Comment on USCIS SEC Engagement
April 3, 2013 7 Comments
Today’s EB-5 Engagement with the Securities and Exchange Commission and USCIS featured representatives from the SEC Division of Corporate Finance, Division of Trading and Markets, Division of Investment Management, and Division of Enforcement. The panelists discussed EB-5 offerings as securities and conditions for exemption from securities registration, individuals involved in EB-5 as broker-dealers or investment advisers and associated registration issues and exemptions, and SEC enforcement with particular reference to the recent Chicago case. Two passing comments from Barbara of the Division of Investment Management stand out to me as a summary of the call: “you need to be worried,” and “it does get very complicated.” As a non-attorney I would have liked to hear “just do it this way and you’re safe” but instead I heard something like: here are some of the many lines to avoid crossing, and if in doubt you’re probably not compliant, but the issues are fact-specific so consult a good lawyer. Rob Silvers opened the call by noting that USCIS has been engaging with the SEC at the programmatic and case-specific level, but did not comment on the results of this engagement. The call declined to tell us whether this joint review of actual cases has identified endemic or repeated practices in the EB-5 program that are problematic from the SEC perspective (though Robert Divine did ask the question). I hope that USCIS and/or the SEC and/or securities attorneys in the EB-5 industry can come up with a set of basic practical “dos and don’ts” that focus on the positive (how to get it right) and also highlight the relative black and white amidst all the grey areas. Panelists at meetings like this tend to hedge their statements so much that we non-attorneys can get lulled into thinking that the fine print rules are too ambiguous to be a serious guide or threat. We struggle to distinguish between practices that may raise issues in 15% of situations and those that are problematic 99.9% of the time. Obviously false statements and schemes to defraud are always wrong, but beyond that what do offerors most need to know when structuring and promoting investments? Who will help us identify and publicize any commonly-used practices in EB-5 deal structure and marketing that are almost certainly problematic, securities-wise? Or reassure us about what is most likely okay, for that matter? We want to keep our job-creating American business people safe from litigation. We don’t want EB-5 to become the new asbestos, or to fade based on unfounded fears.
That said, the call was substantive and helpful, and I would recommend it to everyone involved in an EB-5 offering. You are welcome to download my recording of the call from Dropbox.
Update: USCIS has published an Executive Summary of the call.
Update: See also “Investor Alert: Investment Scams Exploit Immigrant Investor Program” (10/1/2013). Published at http://www.sec.gov/investor/alerts/ia_immigrant.htm.
Update: I’ve added a section of securities compliance links to my Resources page.
EB-5 Updates 
http://dharlawllp.wordpress.com/2013/04/03/uscis-and-the-sec-stakeholder-engagement-eb-5-investments-and-implications-under-federal-securities-law/
I understand that many, if not most, EB5 offerings are structured as limited partnerships (or LLCs) run by general partners (or managers). Did I just hear an SEC officer say that these LP (or LLC) funds may be “Investment Companies” that must be registered, and that the GPs (or managers) of these “pooled investment vehicles” may be “Investment Companies” that must also be registered? Thank you.
The EB-5 Insights blog has a nice summary of the call, including this point which addresses your question:
The Investment Company Act of 1940, as amended (the “1940 Act”). The 1940 Act applies to pooled investment vehicles (i.e., limited partnerships or limited liability companies) that raise capital to loan to project companies. The 1940 Act requires that the pooled investment vehicle file a registration statement and prospectus with the SEC unless there is an available exemption from doing so. Common exemptions include Section 3(c)(1) and 3(c)(7) of the 1940 Act. The SEC also alluded to an exemption available to pooled investment vehicles that either hold direct interests in real estate or real-estate related assets (this exemption can be found in Section 3(c)(5)(C) of the 1940 Act and deals, in part, will fully secured real estate loans. “Fully secured” means that the fair market value of the real estate collateral is no less than the outstanding principal balance of the loan).
See http://www.eb5insights.com/2013/04/05/u-s-securities-laws-and-the-eb-5-investor-program-the-securities-and-exchange-commissions-perspective-2/
Under the Investment Company Act 3(c)(7), funds (in this case the Regional Center, acting as a fund) which are sold to “qualified purchasers” are exempt from registration under the Act. All foreign investors should be qualified purchasers, and most likely are. This applies only to funds that privately offered. A qualified purchaser is (1) any individual (or married couple jointly) owning more than 5 million dollars in investments.
If you cannot find a qualified purchaser, then an exemption under 3(c)(1) may apply. In that exemption, securities in a private offering may be sold to investors as long as the total number of beneficial owners in the fund are less than 100. Note that beneficial owners is a highly technical term, as well.
Hope this helps.
Thank you for this useful summary of the call.
““Fully secured” means that the fair market value of the real estate collateral is no less than the outstanding principal balance of the loan).”
So if the pooled investment vehicle extends a loan to a real estate project company and then subordinates the EB-5 creditor’s secured interest to a subsequent lender such as a bank, then the pooled investment omapany is not exempt?
Would any securities attorney out there like to give a professional opinion on this question?