USCIS & SEC Hold Intra-Agency Conference Call on Securities Issues Related to the EB-5 Investor Visa Program
U.S. Citizenship and Immigration Services (USCIS) and the Securities and Exchange Commission (SEC) invited interested individuals to participate in a stakeholder teleconference to discuss the EB-5 Immigrant Investor Program. It was held April 3, 2013. During the engagement, subject matter experts from the SEC discussed securities law compliance in the context of EB-5 regional centers and investments. Stakeholders had an opportunity to ask the SEC questions at the end of the teleconference. Please find following the four presentations from each industry expert and the Q&A segment.
by Rob Silvers of the USCIS
I’m at the California Service Center where we process our EB-5 caseloads. Director Alejandro Mayorkas has been very focused on enhancing our collaboration with enforcement and regulatory authorities whose jurisdiction reaches into certain aspects of EB-5 projects and investments, and the SEC is one such agency. We’ve built a valuable relationship with the SEC and we’ve engaged with them at a programmatic level as well as at a case-specific level of involving referral of cases and assistance in particular investigations.
At USCIS, we administer the INA and the implementing regulations, but we work to support the SEC in its mission of regulating compliance with the US securities laws. So today is really a very valuable opportunity for the SEC to address the EB-5 stakeholder community and conversely for the EB5 stakeholders to direct their questions regarding securities law compliance in the EB-5 arena to the SEC. We’re very grateful to the SEC for their continued partnership, and for accepting our invitation to join today’s engagement and look forward to their presentation.
Offers & Sales
by Karen Wiedemann, SEC, Division of Corporate Finance
Before I begin, I’d like to give our standard disclosure, both on my own behalf and behalf of all of my colleagues. The views we express today are our own, do not necessarily reflect the views of the commission or colleagues on the staff.
We’ve been asked to key up for you the principle issues that may arise under federal securities law in connection with activities by regional centers and other participants in the EB5 visa program. Just a cautionary note, this is obviously pretty high level discussion, and should not take the place of you getting you own legal advice, which we would very much urge that you consider doing.
When the Law Applies
To get things started, we’ll put some basic building blocks in place. When should you worry that federal securities law may apply to what you’re doing? To the subject of securities law, you obviously have to be transacting in securities, just be aware that the definition of ‘securities’ is very broad. It includes not just the things that immediately comes to mind like shares of stock in a corporation. It can include all kinds of investment – interest, limited partnership interest, member interest, LLCs, lots of other things that fall under a general rubric of investment contracts. And so as a general rule of thumb, you should just be sensitive to the likelihood that the investment opportunities that you’re offering may well constitute securities and you should proceed as if they do, unless someone who’s looked at it carefully reaches a different conclusion.
The other thing that you should be aware of in terms of offering and selling securities is that federal securities laws will apply to all offers and sales that are made using what we would refer to as the ‘means of interstate commerce.’ That includes things like the Internet, the telephone, U.S. Postal Service – again it is extremely unlikely that your activities do not involve the jurisdictional means and so as a general proposition, offers and sales of investment interest are very likely to implicate U.S. federal securities law. So you just have it in your mind, as you go about your business.
The next thing to make clear is that, as a general matter, offers and sales of securities – a huge system – have to be registered with the SEC unless there is an exemption available. SEC registration you will have heard of referred to as ‘going public’ or ‘doing IPO.’ There are a number of potential exemptions for securities offerings. We’ll talk very quickly about a couple of the ones that are relied upon most frequently. But the thing for you to remember is that the exemptions that we’ll talk about are exemptions from registration requirements – they are not exemptions from the whole of the federal securities law. So even if you’re eligible to rely on an exemption, that means you don’t have to register with the SEC, but it doesn’t mean that federal securities law doesn’t apply to what you’re doing, and in particular, the anti-fraud provisions of the federal securities laws will apply, even to exempt offerings. We should be clear about that.
Some of the highlights for exemptions that people tend to rely upon most frequently – there are exemptions for private placements, there’s an exemption under regulation D which is probably our most frequently relied upon private placement exemption, there are a number of conditions that attach to satisfying those exemptions, but the most important one for this purpose is a prohibition on the use of general solicitations and general advertising to find investors for those offerings. That general solicitation would include, for example, using newspaper publications, radio or television broadcast media, could include an unrestricted website, cold calling, anything that’s sort of broadly reaching out to the public.
