SEC Delays Rules on Key EB-5 Section in JOBS Act

by Yi Song, Esq

When the JOBS Act was enacted in April 2012, it raised a significant amount of excitement in the EB-5 community. At the time, there was a general consensus that the Act could change the landscape of EB-5 private offerings. However, the Securities and Exchange Commission's (SECs) indefinite delay with respect to implementing its rules currently leaves the Act in a state of limbo. One of Mary Shapiro's last acts as the outgoing Chairman of the SEC, scheduled to depart on December 14, 2012, has served to delay the application of a highly relevant section of the JOBS Act to the EB-5 investor Program.

The decision on implementing the SEC rules on this particular section of the JOBS Act has been criticized as being overly politicized. The highly relevant section of the JOBS Act to the EB-5 investment program is known as Regulation D. The new law will repeal the prohibition on general solicitation and general advertising rules for private placement offerings conducted pursuant to Rule 506 of Regulation D, provided that all purchasers are accredited investors.

The rule potentially affects hundreds of billions of dollars from companies' private placement offerings. The delay of implementing the new rules is caused in part by the concerns pertaining to Shapiro's personal legacy. Reports are that Shapiro stated that: "[She doesn't] want to be tagged with an Anti-Investor legacy", in a released SEC internal email.

Internal SEC emails, released to a congressional panel and reviewed by The Wall Street Journal, appear to show how a last-minute intervention by a consumer lobbyist may have helped to persuade Ms. Schapiro to change her mind and delay this key provision of the JOBS Act. Within an hour of receiving the consumer group's email, Ms. Schapiro sent Meredith Cross, the head of the SEC division tasked with the responsibility for writing the rule, a message with the subject matter entitled: "Please don't forward."

Republican Representative, Patrick T. McHenry, accused Mary Schapiro of deliberately slowing down the progress of Regulation D, which would benefit companies selling securities through private offerings. Mr. McHenry blames Schapiro for "prioritizing special interest groups' requests over the faithful implementation of the law," just to uphold her legacy amongst the special interest groups.

The general solicitation and general advertisement requirement was instituted from the 1930s to protect unsophisticated investors from unscrupulous individuals. In the JOBS Act, Congress requested repealing the prohibition on general solicitation in an effort to jump start the economic and to decrease the regulatory and bureaucratic issues frequently encountered by small businesses.

The generally accepted protocol is for the SEC to seek public opinions and commentary before approving a regulation. However, in this case, the agency was forced to dismiss the public's comments due to the short time frame Congress established. Such a deviation from the norm did not go unnoticed by Lobbyist Barbara Roper from the Consumer Federation of America, who objected to the regulation and demanded that the SEC solicit the public's opinion before approving the regulation. This has certainly been a cause for worry on Ms. Schapiro's part.

It has been argued that significant pressures and bold threats from lobbyists, high-level investor groups, and other opponents of the regulation, contributed to Schapiro's change of mind related to the new regulation. Schapiro has denied allegations of prioritizing special interest groups over the faithful operation and implementation of the law.

A letter from the House oversight subcommittee urges Ms. Schapiro to implement the rule ending the general-solicitation ban before her scheduled departure from the Commission.

A statement released by the SEC states that: "The law generally requires the Commission to seek public comment on a specific proposal before adopting it, and that is the Commission's customary process. The staff's initial work on the rule assumed public comments would be sought and the staff ultimately recommended that the Commission proceed in that way."

It remains unclear when the implementing measures of the JOBS Act will be established.

About The Author

Yi Song, Esq. is an associate attorney at Mona Shah & Associates in New York City. She is also licensed to practice law in People's Republic of China. She has practiced tax law in Beijing, China with a leading tax firm. She clerked in Beijing, the nation's capital at the Supreme Court of People's Republic of China. At Mona Shah & Associates, Yi practices EB-5 law and securities law and works on many successful EB-5 capital raising projects. She obtained her LL.B. degree from Beijing Foreign Studies University and she is a graduate from Georgetown University Law Center in Washington, DC. Yi is a native speaker of mandarin Chinese. She speaks fluent English and basic French.

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