Immediately following the four presentations, subject matter experts from the SEC were available to answer a wide range of questions from the callers.
Question: Let’s think in terms of a non-regional center program for a moment. This is going to be a $4 million to $5 million investment. The people in the United States are using brokers in China or Korea or somewhere else to solicit for them. They do no solicitation inside the United States, nor will they accept anybody to apply who’s a resident in the United States. They might have a webpage that describes their EB-5 investment. Is this webpage going to get them in trouble as soliciting from the United States? Especially if the webpage says that it is not an offer of solicitation, and that can only be made to a prospectus or a CIM locally – how much do they worry about that is my question?
Joe Surey, Trading and Markets Division:
If I could get you to clarify a little bit, just so I make sure I understand, it’s a person in the United States who is, through a webpage, doing exactly what? Soliciting investments for let’s say Chinese residents to participate in the program?
Audience: I believe that might run afoul of law and regulations – but let’s say that you’re building an office building in downtown Chicago, and you’re going to raise $20 million at $1 million apiece from 20 investors and all of the investors come from abroad. All of the offers are made by brokers abroad, and you don’t do any solicitation or advertising inside the United States – I think you’d agree up to that point, they’re probably exempt under Reg-S. But let’s say they have a webpage that merely describes their project as an EB-5 program so that somebody outside the country can look at pictures of the building they’re going to build and that sort of thing. Just a general notification about their project that is not an offer of solicitation to sell, but just makes the availability of it aware.
Karen Wiedemann, Division of Corporation Finance:
It’s a fair question, but not one that we can answer. We really have to confine ourselves to talking about the rules and regulations and how they work and we’re not permitted to give legal advice or to express views on particular facts or particular transactions. Those are questions that might make sense to ask of your own counsel. The one thing that I would point out, though, is that in the context of the exemptions that I was talking about for private placements and Reg-S offshore placements, where in both cases solicitation activity in the U.S. would be problematic, you should be aware that the definition of ‘offer’ is a very broad one. So any medium that sort of is broadly available to the public very much risks being considered to be an offer of securities, because it is intended to solicit offers to buy securities.
That’s sort of a technical answer. That’s about as far as I can go. So, good questions to ask your own counsel, but you shouldn’t assume that just because something says it isn’t an offer that it wouldn’t be considered to be an offer under the terms of the securities laws that apply.
Question: If you’re a broker overseas, let’s say a Chinese immigration agent – to what extent are you allowed to have an office or conduct any kind of marketing activities in the U.S.? Let’s say there’s no marketing activities going on, but they simply maintain an office somewhere in New York for just routine operations. Is that something that could blow their Reg-S exemption? Maybe too specific a question, but I’d like to have some sense the extent to which an overseas broker covered by Regulation S can sort of drift away from its own shores, into the U.S., without blowing its Reg-S exemption.
Joe Surey, Trading and Markets Division:
Before the Reg-S specific reference, I was thinking this is more directed towards me, and I would say that as I began my comments with the territorial approach, this would be a potential problem for broker-dealer status. And the way I would use an example is what we not infrequently see, not in the context of the EB-5 program, but elsewhere, in particular in the Miami area. There are entities that will have offices in Miami or Fort Lauderdale, so Florida, and its entire business is soliciting of non-U.S. investors to purchase non-U.S. securities. The mere fact that they have the territorial presence in the U.S., even though they’re selling foreign securities to non-US residents, triggers the broker-dealer registration activity.
Audience: Can I follow with one example? Sort of the opposite. You have a U.S. citizen soliciting investors in China, goes home once a year to visit mom and dad, but otherwise, he’s living in China. Would that person have a problem? Should that person be licensed as a broker-dealer or broker-dealer rep?
Surey:
That’s hard. You can’t really answer that, just based on those facts. If in fact the person is not doing any activity in the United States, at all, and lives abroad, and is engaged in soliciting a transaction, he may or may not have an ability to rely on exemptions, but it’s going to be very fact-specific. If it’s somebody here who frequently goes abroad to solicit investors for EB-5 programs or whatever and the activity abroad is just one part of what he’s doing, then the question changes significantly. It’s more likely there would be a registration issue on the table. Obviously my assumption is first it’s being paid in connection with his activity, if it’s not being paid, then it’s less of an issue.
