On June 23, 2015, the Securities and Exchange Commission (“SEC”) announced that it had entered into an Offer of Settlement with Ireeco, LLC and Ireeco Limited, finding that their activities constituted a violation of Section 15(a)(1) of the Securities Exchange Act of 1934 (the “Exchange Act”) because they acted without registration as a broker-dealer with the SEC.  By entering into an Offer of Settlement, the Ireeco entities waived their rights to an administrative hearing, and without admitting or denying the findings, they consented to the entry of the Order.  The Order requires that the Ireeco entities cease and desist from committing or causing any further violations of Section 15(a), censures the Ireeco entities, and orders further proceedings to determine whether to require disgorgement of ill-gotten gains and/or civil penalties, and if so, the amount of such disgorgement or penalties.

The Order provides several important insights into the SEC’s views of what constitutes marketing activities that require broker-dealer registration in the EB-5 investment market.  We offer our analysis of these issues here.

According to the Order, the SEC found that the following activities violated the Securities Exchange Act:

  • Ireeco LLC was formed in 2006 as a U.S. entity with an office in the U.S., where a small staff of 4 to 5 people worked, including the two principal owners, Stephen Parnell and Andrew Bartlett.  They operated primarily through a website, whicheb5.com, which offered to help foreign individuals determine if the EB-5 Visa Program would work for them and to help them find EB-5 regional centers and projects.
  • Ireeco Limited was formed in 2012 as a Hong Kong entity, and replaced Ireeco, LLC as the company that solicited foreign investors for EB-5 investments. It listed a “U.S. Admin Office” address for the company in Greenville, South Carolina, and continued to rely on the same small staff of 4 to 5 people located in the U.S., including Parnell and Bartlett, that operated Ireeco, LLC.
  • In at least 10 instances, potential investors were already residing in the U.S. on some other type of temporary visa when they were solicited by Ireeco, LLC or Ireeco Limited.
  • Ireeco would give each investor one or more EB-5 regional center projects as possible choices, and claimed to perform “due diligence” on each of the regional centers it selected for its customers.
  • Ireeco would give each investor one or more EB-5 regional center projects as possible choices, and claimed to perform “due diligence” on each of the regional centers it selected for its customers.
  • After each investor identified which regional center they wanted to work with, Ireeco would “register” the investors with the regional center. The investors then dealt mostly with the regional center, received offering documents from them, and only occasionally dealt with Ireeco after that.
  • Ireeco LLC and Ireeco Limited had “referral partner agreements” with regional centers, who compensated them for each registered investor who invested funds in an EB-5 offering, which was generally $35,000 per investor paid through the Administrative Fee.

The SEC’s focus on these facts gives a clear indication of the types of conduct that could lead to a violation of the Exchange Act, including the following points:

  1. Receipt of Referral Fees will likely trigger a registration requirement if the recipient or the investor is subject to U.S. jurisdiction. Both of the Ireeco entities received referral fees for referring clients to regional centers for EB-5 investments.  They had no involvement of any kind in the projects they were recommending, and their sole source of compensation was referral fees from the regional centers to whom they referred clients for investments.  The SEC has said in the past that it views all referral fees as a form of broker-dealer compensation that, if performed in the U.S., require broker-dealer registration, and the findings in this Order are consistent with that position.  Although some courts have disagreed with this position in cases where the court held that a referral fee alone was not enough to trigger a registration requirement, the SEC continues to take a hard line on this issue.
  2. It does not matter if the referring party does not directly engage in the offering. The Ireeco entities may have believed that as long as they did not directly provide offering documents to investors, and they turned the clients over to the regional centers to complete the investment, they would not be considered engaged in broker-dealer activity.  The SEC has clearly indicated in its findings that it does not believe this is sufficient to avoid a registration requirement.
  3. Conducting activities in the U.S., even by a foreign entity, will trigger application of U.S. laws. The Ireeco owners apparently tried to avoid U.S. jurisdiction by setting up a Hong Kong company in 2012 which replaced the U.S. entity, but they still used a U.S. address and had a U.S. staff.  The presence of a U.S. office and/or staff in the U.S. will trigger application of U.S. laws, regardless of where an entity is formed.  For this reason, foreign migration agents engaged in marketing EB-5 investments must not have U.S. offices or U.S. staff if they wish to avoid application of U.S. laws to their activities.
  4. Receiving any referral fees for investors located in the U.S. will trigger application of U.S. laws. The SEC specifically noted in its Order that at least 10 of the investors the Ireeco entities solicited were in the U.S. under temporary visas.  Although the number seems small, it shows that any referral fees paid for any investors located in the U.S. will trigger application of U.S. laws.  For this reason, regional centers should avoid payment of any referral fees for any investors located in the U.S., even to foreign migration agents.  Referral fees can only be paid to persons who are not registered as broker-dealers under U.S. law for investors located outside the U.S., and those persons cannot have offices or staff in the U.S. or otherwise conduct business in the U.S.

The SEC’s Order does not break any new ground in terms of the principals that apply to the payment of compensation in connection with EB-5 investment offerings, but it does illustrate how these principals apply in the context of EB-5 investment offerings.  In this respect, it is a helpful guide to the EB-5 investment community of the types of conduct that will trigger an Exchange Act violation.

This action by the SEC is a reminder that every regional center should review its marketing and compensation policies and practices to determine if it is conducting its EB-5 investment business in accordance with U.S. laws and regulations, and every person engaged in marketing EB-5 investments should consider whether their activities require broker-dealer registration under U.S. laws.