Under our interpretive guidance, there are circumstances in which registered broker-dealers are permitted to solicit a person with whom they have a pre-existing substantive relationship, but it’s a general proposition for these exempt offerings and exempt private placements – general solicitation is prohibited. Some of you may know that the Jobs Act, which was signed into law about a year ago, requires the SEC to change its rules to permit general solicitation in offerings where securities are sold only to so-called ‘accredited investors,’ where the issuer has taken reasonable steps to verify that the investors are, in fact, accredited. Rules have been imposed to implement those provisions of the Jobs Act but they haven’t yet been finalized, they’re not in affect, and so that provision isn’t offered as yet.
The other key exemption that I wanted to touch on was Regulation S, which is the exemption or the set of exemptive rules that are available for offshore offerings conducted outside the United States. Reg-S generally provides that offers and sales of securities that occur outside the U.S. are not subject to Securities Act registration requirements. As I said before, and I’ll just underline it here, they remain subject to the anti-fraud provisions of the act – they’re just exempt from SEC registration.
Meeting the Conditions
To qualify for Reg-S there are two basic conditions that have to be met – the offer of sale has to be made in an offshore transaction with no directed selling efforts into the U.S. In offshore transactions, the standard that’s likely to be relevant for you is that the offer is not made to a person in the U.S., and at the time that the buy order originated, the buyer is in fact outside the U.S. or the issuer reasonably believes that they are.
No directed selling efforts, basically no conditioning of the market in the U.S. for the securities. As a practical matter it looks a lot like the prohibition on general solicitation. In addition to these two basic elements, there are additional requirements under Reg-S that vary depending on the domicile and SEC reporting status of the issuer, the entity that’s issuing the securities that are being offered and sold, and the degree of U.S. market interest in that. I don’t want to go into the fine detail here and you should take a look at that, but broadly, securities that are issued by a non-SEC reporting, U.S.-domiciled company are in category three, the most restrictive of the Reg-S categories with the most additional conditions around use of the exemption. If that’s where you fall, that’s what you would need to look at.
The other thing to note is that Reg-S is non-exclusive, so if you don’t meet the conditions for that exemption, but do meet the conditions for Reg-D or any other exemptions, you can of course claim that. That’s our quick walk through – offers and sales.
by Joseph Surey, SEC, Trading and Markets Division
At the Trading and Markets Division, we’re principally responsible for administrating the Securities Exchange Act of 1934. Of particular interest to this group today will be the question of status of individuals involved in this investment activity and whether they generally need to be cognizant and aware of broker-dealer registration requirements. I think as Karen said on this dialogue – it’s highly likely that there are investments that involve securities here, so if someone is engaged in the activity of facilitating foreign investors into an investment involving a U.S. business, it’s highly likely that they’re engaged in brokerage activity. So let’s parse that a little more in detail.
Broker-Dealer Status Explained
So the question is – threshold status – are you a broker or a dealer? A broker is someone who is engaged in the business of affecting transactions and securities for the accounts of others. The dealer is similarly engaged in the business of affecting transactions for its own account. In the context of this program, the most relevant discussion focuses on brokerage activity. Now, the commission has approached broker-dealer status and registration on a territorial basis, and what I mean by that is if you are in the U.S. and you do the activity, regardless of what activity, regardless of whether it involves foreign investors and is done outside the country, that’s within the territory, and therefore the registration hook is there.
Similarly, if you’re outside the U.S. and you’re soliciting into the U.S. seeking investments, you also would trigger the threshold hook and registration status would be implicated. So the question then is what are the threshold mechanics around brokerage activities? What are the activities that cause you typically to be considered a broker? The courts and the commission have addressed this over the course of years with identifying multiple activities that could cause you to be deemed to be a broker-dealer. So there’s not a precise litmus test of if you do one, two, three, or four things, or two things in combination, you by definition are a broker. It’s very fact-specific, so consequently if you engage in this kind of activity, it’s very important for you to get counsel or advice from someone who’s very familiar with how the securities regulatory structure works, particularly the Broker-Dealer Act in 1934.