Audience: Well, let’s say that person is getting finder’s fees overseas. U.S. citizen, lives almost entirely overseas. Let’s say entirely overseas. Does U.S. citizenship by itself render that something that should be within Reg-D?
Surey:
I think you’re confusing the 33 and 34 Act Statutes. I’m speaking about the person’s status as a potential broker-dealer, which would trigger registration under 15A of the 34 Act.
Audience: I’m basically – if I could boil it down to its simple terms – should that person, that U.S. citizen overseas, start thinking about taking the Series 7 or Series 79 exam and associating with a broker-dealer firm, or may they just regard themselves as a fonder like any Chinese broker over there, the immigration agency, and just think he doesn’t really have to go through that?
Surey:
I would caution to look at where the person really resides. I mean if the person is truly living outside the U.S. and all the activity is taking place outside the U.S., then it’s less likely in that scenario, so I can’t say with certainty that there wouldn’t be a broker-dealer status question if he’s being paid for putting together a foreign investor with a U.S. EB-5 investment.
Question: I’m also an immigration attorney and member of Investment USA. I’m not a securities attorney, so forgive me if my question is a little bit confusing. But I want to go back on what’s happening now with the EB-5 regional center and EB-5 projects regarding broker-dealers and your definitions of what an investment advisor is. The reality, as I see it, is most of the investors are being pooled together by, as the gentleman before said, usually brokers that are in places like China. These brokers usually are not registered with the SEC, because most of their – not to say 99 percent of their activities – are in China and they might have an office in the U.S. for liaison only.
But I’d like to know that if the SEC is concerned about fraud, are they also – let’s say in China and other countries, brokers are getting finder’s fees. That’s the reality of the EB-5 business. Does it need to be, number one, a disclosure by the EB-5 project or EB-5 regional center project, as to the investors, as to their finder’s fees are being paid to brokers? And, number two, if the brokers do not disclose the finder’s fees to the investors, what are the repercussions either to the brokers, by the SEC, or to the EB-5 regional center because of, again, I understand it as an immigration attorney _ _ fiduciary duty by a broker-dealer to an investor, but it may be a fiduciary duty by the investment advisors, which you may interpret to be the EB-EB-55 regional center project? So I need a little bit of guidance generally on the fiduciary duties and the disclosure element. And then maybe that could go to Barbara.
Karen Wiedemann, Division of Corporation Finance:
I’ll try to respond to the disclosure question as best I can. This is also in the category of sort of very specific situations that we can only address in broad outline. But it connects to the comments you’ve heard already about the fact that even when transactions are exempt from SEC regulation, they’re not exempt from the anti-fraud provisions of the federal securities laws, and so you need to ask yourself from the standpoint – have you provided the investors with all material information that they need to make a fully informed investment decision? And obviously things like use of proceeds and payment of fees and potential _ _ _ between promoters of investments and _ _ immediately to mind as potentially material elements that ought to be disclosed very plainly and clearly and prominently to any potential investor. So I can only answer it to that extent, but that seems pretty plain to me.
Steve Collins, Division of Enforcement:
Just staying at the hypothetical level, I’ve seen examples in the EB-5 context where there are disclosures about such things as payment of fees and very clear disclosures about the use of the $500,000 or the $1 million and the use of the administrative fees, and what the administrative fees might be used for. So without opining on what is good and bad disclosure and what may or may not run afoul, I’m just thinking in terms of situations where I have seen clear disclosures around how funds are intended to be used, and I know that in this program, there’s often a distinction in some investments between the $500,000.00 or $1 million and the use of the administrative fees, which is usually described in some detail. I just note that, to give an example where you might see that kind of disclosure, but to Karen’s point, again, the inquiry from an anti-fraud perspective is simply under a Supreme Court precedent – what would be material to a reasonable investor, and that’s a question you’ll have to consult with counsel on that we couldn’t tell you in a hypothetical way.
