Miami Vice


Yesterday, June 23, 2015, the SEC charged two firms with brokering securities without the needed broker-dealer licenses. The investigation was led out of the SEC’s Miami office which charged a Boca Raton, Florida based firm, and its Hong Kong counterpart, with a US presence, with illegally brokering $79 million of EB-5 investments. For a copy of the SEC Announcement see

The SEC’s action is interesting and instructive on several fronts. Firstly, this is one of the first SEC cases that did not involve a purported fraud. No one should question that the SEC had a legal basis for taking the actions that it did, but it is an expansion of their activity set to go beyond the relatively plain vanilla 10(b)(5) cases (for fraud) that it has pursued thus far concerning enforcement of the US Securities Laws in the EB-5 arena. There is no firm suggestion that the investors in these cases were in fact harmed, which can put this in the category of a victimless crime. It is noteworthy that there was no corresponding criminal action on the part of the US Justice Department. The SEC’s justification and rationale is the protection of the integrity of the capital markets. In the context of the EB-5 market, that is definitely a worthy goal. Hopefully this is just a beginning for the SEC as there are undoubtedly bigger and more bad-acting fish to fry in this sector.

Another point to note is the scale of the activity. $79 million is a lot of money and concerns a lot of investors (for EB-5 purposes). It would have been hard for the accused to argue that they were ‘finders’ in this context. Not so long ago, the SEC suffered a setback in their approach to the finders vs brokers debate (essentially taking the position that finders do not exist where transactional based compensation is involved). In SEC v Kramer, also in Florida, the judge found presence of transaction compensation alone, given the small volume of transactions, to be insufficient to make the individual in question a broker. See SEC v. Kramer, 778 F. Supp. 2nd 1320 (M.D. Fla. 2011). Other district courts have also refused to follow the SEC’s position in this area.

With respect to the applicability of the securities laws, like the real estate investments that were brokered, one of the most important features is always location, location, location. The second company charged, a Hong Kong company, was ensnared because of its ‘presence’ in the United States. Companies, agents and the like who are relying on the extra-territorial nature of their actions to insulate them from obligations under US law need to be very concerned about what does (or does not) create a jurisdictional nexus for these purposes. Whether the SEC is correct in asserting its jurisdiction is almost beside the point. With the agency’s resources, unless the accused is willing to go away and stay away forever, a charge by the SEC is a painful experience in the best of cases. Migration agents with offices of any kind in the US should be especially concerned. Those attempting to solicit potential investors using means directed to them while they are physically present in the United States, who are themselves in the United States, and are to be compensated based on the successful transaction should know that they are putting themselves squarely in the SEC’s crosshairs. As the SEC has now shown, they will act in the absence of harm or fraud for the sake of defending the market’s honor and virtue.

So what else does this mean? From the perspective of the regional center (the issuer of the securities), there are a whole host of potential problems that arise from accepting investors from those found to be unregistered brokers. Firstly, there are legal theories of facilitation under which the SEC (and/or the Justice Department) could seek primary liability from the regional center and its principals. Secondly, it is almost a foregone conclusion that either from new regional center legislation or via new rulemaking, regional centers who work with agents that violate the US Securities Laws will be at risk for additional sanctions, including potentially a revocation of their regional center status. Foremost, however, is that the use of an unregistered broker-dealer gives rise to a rescission right on the part of the investors. This means that any of the affected investors at any time could demand his or her money back, notwithstanding what the investment contracts say. While that is bad for the regional center, it may be worse for the investors. It’s an especially troublesome query to imagine how the investor rescission right might be interpreted by USCIS (or the courts) in the context of In Matter of Izumi, which makes investor rescission rights illegal and therefore fatal to gaining lawful permanent residency via EB-5. Does this mean that an investor, by coming thought an unregistered agent, then should have his or her I-526 or I-829 petition denied as a matter of an unintended interaction between US Immigration Law, Federal Securities Law and State Contract Law? This writer certainly hopes not as then the victimless crime would have a victim after all by the hand of the enforcement that was supposed to provide the protective shield from the harm in the first place. It seems, once again, that the market’s virtue and EB-5 make for strange bedfellows.

©2015 Matthew Gordon

Reprinted with permission.

About The Author

Matt Gordon Matt Gordon is a the Managing Director of E3 Investment Group. He is a finance professional whose vision and passion is to help realize extraordinary value through the flawless planning and execution of strategy, financings and transactions that foster aggressive sustainable growth. Mr. Gordon is a licensed attorney, having practiced law with some of the most prestigious Wall Street firms, including Fried Frank and Sullivan & Cromwell. He is a member of the New York State Bar and holds SEC securities licenses.

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