SEC Rule 2210 in EB-5


FINRA Rules are only applicable to issuers that have a broker dealer involved in distributing an offering. Bob, as a FINRA expert, do you mind talking a little bit about SEC Rule 2210?

Bob Cornish: First of all, if you’re working with a FINRA registrant, you need to understand that somebody who is a designated principal of the broker dealer is likely going to be reviewing, editing, and approving your sales material. 

For people who are working with broker dealers, this is very important because Rule 2210 forms the basis of what a broker dealer is supposed to do in terms of supervising sales material. It also lays out the responsibilities of the individuals who are registered with the broker dealer and in some cases those who are working with the broker dealer.

For those unfamiliar with the general structure of how funds are distributed in the broker dealer scenario, your typical mutual fund for example, has an entity called the distributor. In EB5 or private placement that entity could be called a distributor or a placement agent but in any event those entities are broker dealers.

Those broker dealers will enter into an agreement with another broker dealer to sell and place products (in this case EB 5 offerings). Obviously, when you’re dealing with broker dealers and people working on behalf of them, they are engaging in sales and marketing activities. And since a lot of people have their own websites, FINRA deems that as communication with the public; that is generally anything that’s mass distributed to somebody who is intended to be a customer.

Kurt Reuss: So John, do you look at Rule 2210 as being guidance for your business or do you look at 10b-5 or do you feel that 10b-5 falls within Rule 2210? How do you approach things?

John Leo: We’re required to follow Rule 2210. When we look at a transaction we, as part of our engagement, review all of the materials whether they’re being used in the US or in China, as we do have a bilingual staff. What I’ve found is that it’s very rare that I see complete fabrication; but it is fairly common to see what I call a certain “murkiness,” if you will, in financial estimates. That’s where certain financial information is being stated more as “fact,” as opposed to pro forma financials. Again, that’s not complete fabrication but it’s not straightforward either and would certainly be a violation of the rule.

Additionally, many issuers have no control over the marketing material in China and we see that as an issue. In addition to offering to review the marketing materials we also offer to draft the material, with disclosures. The problem is pushback within the EB-5 industry, compared to private placements overall. The preference in EB-5 seems to be to leave the marketing materials up to the agents in China, who really aren’t aware of the ramifications down the road of making potentially misleading statements or statements which aren’t couched with appropriate language.

That’s what I see as the biggest problem; you want to control your information. If someone’s putting something on a billboard, you want to see it. If someone’s putting something on a website, you want to sign off on it. That’s really the approach anyone should have. It’s your information; you want to control it, not just the PPM but the marketing materials, as well. Though we know they shouldn’t, a lot of investors rely on the marketing materials, and it definitely calls into question both the transaction and the provider.

Individuals involved in the transaction, that do not know the regulations, or choose not to follow them, can certainly damage your reputation.

This post originally appeared on EB-5 Diligence. Reprinted with permission.

About The Author

Kurt Reuss

Kurt Reuss works at Primary Capital.

Robert Cornish

Robert Cornish focuses on litigation, arbitration, regulatory and compliance matters for broker/dealers, investment advisers, hedge funds, commodity firms, institutional investors and family offices in the U.S. and abroad. He represents clients on FINRA and NFA arbitrations and court proceedings. He also represents securities and commodities registrants in connection with enforcement and disciplinary proceedings before FINRA, NFA, CFTC, SEC and state securities regulators. Having previously served as in-house counsel with prominent investment firms, Mr. Cornish provides valuable insight and counseling for clients with complex business management and marketing matters in the investment arena.

John C. Leo

John C. Leo focuses on the day to day management of Primary, which includes compliance and risk management, in addition to the origination and execution of investment banking transactions. John Leo acquired Primary Capital in July 2007. Prior to acquiring Primary, Mr. Leo was the founder, Chairman and majority owner of American Union Securities, Inc. (AUS), which focused on investment banking, mergers and acquisitions in China. Mr. Leo sold his ownership in AUS in March 2007 to expand his focus beyond China.

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