Audience: Just as a follow up, what do you think about the issue of the broker-dealer having no fiduciary duty to the investor, and if the investor says, oh, I did not know, for example, that the administration fee which could be classified as a marketing fee, is really a finder’s fee to the broker – the broker did not disclose that to me, and that could be a broker in China or any other country. Then _ _ that material to maybe a misrepresentation would the SEC, could the SEC, go after the broker, or would the SEC go after the EB-5 regional center under those circumstances?
Joe Furey, Trading and Markets Division:
Well, I guess a couple things come to mind. First, I think is a flat _ _ statement of law an investment advisor has a fiduciary duty to his clients. A broker-dealer may have a fiduciary duty to his clients depending on the terms and conditions and the nature of the specific transaction in place. And as to – and Barbara can specifically comment on the advisor fiduciary duty aspect to it, but in terms of what would the commission do, it’s going to depend on, as Steve articulated and Karen, it’s ultimately the core here is going to be an anti-fraud analysis as to what’s taken place and what the disclosure is. And the other issues, I would say, would be tangential, though not unimportant, but tangential to the anti-fraud issues.
Collins:
I just want to make sure, I think between Karen’s comments and mine, so that there’s just maybe a little more clarity. There’s a latent issue I think we’re discussing and I want to be direct about it. We think often in terms of false or misleading statements when we can think about the anti-fraud jurisdiction and someone committing fraud, lying for example, to investors. The point you raised, sir, about things that may not be disclosed, can also be a basis for our anti-fraud jurisdiction. So from our perspective, failing to disclose material things to investors can run afoul of the anti-fraud jurisdiction, so it doesn’t have to be a lie. It’s essentially a lie from our perspective if you make statements to investors that leave out material information. I think that’s what you’re getting at with your question, I just wanted to make sure that was clear to the folks on the call.
Audience: I think that even when we are talking about the USCIS draft policy memorandums, we’re talking about changes, material changes. We’re talking about the issue of what is material. I think that just as we would require and ask from the USCIS for clarity, which would lead to predictability, I think we definitely need to continue the dialogue with the SEC, because without the clarity from the SEC, we can’t have a successful EB-5 program, and so when you talk about what is material filing to disclose material facts, again, we need to have some clarity as to what is ‘material’. For example, if EB-5 regional center project says, well, we are using the administration fees for marketing efforts, is that enough to file a disclosure to encompass that, yes, we’re going to be using – would that be enough if from the administration fees that the finder’s fees are to be paid to the brokers? That’s the clarity that we really need.
Cohen:
I think just from the SEC’s perspective, while we have very much enjoyed and will continue to enjoy collaborating with USCIS with respect to this program as appropriate, and we appreciate the opportunity to share some general principles with you all, from our perspective, the EB-5 program – the investments in the EB-5 program are just one part of the very broad capital markets, potential investments in our capital markets, that people make. The investments themselves are unremarkable in the sense that people in the U.S. and outside the U.S. invest in our capital markets all the time, and just as a practical matter, we hate to keep going back to this refrain, but people are going to have to engage securities lawyers who are skilled in these things. We’re unlikely to be the source of ongoing regular guidance with respect to the EB-5 program specifically, but we suggest you consider that there are lots of very experienced securities lawyers in the United States who are very well qualified to answer these questions on the areas that each of us have touched on.
Question: I have a question relating to the Chicago Convention Center that is currently ongoing, and that is whether or not _ _ _ _ _ too specific question, but whether something _ _ _ would direct the $500,000 investment to an escrow account that is located in the United States rather than sending the money back to the country in which it originally originated from?
Steve Cohen, Division of Enforcement:
As the motion we filed recently is actually available publicly. It’s filed with the court in Chicago. My general recollection is that we looked to the terms of the agreements by the investors, and the origin of the funds, and that our goal is to return monies to investors in most instances from the perspective that these funds were held in an escrow account, and our expectation is that the monies will be returned from to the origin from where the funds came from into the escrow account. I can’t go any deeper than that but to tell you that our position is on record and filed with the court.
Audience: _ _ the investor request that they be _ _ _ located in the U.S. it would not be something that the SEC would consider?
