By Wassem M. Amin, Esq.
On April 3, 2013, USCIS and the SEC held a joint conference call to discuss what aspects of federal securities law are implicated by EB-5 Investments, as it relates to both the issuer and the investor. As a disclaimer, I am an avid supporter of the EB-5 Investment Visa, and have discussed it in detail in previous posts. In summary, the EB-5 Investor Visa allows foreign investors to obtain permanent residency in the United States if they invest a minimum of $1,000,000 (or $500,000 in a high unemployment or rural area). The permanent residency is conditioned on the success of the investment after two years and, in particular, whether the investment creates a minimum of 10 full-time jobs for American workers.
In the early 1990s, USCIS implemented a pilot program, recently extended through September 2013, which allows the creation of a so-called "Regional Center." The purpose of the Regional Center is to structure, administer, and market a project primarily funded through the pooling of EB-5 investments. In many cases, the Regional Center is also the project developer, but can be a third party as well. Each EB-5 Regional Center must be individually approved by USCIS. For example, a project developer who is developing a ski resort could form a Regional Center to solicit EB-5 investors. Typically, the investments are structured as a Limited Partnership interests, where the developer is the General Partner and the investors are Limited Partners. Garnering little attention at first, primarily due to inconsistent administration by USCIS, the pilot program recently took off after a complete overhaul of how it is administered and, specifically, the creation of a separate division in USCIS solely for adjudication of EB-5 visas.
Overview of Stakeholder Conference Call
The joint USCIS/SEC conference was primarily concerned on how Regional Centers, as well as those who solicit investments, may by subject to SEC Regulations. At the outset, the USCIS noted that the Director of the agency has been focused on enhancing regulation and cooperation with federal agencies in the EB-5 Program. The SEC was represented by senior staff members from the following four departments: Division of Corporation Finance, Trading and Markets Division, Investment Management Division, and the Division of Enforcement.
Division of Corporation Finance
The SEC noted that the principle issue that may arise for EB-5 Regional Center is whether they trigger regulation under federal securities laws. The answer will, in virtually all cases, be yes. A threshold issue is whether the Regional Center is "transacting in securities." The definition of securities, as the SEC stressed, is very broad and includes any investment interest. The second factor, offering or selling securities in interstate commerce, is also very easily triggered--particularly considering the target investor.
What happens if an issuer of securities is "transacting in securities"? That triggers the SEC's federal registration requirements - a complex penumbra of laws that is most commonly known as "going public" or filing an IPO. There are exemptions from registration which are used by Regional Centers--Private Placement exemption, Regulation D, and Regulation S. Generally speaking, these various regulations are designed for relatively small offerings or offerings made overseas.
This allows most Regional Center exemption from registering with the SEC, but does not exempt them from regulation by the SEC. This key point was reiterated several times throughout the conference call. Therefore, Offerings of investments through Regional Centers are still subject to the anti-fraud provisions of federal securities laws. Additionally, they are subject to the prohibition against general solicitation and advertising. That prohibitions is so broad that includes internet posts, local newspaper articles, and everything in between. (NOTE: the JOBS ACT, enacted last year, changes the law to allow general solicitation and advertising for exempt issuers. However, the SEC noted that, while they have drafted proposed rules, none have been implemented yet.)
Trading and Markets Division
The SEC's Trading and Market Division is primarily responsible for administering the Securities Exchange Act of 1934 (the "34 Act"). Within the context of EB-5 investments, it is focused on the status of individuals involved in the sale and offering of these investments, commonly known as Broker-Dealers. The bottom line here is that, if someone is engaged in the activity of soliciting foreign investors, it is highly likely that they are engaging in brokerage activities, therefore triggering the requirements of Broker-Dealers. The SEC noted that the commission has "approached registration on a territorial basis." Therefore, the seller or solicitor of investors will be subject to the 34 Act even if they exclusively solicit foreign investors.