I suppose that I could have named this chapter “Presenting the Right Client to the Right Project.” Either title works, but I feel strongly that, although you are probably involved in promoting an EB-5 project, nevertheless, the client is more important than the project. I realize that we have already mentioned this, and we will continue to do so, because putting the project ahead of the client is setting the table for failure. There is, in my opinion, a vast difference between selling an idea, product, service or project, and having any of those “in stock” to achieve customer satisfaction by making your service or project the means to the customers’ ends.
The Key Is “Suitability”
The Financial Industry Regulatory Authority (FINRA) recently issued an opinion on Rule 2111 as it applies to EB-5 programs and, in particular, the need to keep the client’s motivations uppermost in the presentation of EB-5 projects and opportunities to those clients. The rule is not exclusive to the EB-5 program, but it is applicable to security or investment strategy involving a security. Because most EB-5 projects are pooled investments, activities are regarded as comparable to private placement securities.
Simply put, Rule 2111 is about ethics, and it embraces two principles: reasonable basis suitability and customer-specific suitability. Let’s take a closer look at each of these.
Reasonable Basis Suitability
This principle is the broader of the two, and it means that anyone who is promoting an EB-5 project must first do his homework by thoroughly investigating both the legitimacy and the viability of any project before undertaking to promote it. In other words, the fact that your cousin Vinnie is head of the project is not adequate to prove reasonable basis. In fact, it may raise some real concerns. The actual rule states that a project promoter should “at a minimum, conduct a reasonable investigation concerning the issuer and its management; the business prospects of the issuer; the assets held by or to be acquired by the issuer; the claims being made; and the intended use of proceeds of the offering.”
You should perform whatever amount of due diligence is necessary to ensure that a particular project is consistent with EB-5 requirements, is legitimate, and is viable to the extent that it appears in every way to be, at minimum, suitable for some investors.
Customer-Specific Suitability
Determining the Reasonable Basis is like selling Chevy pickups. The owner of the dealership has a reasonable basis to believe that Chevy pickups are suitable for at least some buyers. From a practical standpoint, however, he also realizes that Chevy pickups are not suitable for everyone. For instance, if a customer visits the dealership looking for a new car for his family, which includes his wife and their five children. Regardless of his own reasons for selling pickups, e.g., special manufacturer incentives, he must realize that a pickup is not suitable for this customer.
In that example, it would be a stretch to imagine that the dealer could convince the customer to purchase a pickup. For one thing, the customer knows that it does not fit his needs. The same may not be true of a Chinese investor, especially one who has not seen the actual project or the details of it.
The presenter of an EB-5 project needs to profile each potential customer financially, and especially must understand the investor’s objectives versus his or her risk tolerance. This is nothing beyond what any financial advisor should normally do. All customer-specific suitability means, is that this must be done within the context of whether or not the project is suitable to the extent that it fits the client’s immigration and investment goals.
All of this seems to be reasonable, and it is. On one hand, it’s worrisome that there is any need at all for such guidance; but on the other, it’s encouraging that the guidance is out there. The fact that the government has provided such guidance clearly demonstrates that U.S.-based oversight Agencies want the EB-5 program to succeed, not to the singular benefit of a few, but to the benefit of all.