So what are the principle things that could get somebody in the context of this arrangement into potential problems? First and foremost is you’re soliciting the investments – that obviously is square one in terms of you’re not going to have an investment if there’s no solicitation. Two – advertising indirectly would also fall into the solicitation area. But also, most importantly, is how you’re being paid. If you’re receiving compensation in connection with the investment into a securities product, you’re almost inevitably going to be found to be engaged in the business of doing that activity, which means broker-dealer status.
So if you’re being paid for finding investors, there’s a potential problem. If you’re soliciting investors here or abroad, there is a potential problem. The key is that the compensation oftentimes is characterized – “oh, that’s not transaction-based compensation” – is typically how we’ll be told the scenario. That begs the question – what you have to do is look at the specific context of all the activity and what’s going on. If, in fact, the person has the ‘salesman stake’ is the term we typically use in seeing that that investment is consummated and their payment is contingent on that activity, that in all likelihood is transaction-based compensation that would trigger broker-dealer registration.
A Safe Harbor
Now, there is one particular safe harbor for broker-dealer status – it’s rule 3A4-1 under the Exchange Act, which basically allows natural persons who are associated with the issuer of a security not to be required to register as a broker-dealer if they meet certain requirements. Some of the requirements are, they can’t receive transaction-based compensation. They can’t, within the last 12 months, have been associated with a broker-dealer. They can’t have had bad activities in the past, which we call ‘statutory disqualifications,’ which, among other things, would include felony convictions, being subject to an injunction by a court of competent jurisdiction, or being disciplined by the SEC, the CFTC, or a self-regulatory organization such as FINRA, or even a foreign securities regulator.
So the bottom line is if you’re actively out soliciting investments in the context of this program, and you’re getting paid for it – emphasis, again, on being paid for it – you inevitably have passed the threshold question and need to get detailed advice from someone who is experienced in the area to determine whether you have a broker-dealer registration issue – and that’s the 50,000-foot view.
Investment Advisors Act
by Barbara Chretien-Dar, SEC, Division of Investment Management
I’m from the Division of Investment Management, and our division regulates two things. We have two statutes that might be of concern to this audience here. The first one is the Investment Advisors Act, which regulates investment advisors of all kinds. The other one is the Investment Company Act, which regulates registered investment companies, otherwise commonly known as ‘mutual funds.’ Both of those statutes are maybe of concern to the EB-5 types of transactions, depending on how they’re structured. Joe talked a lot about compensation, and if you’re not a broker-dealer because you’re not compensated in the way that Joe was talking about, the likelihood is that you might be an investment advisor. It also tees off of compensation, to some extent.
The definition of ‘investment advisor’ is somebody who is in the business of providing investment advice for compensation. There is an exclusion under the Advisors Act that applies to broker-dealers, because broker-dealers typically give investment advice, but their advice is typically incidental to their brokerage activities, and usually it’s transaction-based. So if you’re not a broker-dealer, and you are providing advice to investors with respect to specific investments that they might make, you may fall into the definition of an investment advisor.
Defining The Investment Company Act
The second issue that impinges on the Investment Company Act as relates to these regional centers, of which I know precious little, but from what little I know, they look like pooled investment vehicles run by a third party – that’s the definition I keep seeing over and over again – and the third party typically assesses a fee for running the pool. Now, depending on how these things are structured, they may actually be investment companies that may or may not be required to register under the Investment Company Act. The Investment Company Act is very broad, and it is not unusual for pooled investment type vehicles to get tripped up into the definition and come within the regulatory purview of the Company Act.
Essentially the definition is – any pool, any issuer that holds securities, that invests in securities or trades in securities, triggers the definition of ‘investment company.’ So if a regional center is structured in a manner where multiple investors have a share in a pool or a regional center that in turn holds investments in whatever projects are being invested in, that is an investment company. At that point, you need to start worrying about getting competent 40-act counsel to guide you through either exclusions or exemptions or possible registration. It does get very complicated.
