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  • Article: Hiding behind Reg “S”? Be very careful! By Robert Whyte

    Hiding behind Reg “S”? Be very careful!

    by


    EB-5 is an “offering” of a US based security. There is no question about this fact. The US Securities and Exchange Commission (SEC) put in place some ten years ago Reg “S” to assist “unregistered” offerings that relate to the funding of projects in the USA that are sold overseas, not to American persons living in the USA and not to be sold here in the USA. One of the major concerns the SEC has is the reselling of these securities, back here in the USA by persons that have purchased these securities overseas and then try to unload them in the USA. This attempt to circumvent the rules is a major boo-boo in the eyes of the SEC. EB-5 investments are not commonly resold, but everything changes and some investors might try this to recoup invested funds once approved. However this is not the current marketing problem with Reg S for EB-5.

    Relying on Reg S does NOT ALLOW a project to fully circumvent ANY other SEC rules, ones that deal with for example FRAUD. Standard compliance with the Investments Acts of 1933 and 1934 and the Investment Company Act of 1940 must be observed, all the rules. Also once the securities land in the USA they become covered by all the other rules of the SEC, and Reg S gets set aside.

    Federal securities laws can impose injunctive rulings, rights to rescind, make the project return the invested funds, or worse the project and the principals could be charged with fraud or other criminal offences under the laws mentioned above if they are not followed.

    It does not provide protection from any unlawful securities activities. Falling back to Reg D may provide some wiggle room in the marketing stage, but again there is a SEC process that needs to be completed to ensure that the investors are accredited. Plus there are advertising restrictions that you and your project must follow under Reg D. Be aware of these.

    Direct selling of Reg S is complicated, and the definition of a US person is defined as anyone that is a resident of the United States: how then do you deal with temporary visa persons, like F1 students. If you make any reference to the offering in a meeting or presentation while in or on US soil, you have violated Reg S. This also applies to conferences, meetings of any sort, a lunch or a telephone call made to a person in currently IN the USA. At conferences you can market the scope of the project, but without any references to the investment, terms or subscription information. Please remember that any marketing of this type can be considered “arousing interest” in the project and that in the eyes of the SEC is considered selling. A picture of the project or conversation of the jobs to be created should be alright, but this is a fine line. Keep in mind that investors do attend conferences in the USA. Don’t fall into this trap to trouble. Know what you can and cannot say, hire a FINRA broker dealer to guide you.

    This is risky business. The SEC is starting to look much more seriously at EB-5 and hiding behind Reg S is not a good or solid business decision. You take this action at your own risk. You should also consult with a securities attorney, I am very sure they will agree.

    Rule 901K provides information on who is a US person under its definitions. It is clear that Reg S is a safe harbor for selling outside the USA only. There is NO inclusion of people when you are selling Stateside.

    Reg S was not designed for EB-5. Trying to put this square into a circle can only lead to problems. Remember that all of your EB-5 investors will end up in the USA. They will become US persons and they can hire US based lawyers to come after projects and promoters of projects.

    Now for web sites; If you have any offering information on the project on your web site, you have fallen on the wrong side of Reg S. Plus marketing in the USA, through a website that any America can visit, unless you have a password protected site…. well… you are then falling under new Reg D and not Reg S. I will write on Reg D at a later date.  You can put your historical project(s) on your site, and your success rates, your approvals rate, but not your current project and certainly no subscription information that relates to your current project. Don’t put any historical offering information there either, why juggle fire.

    What is permitted? Plant inspections or project inspection only. Again be careful to NOT discuss the offering information during these visits. Once you do, Reg S has evaporated. There is a ton of gray area here, we suggest being on the safer side of this issue and stay away from any “selling”.

    Remember that Reg S has to be completed off shore. If a subscription agreement is signed in the US you have no Reg S protection. None. No offer can be made to any person within the USA, if an investor makes such a claim that you did, or an F1 student makes that claim from a meeting they attended you presented or even suggested terms of the offering, the Reg S is blown.

    Lastly how does this apply to State regulations? There is NO Rule 506 blanket coverage for notices of filing under Reg S. Therefore all state rules have to be followed. If you are registered in one state (Delaware) and your project is located in another (New York), both sets of state rule’s need to be followed.

    Using unregistered broker dealer activity is not advised, in any fashion, at any time, for any project, whether Direct EB-5 or a Regional Center of any size. It is extremely easy to blow up the coverage that your project may have using Reg S. Save yourself all of this serious concern and use a registered licensed broker dealer to do your compliance, keep you within the SEC rules and oversee your project under FINRA regulations. Be careful. Call with any questions at anytime.

     

    The aforementioned should not be considered as legal advice, it is not is it intended to be legal advice of any matter or type. Only a licensed attorney can provide legal advice on this subject matter. The comments hereto are those of the author who is not an attorney, but a member of a FINRA broker dealer.

    This post originally appeared on EB5 USADIRECT.COM. Reprinted with permission.


    About The Author

    Robert Whyte from Canada on an "O" visa, now a US citizen (2014) completed his first Direct EB-5 project in 2011. He has spoken on Direct EB-5 from Shanghai to New York. A past Wall Street investment banker for 20 years, held Series 7, 63 and 24 FINRA/SEC licenses. He lives in Los Angeles and travels often to Asia.


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

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