I-526 Insurance; Proper Disclosure is Critical
Kurt Reuss: Proper disclosure is an important issue with this I-526 product, considering it is a new product with no claims paid to date. Doug, how do you approach a product like this, when developing disclosures in the PPM?
Doug Hauer: I think you have to be very careful to, in plain language, describe the mechanics of how this policy is actually working.
An investor who is reviewing the PPM should be able to review the section on the insurance and walk away with an understanding of how mechanically a policy would work and what kinds of claims would result in there being coverage and what kinds of claims would result in a denial of coverage.
I think the trap for an issuer or a regional center issuing a deal is that the term 'insurance' conveys a safety net, or a risk-free proposition. You have to be careful here if you're an attorney drafting a PPM for a client; you need to spell out in clear terms what the limitations are and what the parameters of the product are.
I think it would be important to alert investors, in a PPM, of the risks with this product.
One area that we see in these policies that leads to some confusion is how 'fraud' is defined. Fraud, in a securities law context, when you're talking about an issuer, can mean many different things.
It's going to be important to calibrate those disclosures, make them clear, put those disclosures in plain language, and ensure that all parties in a deal get protection through understanding what the limitations of the product are.
Marc Difanti: I think we all agree with Doug in that regard. We've worked closely with a number of different people to put together some template language that we provide to our approved projects to help them, at least in the beginning stages.
Certainly we agree that it should be reviewed from an immigration standpoint and from a securities council standpoint. It also needs to be tailored to each individual project to fit correctly with that project, but we've helped them at least in the beginning stages in providing template offering document language that starts that process off. It outlines the covered exposures and the excluded events and what the policy really provides.
I wholeheartedly agree and believe it's important from a marketing standpoint.
Bruce Rosetto: Folks need to understand that the offering documents are documents regarding risk disclosures. It's not a sales document. We would never say that the insurance protects against any I-526 denial. We would focus on the risks of the insurance and the interpretation of the exclusions so it's clear to someone buying this insurance that there truly are risks here and that there's no guarantee that they're going to get paid just because they have an insurance policy.
You must focus on the Exclusion section of the policy and make sure you understand them. In addition, in the PPM itself the Risk Factors should delineate this risk as well.
Doug Hauer: I would add that while the SEC obviously knows about EB5, they generally look to the gatekeepers to ensure that investors are given fair disclosures.
That means that if you have one of these insurance products in your offering documents, you're going to be really scrutinized later on if you mischaracterized how the coverage works.
Every lawyer operating in this space who's advising a client on a PPM needs to actually understand the mechanics of the policy. That's critical. You can't have robust disclosures if you don't understand how the policy works.
The second thing is that if you are an issuer and you put out a PPM that mischaracterizes this coverage and, as a result investors subscribe, you could find yourself in trouble with the SEC.
I think in the current climate, the EB5 industry is going to be under more and more scrutiny to do things right. It really means that the disclosures have to be fair to the investors and have to let the investors know about the gaps and limitations.
I think the term insurance itself connotes, again, a sense of security and that's where you have to be especially careful. If you run afoul of your obligations as an issuer to disclose and you don't properly disclose this policy, I think you could potentially end up with a 10-b(5) claim by the SEC if investors complain.
I'm sure state regulators would have a field day with a PPM that doesn’t properly explain the risks.
This post originally appeared on EB5 Diligence. Reprinted with permission
Mark Freitas's career in the insurance industry has spanned over 30 years. As President and Chief Executive Officer of Mark Edward Partners, a national insurance brokerage firm headquartered in New York City, Mr. Freitas leads the firm’s business strategy and development. Along with the company’s traditional property and casualty practice, Mark Edward Partners creates and develops cutting-edge products and programs not readily available in the insurance marketplace.
Doug Hauer is a Member in Mintz Levin's Corporate & Securities Practice and Immigration Practice. On the corporate side, he focuses on private offerings and related securities work. Doug serves as counsel to developers and businesses seeking capital through the EB-5 investor visa program. He also counsels lenders, private equity firms, and EB-5 Regional Centers on all aspects of EB-5 financing. In the immigration law space, Doug represents corporate, institutional, and individual clients in routine and complex immigration matters. He has in-depth experience advising companies on the immigration consequences of corporate restructuring. He also advises businesses on the legal aspects of establishing new offices and operations in the US.
Kurt Reuss provides all his clients with free access to due diligence reports as a licensed broker dealer representative with Primary Capital. Mr. Reuss co-founded EB5 Diligence as a way to provide his clients with the most thorough due diligence reports possible and works closely with investors to assist them in selecting a suitable EB-5 investment.