I’ll talk a little bit about some of the exclusions that might be available for the regional centers, depending on how they’re structured.
There are two exclusions that really are intended for hedge funds or venture capital funds, but that may or may not work for these regional centers, and the relevant sections under the Company Act, for anyone who’s interested, are section 3C-1 or 3C-7 of the Company Act. The first one, section 3C-1 is for private funds with fewer than 100 investors that are not making a public offering. Those are basically for smaller type hedge funds. Section 3C-7 is basically for institutional hedge funds. So 3C-7 allows you to have an unlimited number of investors, but your investors all have to be qualified purchasers, which individuals may or may not meet.
If a pool, if a regional center, is operated by an outside third party that decides what investments to make, that third party meets the definition of an investment advisor. So there are two things going on – one you’d have to worry about registration of the pool itself, as an investment company, both under the 33 Act and the Investment Company Act, because issuers, if they can’t rely on a 33 Act exclusion, will have to register their securities under the 33 Act, and separately, would have to register under the 40 Act, unless there’s an exclusion available. And then, separately, the operator of the regional center might be an investment advisor that may be required to register unless there’s an exclusion available. Even if an exclusion is available for an investment advisor from registration, just like under the 33 Act, the anti-fraud provisions still apply to that investment advisor, and I would just mention here that an operator of a pool that is an advisor to a regional center has a fiduciary obligation to the pool, because the pool is essentially an advisory client and there’s a whole body of case law starting with the Supreme Court decision in the 1960s called ‘capital gains’ that says an advisor has a high fiduciary duty to its client, which means you must disclose conflicts of interest, and in addition to not defrauding your client, you have to disclose any self-interest or self-dealing that you might be engaged in to essentially the pool and the investors. So that’s just on an aside.
If you meet the definitions, there are certain obligations, common law obligations, that are imposed at the federal level now that accompany that. Possible exclusions for investment advisors, I already alluded to the broker-dealer exclusions that may apply, most of that will be driven by how you are compensated. There’s also an exclusion for attorneys and accountants and teachers, which we call basically the professional exclusion. The key to that exclusion is that any investment advice that you provide must be incidental to your profession. So if somebody is engaged to a great extent in seeking out investment opportunities for a regional center, say – even if you’re an attorney or an accountant, that doesn’t give you an automatic out, because the advice, the investment advice, has to be incidental to your profession, which means your profession has to come first, and the advice secondary.
But if this is a business that somebody really is focusing on in terms of seeking out investment opportunities – those exclusions are not going to be available. The other exclusion that may or not apply – if the regional centers are, for example, sponsored by a state government or a municipality or has any type of public involvement, there may be an out for governmental entities. There are two exclusions available, both under the Company Act and the Advisors Act, that apply to governments. So in the U.S. government any state municipality or political subdivision there are – or of any agency thereof or instrumentality there are, is excluded both from the Advisors Act and the Company Act. So depending on the level of state involvement, there may be out there.
Advisors Action Not Applicable
Joe had talked a little bit as to territorial applications of the securities laws. We have similar things under the Advisors Act, but as I was thinking about it, I don’t think any of them are going to necessarily work for the regional centers, which I understand are in the U.S. I think any possibility that somebody might be a foreign advisor or an exempt reporting advisor – the terminology I’m using is all Dodd-Frank related and really kind of relates to hedge fund advisor registration. I don’t think it’ll work because the regional centers are going to be in the U.S., so that kind of cuts off that avenue of possible exemption. That’s it for my two statutes.
by Steve Cohen, SEC, Division of Enforcement
I’ll be reasonably brief, because my best advice is for you all to listen to the advice and guidance of my colleagues here from the regulatory divisions. Looking to their guidance is likely the best path to avoid any interactions with the division of enforcement. But I am also here to provide a cautionary tale of one regional center and some players who from our perspective ran afoul of the federal securities laws. I would note something that Barbara just said, and I think it’s relevant to the other presentations, which is just because somebody has a valid, for example, Reg-S exemption, just because you may not be engaged improperly as an unregistered broker, or investment advisor, or investment company, just because you might otherwise engage in business such that they don’t fall under the regulatory auspices of the Securities and Exchange Commission does not mean that a securities offering in conjunction with the EB-5 program doesn’t fall under our anti-fraud jurisdiction.
