I’m new to the EB-5 world. What I’m seeing here almost makes me want to run screaming back to my old world, where I practiced corporate and securities law (including at the SEC) for 30 years.
How are you getting away with violating the securities laws? I’m seeing violations of Section 5 of the Securities Act all over the place and this has serious implications for the success of the projects that are being funded by EB-5.
Let’s start with some legal fundamentals:
- The term “security” is very broad and includes many types of investment contracts including LLC and LLP interests, in addition to common and preferred shares.
- All offers and sales of securities made using the means of interstate commerce (phones, email, internet, mail) must be registered under the Securities Act or made in compliance with an exemption from registration.
- The only exemptions from registration that are available to EB-5 offerings are conditioned on some very specific restrictions on publicity.
- The term “offer” is very broadly interpreted by the SEC and includes any attempt to promote the offering or condition the market for the securities offered.
Most EB-5 offerings purport to rely on Regulation D or Regulation S under the Securities Act, or both. Both have strict rules limiting publicity. The conditions to Regulation D include a prohibition on “general solicitation or general advertising” (GSA). Regulation S includes a prohibition on “directed selling efforts” in the United States (DSE). GSA and DSE are not identical but they do overlap. The following activities would all violate both prohibitions:
- An interview by a US radio station with the CEO of a company seeking funding in which he talks about the EB-5 program and mentions that his company is seeking funding.
- A video interview posted on an information or news site in which the sponsors of a project seeking EB-5 funding talk in detail about the project and discuss the number of jobs to be created by the project.
- Postings of available projects on Regional Center websites.
It doesn’t matter that only certain people can actually buy the securities. It’s the offer that is violating securities law in these cases.
The remedy for a violation of these prohibitions is recission. This means the entity selling the securities has to offer to buy them back. You can easily imagine a case in which an EB-5 project getting close to full funding fails because it has to refund early investors.
In all of the above cases, there are ways to publicize deals properly. This might include password-protecting information and complying with “safe harbors” for information aimed at overseas markets. But if you aren’t doing that, then you may be violating the securities laws. EB-5 offerings don’t exist in their own special universe with its own special securities laws. If you sell securities, you must comply with the laws that regulate the sale of securities, including restrictions on publicity. It’s as simple as that.