Lessons Learned from the Recent Securities and Exchange Commission Enforcement Actions
by Jeff Campion
The Securities and Exchange Commission (“SEC”) has been very active as of late in the EB-5 space. As recent as last week, the SEC filed a complaint for injunctive and other relief against another issuer in EB-5. There are some very important lessons the industry can take away from these recent actions.
The main issues the the SEC has raised in recent enforcement actions are: material misrepresentations and material omissions, violations of limited partnership agreements, and related party transactions. The reality is that you cannot make a bad actor tell the truth or do the right thing. However, sometimes, there are changes in the business that were not contemplated. When these occur, it is important to speak with counsel to determine whether such changes are material and if a supplement to the offering documents is advisable.
With respect to violations of the limited partnership agreement, once again, if a bad actor wants to violate his agreement, he will. However, there are ways to minimize the adverse impact of a bad actor. A third party, unrelated fund manager to oversee the investment by the EB-5 investors would be wise. That is, if each project were required to hire a fund manager that could only be fired for fraud, misappropriation or embezzlement, or some other bad act, it would provide an unbiased third party to hold the project owners accountable to their agreements and assist in initiating actions against the project if it is deemed necessary. In this way, the fund manager would be able to watch over the project and protect investors.
Detailed reports on a regular basis should be prepared by the project to the fund manager with respect to flow of funds, money spent, and project progress. In this way, the fund manager will be able to review the reports, ask questions, and report back to the EB-5 investors as to the project’s status. Related to this has been the “sources and uses” issue. The “uses” side of the equation discloses to an investor where the money will be spent. Recent enforcement actions allege that money was not used as disclosed in the “sources and uses” provided to the EB-5 investors. Once again, a third party, unrelated fund manager that has regular reports will be able to determine whether the project is using the funds in accordance with the “sources and uses” schedule.
I would note that the issue with “sources and uses” isn’t necessarily desiring to use money in a different manner. There could be real business reasons to deviate from the “sources and uses.” The issue is one of adequate disclosure to the EB-5 investor via a supplement and – maybe – providing a rescission right to the EB-5 investor. Of course, the fund manager would need to ensure that if there were a change in the “sources and uses” that it would be EB-5 compliant per USCIS rules and whether an amendment to the USCIS filing were necessary.
Some of the issues in the recent enforcement actions center around related party transactions. While related party transactions are not per se wrong, there needs to be complete transparency when there are related party transactions. For example, when purchasing land from an entity that a related party owns, it would be wise to have more than one land value appraisal to demonstrate the bona fide nature of the transaction. The issue becomes one of full disclosure and transparency in the transaction avoiding the appearance of self-dealing.
The SEC is taking action in EB-5 enforcing rules and regulations that have been in existence for decades. Each time the SEC takes an action, it shows that there is the rule of law and that investors will be protected. This combined with increasing the USCIS’s authority through integrity measures will only strengthen the program for the future. And, we as an industry can apply some of the straightforward measures above to protect the EB-5 investors that have trusted us with their lives.
Reprinted with permission.
Jeff Campion is an immigration attorney and the ceo of Pathways EB-5, Inc., a family of approved regional centers that covers nearly every major U.S. population area. He is also a founding member and Co-Chair of EB-5IC.