Cohen:
That, I believe, based on our request to the court, it’s possible that those requests might be able to be taken up with the escrow agent. We are not intending that the commission administer the return of funds.
Audience: And what would be the escrow agent?
Cohen:
The escrow agent is Sun Trust – I don’t have the name or other information handy.
Question: I have a few questions that I think can be answered in a general manner, and they’re pretty practical or pertinent to the regional centers that I’ve come in contact with. One is – with the investment company act of needing to register with funds that would be greater than 100 accredited investors, I’m wondering if there’s a concern about that and especially if we’re using Mr. Sethi as an example, it seems like he had 250 investors, and if you could speak to that?
Another would be with the safe harbor issue. I understand that there may be part of that under that exemption a limit of one offering per year as an understand reasonable amount. Then I have a question as to whether Reg-S and Reg-D can actually be used as exemptions simultaneously with the flow of information from the U.S. easily around the world? And then my last one would be to clarify non-U.S. investors. And as an example, if there is a foreign student in the U.S. that is paying foreign tuition and has a visa just to come to school or to go to school, maybe they’ve been there two or three years, is that considered a U.S. person or not?
Barbara Chretien-Dar, Division of Investment Management:
I will try to answer your first question. I think you’ve got a total of four different questions going on. With respect to the regional center and the enforcement action, the investment company act will only be triggered if the investment vehicle, the pooled investment vehicle, meets the definition of an investment company. I don’t think that enforcement case it actually met the definition of ‘investment company, i.e. the pool was not necessarily investing in securities. I think it was real estate. So there is an exclusion available for pooled investment vehicles that essentially invest in real estate or real estate-related interest. The Company Act I don’t believe was triggered in that enforcement action. I think that answers your first question.
Audience: My second question had to do with the safe harbor from broker-dealer registration. And you correctly point out that 3A4-1, which is the rule, does have a limiting factor that you can do this engagement activity once in a 12-month period. The one thing I would point out, though, is that that is a non-exclusive safe harbor, and failure to meet the terms of 3A4-1 does not by definition mean you are a broker-dealer.
Karen Wiedemann, Division of Corporate Finance:
I think your other two questions are for me. One of them was whether it would be possible to conduct a non-registered securities offering in the U.S. in reliance on Regulation D and offshore in reliance on Regulation S – the answer is yes you can. If you meet the conditions of both rules, then, in principle, that’s certainly a route that you can go down. Your last question I think was about the nature of who is a U.S. person for purposes of Reg-S. Again, if you go back to the broad outline that I provided, one of the basic requirements for Reg-S is that the offer and sale be an offshore transaction. A U.S. person for that purpose is someone who is not in the U.S. – because what is keyed off of is this simple fact that the offering and sale are not occurring here. So if someone is in the United States, that’s not offshore – that’s here.
Audience: If I can continue with that question – if a student goes back on spring break or Christmas or whatever, then is that considered a non-U.S. person?
Wiedemann:
I’m sorry that I can’t give you a more satisfactory answer than to say that the focus is really where the offer and sale are occurring and that how you structure your transaction is going to be up to you, but the general principles are what they are.
Question: You mentioned something about the Jobs Act. Can you give me a little detail around how is EB-5 potentially going to be tied to that, or not subject to that?
Karen Wiedemann, Division of Corporate Finance:
What I wanted to point out, because people may have followed this in the news, is that under the Jobs Act, the SEC is mandated to change some of the rules under rule 506 of regulation D to permit general solicitation in certain instances. I just wanted people who were broadly aware of that to know that although there are proposed rules out there, they haven’t been finalized and adopted. There are no rules in effect and so the prohibition against general solicitation is still fully in force for all of Regulation-D.
Question: My question has to do with the attorney exclusions that we discussed earlier. Could you please clarify how someone like an immigration attorney like myself and our office who represents sometimes projects, sometimes regional centers, sometimes investors, how that would affect an immigration attorney like myself and our office, and how we’d be able to use that, or things we should avoid?
