Yesterday, the Securities and Exchange Commission (“SEC”) presented its views on the application of the U.S. federal securities laws to the EB-5 Investor Program at the quarterly stakeholders meeting held by the United States Citizenship and Immigration Service (“USCIS”). The program commenced with an introduction by Rob Silvers of USCIS, and then proceeded with an approximate 1 hour presentation by the SEC followed by a question and answer period.
The SEC discussion was led by members of various divisions of the SEC which are responsible for overseeing, administering and/or enforcing the U.S. federal securities laws. The divisions represented were (i) the Division of Corporate Finance (aka “CorpFin”) – whose responsibilities include ensuring that investors are provided with material information in order to make informed investment decisions. CorpFin also provides interpretive assistance to companies with respect to SEC rules and forms and makes recommendations to the SEC regarding new rules and revisions to existing rules; (ii) the Division of Trading and Markets – whose responsibilities include regulating the major securities market participants, including broker-dealers; (iii) the Division of Investment Management – whose responsibilities include regulating investment companies and federally registered investment advisers; and (iv) the Division of Enforcement – whose responsibilities include investigating possible violations of securities laws, recommending SEC action when appropriate, either in a federal court or before an administrative law judge, and negotiating settlements.
Based on both my attendance and review of a transcript of the stakeholders’ meeting prepared for me, the SEC reiterated that U.S. federal securities laws apply to the EB-5 Investor Program, as follows:
- The Securities Act of 1933, as amended (the “1933 Act”). The 1933 Act applies to the offer and sale of securities to EB-5 Program investors. While Regulation S and Regulation D under the 1933 Act provides an exemption from the registration and prospectus delivery requirements of the 1933 Act (i.e., undertaking an IPO), issuers must still comply with all of the applicable federal securities laws (of which Regulation D and Regulation S do not provide and exemption), including the anti-fraud provisions (i.e., Section 10(b) and Rule 10b-5) of the 1933 Act. The SEC also reminded the audience that it had not yet finalized guidance on application of the general solicitation rules under the JOBS Act and that until such guidance is provided, that issuers should not engage in any form of general solicitation, including the use of unrestricted Websites maintained offshore by anyone involved in the solicitation of investors.
- The Securities Exchange Act of 1934, as amended (the “1934 Act). The 1934 Act applies to individuals and entities engaged in (i) locating, introducing or facilitating transactions in securities for the account of the issuer or (ii) soliciting business from issuers seeking introductions to investors, including migration agents that either have an office in the U.S. or have representatives in the U.S. soliciting potential issuers of securities as clients. According to the SEC, “if you’re being paid for finding investors, there’s a potential problem if you’re soliciting investors here or abroad. . . .” The SEC also stated that the exemption from broker-dealer status provided by Rule 3a4-1 of the 1934 Act (which is commonly referred to as the “associated persons exemption”) is not available to individuals or entities that receive compensation for, or in connection with, raising capital.
- 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).
- The Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Advisers Act, as amended by the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, may apply to the general partner or manager of the pooled investment vehicle, depending on regulatory assets under management.