The Lesser Known Alternative for EB-5 Investment: Direct Investment Participation in an Offering with a FINRA Registered Broker-Dealer Acting as Placement Agent


In the recent months there has been quite a bit of speculation on the EB-5 Program as a whole with an abundant of the commentary geared towards Regional Centers. What has not received noteworthy commentary are the offerings through Financial Industry Regulatory Authority (“FINRA”) registered broker-dealers acting as a placement agent to company seeking capital, as well as on what a FINRA registered broker-dealer does when it acts as a placement agent to a company, or the “Issuer” (as companies seeking capital are often being referred to in financial industry), and who can be compensated.

What does it mean to be a FINRA registered broker dealer?

A firm has to first apply for membership with FINRA. In its Application, the firm is required, among other items, to state its’ intended lines of businesses, present the procedures that the firm will abide by in order to stay compliant with FINRA and the Securities Exchange Commission (“SEC”) rules, and to demonstrate that it is able to provide the required capital to support those stated lines of business. After FINRA has accepted the firm to be a registered broker dealer, it is a member of FINRA, a self-regulatory organization. FINRA is registered with the SEC and is empowered to oversee the conduct of its members. FINRA is itself a subject to the oversight by the SEC. FINRA established rules that mandate broker-dealers to set internal procedures to operate within securities laws. FINRA’s roots can be traced back to 1939. It has approximately 3,500 employees that provide oversight to approximately 3,300 broker-dealers. As part of that oversight, FINRA performs regular exams of its members and has broker-dealers report their financial status as frequently as monthly or quarterly, and to report regularly various events applicable to their business.

As regulated entities, registered broker-dealer, as well as their associated persons, are subject to oversight on the part of FINRA and the SEC. Information on a U.S. registered broker-dealer and its associated persons is made publicly available and can be easily located on FINRA’s website

The United States securities laws mandate that any natural person or entity that “effects any transactions in, or induces or attempts to induce the purchase or sale of, any security”, be registered as a broker or dealer with the SEC. Individuals come under the SEC jurisdiction by associated with a SEC-registered broker-dealer.

What is the role of the SEC?

The SEC was establish by law as an independent agency of the United States Government in 1934. Its purpose is to regulate commerce in securities. Before the SEC was established, controls in the securities industry were non-existent. The frauds and scandals that led up to the Stock Market crash of 1929 prompted this reform to come about. The SEC claims jurisdiction over any Issuer. An Issuer is a company or any entity that offers a security. The SEC have a broad view of the definition of security as any tradable financial asset. The SEC interprets the securities laws adjudicated by lawmakers into rules. The goals of these rules are to protect investors, maintain fair, and efficient markets, and facilitate capital formation. Regarding their first goal, the SEC has set rules for Issuers regarding disclosures to potential investors. In general, the SEC mandates that an Issuer disclose anything to a potential investors that would be a gaiting factor in the investor’s decision-making process to buy the security. Uniform disclosure rules that were set forth over the past 75 years include risk factors and compensation to insiders and agents. The enforcement authority that the SEC received from the Congress enables the SEC to bring civil enforcement actions against individuals or companies. For instance, they can bring civil claims against Issuers for lack of disclosure and individuals for acting as broker-dealers without proper registration.

Role of Registered Broker-Dealer Acting as Placement Agent relating to EB-5 Investors

A registered broker-dealer’s role as a placement agent is to identify an issuer which can satisfy the requirements for EB-5 investment, perform due diligence, structure the investment, perform suitability determinations, and perform anti-money laundering review of the issuer and its affiliated persons. First answer that needs to be garnered from the issuer is “Can the issuer meet the job creation requirements?” In other words, can the Issuer create or preserve at least 10 full-time jobs (meaning employment of a qualifying employee by the new commercial enterprise in a position that requires a minimum of 35 working hours per week) per each EB-5 investor for qualifying United States workers within two years. The location of the Issuer if equally important to consider in the course of due diligence process in order to ascertain that the Issuer is located in a qualified Targeted Employment Area (“TEA”).

If the issuer is not in the position to create the jobs to fulfil the job creation requirements, then an investment from an EB-5 investors is not viable.

If the issuer can meet the job creation requirement, the next steps for the registered broker-dealer is to formally engage the issuer as its’ placement agent for a capital raise, perform due diligence (including but not limited to, reviewing business and financial history of the issuer, its past capital raise engagements, run background check on the issuer’s officers and directors, review its marketing plans, the history and status of past and present litigation of the issuer, and the issuer’s comprehensive business plan with the job creation section), structure the investment which meets the “at risk” criteria of the EB-5 Program, perform suitability determinations, and perform anti-money laundering review, and finally work with the issuer and issuer’s counsel to prepare offering documents such as private placement memorandum (“PPM”), subscription agreement, escrow agreement and supporting exhibits for the PPM. This all completed before the providing the investment opportunity to an EB-5 investor which is invaluable for an EB-5 investor when they seek to enter the EB-5 Program through direct investment participation.

Upon completing the due diligence, the placement agent and the Issuer begin the process of creating the comprehensive business plan inclusive of job creation plan, structuring the investment to meet specific aspects such as the “at risk” of the EB-5 Program, perform suitability determinations, and perform anti-money laundering review and finally work with Issuer and Issuer’s counsel to prepare offering documents such as private placement memorandum (“PPM”), subscription agreement, escrow agreement and supporting exhibits the PPM. It is important to note, this is completed before providing the investment opportunity to an EB-5 investor. The EB-5 investor is given time to review, inquire and seek advice from their respective outside advisors prior to investing. Due to the amount of information derived from the placement agent’s work product, the EB-5 investor has extensive data and information in making the investment decision. If the EB-5 investor elects to proceed with the direct investment participation through a registered broker-dealer acting as placement agent, they have the appropriate documentation for EB-5 Program. This is invaluable for an EB-5 investor when seeking to enter the EB-5 Program.