Barbara Chretien-Dar, Division of Investment Management:
I can talk generally about the exclusions, but whether or not an exclusion is available in any particular case is going to be very, very fact-specific. So in general, an attorney or accountant can rely on the exclusion under the Advisors Act from the definition of ‘investment advisor’ if their investment advice is incidental to their professional practice. So if you are an immigration attorney and you are being compensated for providing legal services to clients for immigration advice, if you are providing, along with that legal advice, advice about particular investments – say you recommend that the client invest in somebody who’s raising funds for a hotel project – if that advice relates to securities, that advice must be incidental to your legal services.
So the key is that you want to avoid falling into the definition of ‘investment advisor’ which is somebody who is in the business of providing investment advice for compensation. So the way to view it I guess on – and I’m really oversimplifying it here – is you want to provide a lot of legal services and any investment advice you give is on the side and it’s very little and you get no extra compensation for that, i.e. your compensation is for legal services. Once you start getting compensated for the investment advice you provide, you are on pretty thin ice in terms of the definition. Does that help at all?
Audience: I think what we normally do and actually I work for one of the previous callers in Orlando, and what we do is more along the lines of – of course, as I said earlier, the immigration for investors, providing their petitions or sometimes for projects to make sure their legal or financial infrastructures are in place for the EB-5 program. So it sounds like, of course, be careful, but I think we might be okay.
Chretien-Dar:
Like I said, it’s all facts and circumstances. There are a number of no-action letters – you might not know what a no-action letter is (laughter). The staff provides informal guidance very often on very close calls or interpretive questions, and if you go on the SEC’s website and you click on the Division of Investment Management, we have no-action letters that are publically available, and you can search those for either by section or by topic. But the section you would want to search under is section 202-A-11, which is the definition of ‘investment advisor’. You might want to just browse around the Division of Investment Management’s segment of the website and see, and look for no-action letters under the definition of ‘investment advisor’. They can be helpful in terms of providing specific fact-patterns and when the staff would view somebody as an investment advisor or not. Just keep in mind, those are staff views, and they are informal guidance.
Question: My question concerns the Supreme Court’s Morrison decision and how – what _ _ decision on the Morrison’s decision and for those many on the call won’t know what that is, but that was a Supreme Court decision that held that Congress did not intend for the anti-fraud provisions of the 1934 to apply extra-territorially, and in particular, I think this question is suited for enforcement and for creating markets. The reason – magistrate judge decision just happened in Illinois that related to broker-dealer registration and the Morrison decision.
Steve Cohen, Division of Enforcement:
I probably won’t go too deep on this other than to say – suffice it to say, we didn’t, in the Chicago case, for example, we didn’t view Morrison remotely as an impediment to our ability under rule 10B-5 to bring a fraud action against these individuals. Of course, we’re aware of the jurisprudence that’s developing around Morrison. Obviously, to the extent that for some of the _ _ these are going to be facts and circumstances cases around the offerings. And obviously to the extent that these offer and sales take place post-Dodd-Frank, that they also provide some additional guidance, because Dodd-Frank has a provision for offer and sales post-Dodd-Frank that addresses some of the issues that arise under Morrison. But just at a 50,000 foot level, for the majority of circumstances that I’ve seen with regional centers and EB5 offerings out of the United States of foreign investors, our perspective is that Morrison would not be an impediment to us bringing an action under the federal securities laws.
Question: I’m a corporate securities partner that practices heavily in the 40-Acts as well as the 34 and 33 act. I’m going to ask about an issue that comes up frequently, and that is – looking at the interpretive guidance that the SECs provided as well as no-action letters, when you’re dealing with broker-dealer activities and solicitation of investors, there’s lots of material. What we see here is broker-dealer activity or activities that you don’t normally see in the initial securities offering space _ _ offshore broker-dealers that are soliciting issuers here in the United States. Everything is always focused on protect the investor, full disclosure, ensure that the investor is getting adequate disclosure.
And that’s with a lot of the interpretive guidance and action letters speak to – in this situation we have offshore broker-dealers or finders or migration agents sending representatives to the United States or setting up offices in the United States not to solicit investors but to solicit issuers so they can then offer an offshore completely and raise capital from offshore investors through their offshore operations using only instrumentalities offshore, not interstate commerce, to fulfill the capital raising or capital formation needs of domestic issuers. So again, everything speaks to the side of the equation where you’re soliciting investors.
