if a limited liability company offers unregistered interests to a large number of investors, it should expect a visit from Federal and state regulators.

The Securities Act requires that all securities sold must be registered with the SEC, unless exempt.

Rule 506 of Regulation D promulgated under the Securities Act sets forth the exemptions to the registration rules that regional centers must use to avoid registration.

To meet the exemption provided by Regulation D, a regional center must comply with conditions set forth in Rule 502 of Regulation D, including Information requirements. If all of the investors are “accredited investors,” there are no informational requirements (though issuers of course are still subject to anti-fraud requirements).

An accredited investor is a person whose individual net worth, or joint net worth including that person’s spouse, at the time of the purchase of the securities exceeds $1,000,000; whose individual income exceeded $200,000 in each of the two most recent years (and who expects to reach that income level in the current year); or whose joint income including that person’s spouse exceeded $300,000 in each of the two most recent years and who expects to reach that income level in the current year.

Importantly, if securities are sold to non-accredited investors, Rule 502(b) requires that the issuer provide each non-accredited investor with the information specified in that rule (similar to a prospectus

Other potential exemption from registration is provided by Regulation S. Unlike Regulation D, however, Regulation S does not provide an exemption from state securities registration.

Under Section 2(a) (4) of the Securities Act, an issuer is a person or entity who issues or proposes to issue any security. The enhanced informational requirements are an onerous and costly requirement that the issuer can avoid by only selling to accredited investors.

Rule 502(c) prohibits a general solicitation or advertising in the offer or sale of securities.

Rule 502(

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