Earlier this month, the Securities and Exchange Commission brought its second enforcement action freezing the assets of a regional center accused of defrauding EB-5 investors. The SEC also cooperated with USCIS to release a joint investor alert. Sheppard Mullin partner John Tishler published a Q&A article (click here) with his thoughts on the joint alert and the enforcement action. The article includes observations on due diligence best practices and suggestions for regional centers and sponsors to improve the credibility of their offerings.
What is the EB-5 program?
Also known as “EB-5,” the Immigrant Investor Program was created by Congress in 1990 to stimulate the U.S. economy through job creation and capital investment by foreign investors. Under the pilot immigration program, first enacted in 1992 and rolled out in 1993, certain EB-5 visas are set aside for investments in Regional Center projects. The pilot program is currently authorized until September of 2015. Foreign nationals investing the required funds who demonstrate creation of the requisite number of jobs will receive conditional permanent residency, or a conditional “green card,” in the United States for himself/herself, his/her spouse and all dependent, unmarried children under age 21.
Another Sheppard Mullin Toolbox Article: Basic Requirements For the EB-5 Program
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At the end of August, the Financial Industry Regulatory Authority, Inc. (FINRA) issued an interpretive guidance letter to a registered broker dealer (BD), Trustmont Financial Group, Inc. (Trustmont). Trustmont had sought guidance on the applicability of FINRA Rules, and in particular Rule 2111 (Suitability), to FINRA members’ recommendations of securities transactions in connection with the EB-5 Immigrant Investor Program. FINRA is an independent regulator of securities firms doing business with the public in the United States. The Sheppard Mullin corporate and securities group will be publishing a detailed discussion regarding the implications of this guidance for the EB-5 community; I wanted to share some initial thoughts, from an immigration attorney’s perspective.
The final rules for eliminating the prohibition against general solicitation and general advertising in Rule 506 offerings will become effective on September 23, 2013, which is 60 days after the July 24, 2013 date they were published in the Federal Register. Beginning on September 23, 2013 (but not before), EB-5 issuers that rely on Regulation D, Rule 506 as an exemption for issuance of some or all of their securities may use broad-based marketing methods such as the Internet, social media, email campaigns, television advertising and seminars open to the general public, provided that sales are made only to accredited investors and the issuer takes reasonable steps to verify that all investors are accredited. The rules prohibiting certain “bad actors” from participating in securities offerings conducted in reliance on Rule 506 also become effective September 23, 2013. For more information on these final rules, please see our prior blog entry here. For more information on the JOBS Act and Rule 506, please see our prior blog entry here…
As we previously reported, on July 10, 2013, the SEC adopted the amendments required under the JOBS Act to Rule 506 that would permit issuers to use broad-based marketing methods such as the Internet, social media, email campaigns, television advertising and seminars open to the general public. These types of methods are referred to in U.S. securities laws as “general solicitation,” and they have until now been prohibited in most offerings of securities that are not registered with the SEC. This is an important development to the EB-5 community because EB-5 offerings very often rely on Rule 506 as an exemption from offering registration requirements.
In addition, the SEC amended Rule 506 to disqualify felons and other “bad actors” from being able to rely on Rule 506. This is also an important development for the EB-5 community, which has developed a heightened sensitivity to the potential for fraud in the wake of the Chicago Convention Center project.
This morning the Securities and Exchange Commission, by a 4 to 1 vote of the Commissioners, approved implementing rules under Title II of the Jumpstart Our Business Startups (JOBS) Act to remove the ban on general solicitation for offerings to accredited investors under Regulation D, Rule 506. The SEC has not yet released the final rules as adopted, and we do not yet know what will be the effective date of the final rules. We do however know that the final rules, once effective, will require a Form D to be filed with the SEC at least 15 days in advance of the commencement of any general solicitation for a Rule 506 offering.
We frequently speak with our clients about whether their participation in an EB-5 program requires registration as a broker-dealer. Joseph Furey, Assistant Chief Counsel at the SEC Division of Trading and Markets, addressed this topic on the joint USCIS/SEC stakeholder call held on April 3, 2013. The SEC staff takes a broad view of the broker-dealer registration requirements — broad both as to activities that require registration and as to applicability to extraterritorial activities. (Readers should note that an SEC staff view does not necessarily mean that the SEC would be successful in an administrative or litigation enforcement action brought against an unlicensed participant. However, the SEC may bring such an action, and any company not registering would face the possibility of the cost of defending itself in any such action.)
The USCIS just issued the much awaited final EB-5 Adjudications Policy memorandum on uscis.gov. While the Sheppard Mullin EB-5 team is busy analyzing the twenty-seven page memo, I wanted to share the following highlights with our readers immediately. For me the essence of memo offers compromise and renewed confidence in the EB-5 program. The memo emphasizes the importance of flexibility. The Service expressed its commitment to change, stability, predictability and program integrity.
The latest EB-5 stakeholder meeting, held in Washington D.C. focused on the integration of the I-526, Immigrant Petition by Alien Entrepreneur into the Electronic Immigration System (ELIS) program. During the May 23rd meeting, the USCIS discussed the logistics for integrating Form I-526 into ELIS and solicited feedback regarding managing access to the document library, uploading and storing documents and overall expectations from the program. USCIS launched the first phase of this electronic immigration system about one year ago. Starting with transitioning the USCIS Immigrant fee and simpler forms to ELIS, the Service is now planning to add more complex filings to the account based system.