Bill S.1501 Puts the EB-5 Program Under the SEC's Microscope - Could Cause Major Changes in the EB-5 World
This morning, the Senate Judiciary Committee Chairman Charles Grassley and Ranking Member Patrick Leahy co-sponsored S. 1501 (titled “the American Job Creation and Investment Promotion Reform Act of 2015”), to reauthorize the Regional Center Pilot Program through September 30, 2020. This is major news that will have a huge impact on the EB-5 world. The bill proposes several significant changes to the EB-5 program that our office will discuss in a series of articles in the coming weeks. One proposed change contained in the bill has potential to completely revamp the EB-5 landscape. The proposed bill says that:
In view of the objective of promoting investment in the United States, in an action filed by the Securities and Exchange Commission, the purchase or sale of securities offered or sold by any regional center or any party associated with a regional center shall be deemed to have occurred within the territory of the United States for purposes of the securities laws, and subject matter jurisdiction shall also lie within the United States.
This language, if it is included in the final bill and interpreted aggressively by the SEC, has the potential to change the EB-5 world. Currently, most projects rely on a combination of Regulation D, which facilitates domestic offerings, and Regulation S, which facilitates offshore offerings, in their sale of EB-5 securities. For the majority of EB-5 investors that are located abroad, the issuer could rely on Regulation S as long as the sale and offering activities also occurred abroad. However, if the sale of EB-5 securities are deemed to have occurred in the United States for purposes of the securities laws, then Regulation S would no longer be available.
At a minimum, this would mean that 1) a Form D will need to be filed with the Securities and Exchange Commission for every project and 2) the project must verify that every EB-5 investor is accredited, which is defined as meaning that the individual has at least $1 million in assets or income of at least $200,000 in the last two years. These practices are already highly recommended for every project.
The potential game changer is the use of broker-dealers in EB-5 transactions, or the lack thereof thus far in the industry. If transactions are deemed to occur in the United States, then this may call into question the practice of making payments to Chinese immigration agents. Currently, regional centers rely on Rule 15a-6 to make payments to foreign immigrations agents. Rule 15a-6 is interpreted to provide an exception that allows for hiring overseas immigration agents to sell securities to non-US persons outside of the United States. If EB-5 transactions are now deemed to occur in the United States, then this exception may no longer be available and the way that the EB-5 industry operates may have to change.
Michael Homier, a leading securities attorney, believes the language in the proposed legislation is intended to do nothing more than establish venue in the United States for cases involving misconduct. The defendant in the Chicago convention center case argued that the case should not be tried in U.S. Courts since the activities involved the sale of securities to investors overseas, and this change would nullify that argument. This is certainly a reasonable interpretation that assuages concerns, and we agree with it.
However, the language could support the SEC taking a more aggressive position, if it so desired. And as FIFA’s executives recently learned when they were prosecuted under US anti-terrorism laws for corruption, federal authorities are willing to use a law beyond its intended purpose when they believe they are in the right.
Reprinted with permission.
Omar Hakim, Esq. is an attorney at Mona Shah & Associates in New York City. The firm is an established source for EB-5, assisting numerous Regional Centers/EB-5 Projects and Investors in navigating this complex, nuanced and constantly changing area of immigration law. Omar offers clients years of experience in corporate finance, the financial regulatory system, securities matters and in general corporate governance matters. Additionally, he is able to draw on his experiences at major federal regulatory agencies and bodies, which includes work at the SEC, the United States House of Representatives Committee on Financial Services, and the CFTC. He earned his J.D. at the University of Virginia; his Master of Laws in Securities and Financial Regulation at the Georgetown University Law Center; and his B.A. in Economics at Georgetown University.