In a recent actionSEC v. Luca International Group, LLC et al. (“SEC v. Luca“), the Securities and Exchange Commission (SEC) has charged a California-based oil and gas company and its CEO with violations of securities laws in connection with a $68 million Ponzi scheme and affinity fraud. The target of the fraud was the Chinese American community. Additionally, a portion of the funds raised by the defendants came from EB-5 investors seeking green cards through the EB-5 Program. The SEC issued both a press release and cease and desist order this week in connection with this most recent action. We think that this case highlights two important and relevant points for our readership, and that the SEC exposing the defendant schemers/fraudsters in SEC v. Luca is good for the EB-5 industry and integrity of the EB-5 Program.

Prosecution efforts are going global– government agencies in Hong Kong and China assisted the SEC’s efforts 

Now more than ever before, the SEC is on the path to closing down actors in the EB-5 context that engage in deception and fraud. We are in a new era of enforcement, with the SEC becoming more familiar with the EB-5 Program. We think that this enforcement trend will move at an even faster clip as the SEC and United States Citizenship and Immigration Services (USCIS) become more agile in cooperating and responding to credible allegations of fraud.

EB-5 regional centers and issuers need to put into place sound and workable policies to ensure that marketing practices are in line with securities laws. Note that in SEC v. Luca, there was cooperation with the SEC and two foreign agencies, namely the Hong Kong Securities and Futures Commission and the China Securities and Regulatory Commission. Enforcement and prosecution efforts in this context are going global. Regional centers and issuers should ensure that any offshore sales efforts are in compliance with the laws of the countries in which sales activities are performed.

Overlooked federal and state investment adviser registration requirements  

SEC v. Luca is a reminder that investment adviser requirements may apply broadly in EB-5 transactions and require federal or state registration by regional centers, issuers and/or EB-5 deal facilitators. In SEC v. Luca, the SEC asserted that the defendants acted as “investment advisers” within the meaning of Section 202(a)(11) of the U.S. Investment Advisers Act of 1940 (“Advisors Act”) [15 U.S.C. Section 80(b)-2(a)(11), but had no registrations with the Commission. Confusion over investment adviser registration requirements is a commonplace problem in the EB-5 space. In SEC v. Luca, the defendants were in the business of providing investment advice concerning securities for compensation. According to the SEC, these key facts triggered registration requirements under the Advisers Act.

We will soon be providing an extensive alert with regulatory advice to EB-5 regional centers and issuers on the applicability of both federal and state investment adviser registration requirements. The applicability of such requirements should be made on a case-by-case basis with qualified securities counsel. There is no “one size fits all” advice. States have their own considerations in interpreting investment adviser registration requirements. And the SEC has its own interpretive guidance on the parameters of the registration requirements of how the Advisers Act applies.

Conclusion

The egregious pattern of unlawful behavior by the defendants in SEC v. Luca included deceit in the marketing process, fraud in offering materials, comingling and misappropriation of funds, and violation of registration requirements. These are issues not just in the EB-5 context, but with private placements generally. Affinity fraud is also common in private placements.

EB-5 stakeholders should be aware that we are seeing a visible uptick in securities related prosecutions. No issuer, regional center or deal facilitator is immune from scrutiny. The SEC and USCIS are also working together more nimbly with foreign securities agencies. Sound policies, securities compliance and meaningful due diligence by experts are important in EB-5 offerings.

Sunlight is the best disinfectant. This adage is true for the EB-5 Program. Stakeholders who promote a transparent and strong EB-5 Program should applaud the SEC’s efforts.