The Immigrant Investor Program (also known as “EB-5”) was created in 1990 to stimulate the U.S. economy. It allows foreign investors to qualify for U.S. residency by investing in new commercial enterprises that create jobs for U.S. workers. Because of the program’s recent growth, and the fact that offers to invest in such enterprises are likely securities offerings, the SEC has become interested in the application of federal securities laws to the EB-5 program.
One area of SEC attention is whether a “finder,” who is typically used to help facilitate the foreign investment, must be registered as a broker under the securities laws. A broker is defined as someone engaged in the business of effecting securities transactions for others’ accounts. The Exchange Act of 1934 requires a person acting as a broker to register with the SEC. Although there is no precise litmus test for the activities that qualify as acting as a broker, a finder who solicits investors or receives transaction-based compensation, among other activities, would likely be required to register with the SEC.
An individual may be exempt from broker registration depending on, for example, where the activity necessitating registration takes place and the individual’s compensation arrangements. The SEC lacks jurisdiction over any activity occurring exclusively outside the U.S. Moreover, certain employees of the commercial enterprise who do not receive transaction-based compensation may avoid registration. Finally, some courts have carved out a limited exception for individuals whose only activity is to pass along contact information of potential purchasers of securities.
If a finder engages in broker activity without first registering with the SEC, the result could be rescission of the foreign investor’s rights, including damages under state and federal law, as well as the loss of the securities exemption needed to engage in the initial offering without registering the securities. For these reasons, the SEC has publicly urged EB-5 participants who engage finders to seek counsel on the application of the broker registration requirements and other securities laws to the EB-5 program.