What is FINRA Rule 2111?

FINRA, just like the SEC, interprets, makes and amend rules. FINRA Rule 2111 is generally called the “suitability rule”. This rule has been in existence since 2012. In August of 2013, FINRA issued an interpretive letter regarding the applicability of FINRA rules in particular Rule 2111 to EB-5 transactions. FINRA supported the SEC’s positon that EB-5 transactions are securities and are therefore under the jurisdiction of both the SEC and FINRA. FINRA went further to say that that a broker-dealer take additional steps beyond the responsibilities of due diligence and know your customer. The analysis be done to determine that the private placement offering is consistent with the requirements of the EB-5 Program. Regarding the analysis, it is not necessary to undertake a job study under USCIS rules as a direct investment as opposed to an investment through a regional center it is advisable to do so. As stated above a comprehensive business plan with the job creation plan included meets this analysis for direct investment participation.

The Securities Act of 1933, the Issuer and Registered Broker-Dealer

Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D is the exemption commonly relied upon domestically regarding the recommendation of a private placement to an investor that wishes to enter the EB-5 Program. The exemption does not require the Issuer to register the offering with the SEC, but Issuer still has to follow securities disclosure laws. The Issuer does however, need to file what is called a “Form D” electronically with the SEC after they first sell their securities. This Form D is a filing with limited information on it, but must disclose sales compensations and fees.

When conducted through a registered broker-dealer, the registered broker-dealer is required to provide offering documents in compliance with SEC and FINRA rules as well as its own approved internal procedures. When a first sale is made in an offering, the offering documents are submitted to FINRA by the registered broker-dealer.

Who can be compensated?

A registered broker-dealer can be compensated from the sale of securities in an offering, therefore the associated persons receives their compensation through their respective registered broker-dealer. Typical forms of compensation include cash commission and warrant compensation. As previously stated, the registered broker-dealer’s engagement is with the Issuer. The Issuer compensates the registered broker-dealer through the terms of the engagement. An investor participating in the offering does not compensate the registered broker-dealer, however any compensation to be paid to registered broker-dealer is disclosed to the investor in the offering documents.

There are limited situations where a non-registered person can be compensated through a registered broker-dealer. FINRA Rule 2040 was implemented in August of 2015. It governs the payments by broker-dealers to non-registered persons. In summary, the rule provides that a broker-dealer may pay transaction-related compensation to non-registered foreign finder where the finders’ sole involvement is the initial referral of a non-U.S. customer to the registered broker-dealer. The registered broker-dealer is required to comply with the following conditions:

(1) The finder meets the same standards as if he were to be employed by the broker-dealer;

(2) that the finder is a foreign national or foreign entity domiciled abroad;

(3) the customers are foreign nationals or foreign entities domiciled abroad;

(4) customers receive a descriptive document that discloses what compensation is being paid to finder;

(5) customers provide written acknowledgement to the broker-dealer of the existence of the compensation arrangement;

(6) records reflecting the payment need to be maintained.

In Closing

It is the case that while law changes are being discussed and argued in Washington, D.C., the SEC is regulating the EB-5 industry through enforcement actions. Securities laws have been in effect for countless years and the infrastructure for enforcing and adapting have gone right along with them. It should not be astonishing if the ultimate outcome from Washington, D.C. and the SEC will require changes to the regulatory environment of the EB-5 industry. Indeed many of the proposed law changes in front of Congress call for the United States Citizenship and Immigration Services (USCIS), a component of the United States Department of Homeland Security (DHS), to perform functions that are currently undertaken by the SEC and FINRA.

For the registered broker-dealer and registered person community, the regulatory environment is not new. We, as registered broker-dealer, are required to comply with the SEC and FINRA rules and regulations from the moment of becoming registered.

Lastly, we encourage the EB-5 investor to seek out opportunities that provide them with the maximum information in evaluating their investment decisions. When interacting with a registered broker-dealer, they can utilize FINRA BrokerCheck to confirm proper registration and evaluate any disclosures. It’s a start.

Reprinted with permission.

About The Author

John P. O’Shea is the Chief Executive Officer and Jennifer L. O'Shea is the President of Global Alliance Securities, LLC located at 100 Wall Street, 7th floor, New York, New York 10005. John and Jennifer can be reached at their office number 212-878-6500 or email at John at and Jennifer at Global Alliance Securities, LLC website can be accessed at and the FINRA BrokerCheck can be accessed at Copyright 2015. All Rights Reserved. No Investment, financial, or legal advice is provided in this article. Please consult your own professional advisors for advice applicable to your circumstances.

Jennifer L. O’Shea is the President of Global Alliance Securities, LLC. Mrs. O’Shea previously worked at Terra Nova Capital Equities, Inc., Monarch Capital Group, LLC and Westminster Division of Hudson Securities (formerly Westminster Securities Corporation). She is instrumental in the areas of 15a-6 transactions (“Chaperoning”), investment banking due diligence, drafting engagement documents, legal issues relating to investment banking transactions/private transactions and cross-broader transactions.

The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.