The Chicago CC Example
By and large, from my observations, almost by definition, I think, the investments related to the EB-5 program are, almost by definition, securities. As a consequence, making false or misleading statements in the offer or sale of those securities constitutes a violation of the federal securities laws, and could result in actions by the Securities and Exchange Commission or Department of Justice. On February 8th of this year, the United States District Court in the northern district of Illinois unsealed a complaint by the SEC against Anshoo Sethi and two of his entities, which included the Intercontinental Regional Center Trust of Chicago, in which we brought fraud action against Mr. Sethi and his two entities in an asset freeze over the accounts of him and those entities. I’ll highlight a few things related to that action.
Our complaint alleged that Mr. Sethi and his entities fraudulently sold more than $145 million worth of securities and fraudulently attained over $11 million in administrative fees from more than 250 investors principally based in China in conjunction with the EB-5 program, as is, I can tell, not unusual. The investment at issue here involves a very large real estate project – in this case, the Chicago Convention Center, purported to be a real estate project that was to build a hotel and convention center near Chicago’s O’Hare Airport. We brought this case under two theories that I think are worth briefly mentioning.
Recent CCC Events
One was the alleged false and misleading statements by Mr. Sethi and his companies regarding the investments of these companies and I’ll highlight a couple – but the second I think is worth mentioning here as well. We alleged a scheme to defraud by the defendants in this case in conjunction with the manner in which these companies solicited investments by using the EB-5 visa program, making false statements to USCIS as part of a scheme to defraud the investors in the program. In our complaint, we alleged, for example, that the defendants falsely posted to investors that they had acquired all of the necessary building permits to begin building the investment center and hotel, and that several major hotel chains had signed onto the project, which we alleged was false.
They also provided falsified documents to USCIS – the federal agency, as you know, that administers the program – in an attempt to secure the agency’s preliminary approval of the project, and investors’ provisional visas. Swift coordination between the SEC and USCIS allowed us to move quickly enough to stop this fraud, and preserve most of the investors’ assets. There was actually a court hearing today in which the court discussed the SEC’s motion to swiftly return the $145 million that was frozen to the EB-5 investors, hopefully as quickly as possible. Our hope and our goal here, the goal of our motion, is to actually return these funds to investors in a somewhat unusual way, before the conclusion of our action, with the potential consent of the defendants, so these folks can get their generally speaking $500,000 per investor back within the next several weeks or few months.
A couple of other things I would highlight – we alleged in our complaint that in addition to the false statements about the status of the project, the false statements submitted to USCIS included a fraudulent or false comfort letter from Hyatt Hotels about the status of a potential franchise agreement and operating agreement, as well as in response to requests for evidence from USCIS providing a fraudulent financing letter from the Qatar Investment Authority about the nature of certain promises of funding for the program. Among other things, we allege that there were misstatements about the status of construction, when this construction would begin, building permits, ground breaking and other things.
I’d also note, relevant to our scheme to defraud theory, because I know it’s as I understand a central part of the EB-5 program, part of our scheme to defraud theory had to do with representations made by the defendants regarding their ability to secure jobs, or under the project, which, as I suspect you all know, is relevant to the investors’ ability to ultimately secure the visas that they were seeking, which was of course part of the marketing of the investments into the program. The litigation is ongoing, but this is an example of, from our perspective, the EB-5 visa program and a regional center that ran afoul of the anti-fraud provisions of securities laws, and we appreciated the coordination with USCIS in our ability to bring this action.
DISCLAIMER: This is an UN-OFFICIAL non-governmental transcript of the USCIS & SEC EB-5 stakeholder’s conference call that was held on April 3, 2013 and is accurate to the best of our knowledge but cannot be interpreted or relied on as official guidance from the United States Citizenship and Immigration Service (USCIS) or the Securities and Exchange Commission (SEC). We are providing this transcript for those that were not able to listen to the call but in no way should the following be construed as official policy for either of the agencies, it is simply our interpretation of what we understood from the conversations but should not be relied on in any way for official guidance or policy.