But here, the focus is the activity of soliciting issuers. Does the presence of a representative in the United States, whether an office or infrequent travels to the United States to solicit issuers, or make issuers aware of the availability of offshore broker-dealers, trigger registration under the 34 act?
Joe Surey, Trading and Markets Division:
One thing I would note here is that broker-dealer activity runs a wide gamut of various services. And one of the things that struck me as you were describing that is that investment banking firms very often go to U.S. issuers and solicit the issuer to structure a financing or a sale or a purchase and the longstanding view of the commission staff is that activity, investment banking activity, even if you’re looking at only through the lens of focusing on the issuer, still gets into activity which generally speaking would probably trigger broker-dealer registration.
Question: I’m a real estate broker in New York. We’re in the process of setting up an EB-5 regional center. Basically, I understand we’re going to be investing in real estate, to stress real estate and so forth, creating jobs and whatnot, but we’re also going to be investing with other types of investment such as bank notes and tax lien certificates. The question is since we’re dealing with those two, we’re buying the bank notes directly from the banks, not from a securities broker, and when we do the lizz-penances we’re buying it directly from the municipality at a local government that issues. The question is – do we need to register as a registered investment advisor? Do we have to set up the EB-5 center? Going to be a separate corporation than the limited partnership that’s going to own these instruments _ _ the real estate?
And another question is if we’re going to – if we have to go to this, do we just need one status for _ hedge fund or investment company to __ - is it okay to also set up a feeder fund outside the U.S. so we don’t exceed the 100 investor rule as since none of those individuals are going to probably be U.S. investors except for the occasional institutional investor?
Karen Wiedemann, Division of Corporate Finance:
I think those are all really good questions for you to ask your own lawyer.
Barbara Chretien-Dar, Division of Investment Management:
I would echo that. It sounds like you are contemplating a fairly complicated structure that may implicate pooled vehicles, an investment advisor, and kind of a fund-to-fund structure. So I would highly recommend seeking out competent securities counsel.
Question: Understanding that anti-fraud provisions are going to apply in any and all events, if all of the promotion and sales of an investment is done overseas, nothing in the U.S., does a water’s edge analysis of why as to whether a person conducting those activities is required to have a U.S. broker-dealer license, and to follow up on that, does the person’s residence in the United States have any bearing on the analysis? Again, all the activities are conducted overseas.
Joe Surey, Trading and Markets Division:
The framework is not going to change. It’s going to be – what is the activity? Is it being done in the U.S.? So from your scenario, if someone’s totally abroad, and has no jurisdictional hook here, then it’s difficult to see how the status questions are triggered. If you’re here, with most of the activity – with a presence but most of the activity takes place abroad relating to an investment here, the status question squarely is presented, and if they’re being paid in that context, then very clearly have a broker-dealer status question that will, depending on the facts and circumstances, may lead to the conclusion registration is appropriate.
Audience: And that’s even if all the activities are taking place overseas and the U.S. person does no activities relating to the regional center in the United States?
Surey:
Right, the thing I come back to is I think the clearest example that makes this point crystal clear and simple is that I rent an office in Miami. I spend 300 days a year traveling in South America and Central America soliciting rich potential clients to invest in foreign securities. All that activity takes place offshore involving non-U.S. persons, but because I have the territorial presence in the U.S., the status question is squarely raised, and there’s guidance from the commission and releases that activity because of the presence requires registration status.
Question: I’m really curious about the potential new regulations under the Jobs Act. I understand that they’re in the works. Could you inform us about when they’re going to be issued or when a proposed rule can be made available to the public? Seems like it would be a tremendous benefit, reducing the amount of paperwork and uncertainty.
Karen Wiedemann, Division of Corporate Finance:
As I said, rules have been proposed. They’re available on our website. You can look at the rules, you can look at the public comment that’s come back in response to the rules. We’re working on finalizing recommendations to the commission, but we don’t have a timetable for when that process is going to be completed.