In what is expected to be the first of many cease-and-desist orders made by the SEC against brokers handling investments in EB-5 investment projects, all EB-5 organizers and sponsors, through their due diligence, should be sure that the brokers involved in their projects are operating in compliance with applicable SEC rules. Investors should also be conducting a similar due diligence. Lastly, brokers should be sure that either their activities are limited such that they are not deemed to be brokers/dealers, or register under the applicable SEC registration schemes.
On June 23, 2015, the Securities and Exchange Commission ("SEC") instituted public administrative and cease-and-desist proceedings pursuant to the Securities Exchange Act of 1934 ("Exchange Act") against Ireeco, LLC and Ireeco Limited, for illegally brokering investments by foreigners seeking U.S. residency through the U.S. government’s EB-5 Immigrant Investor Program.
According to the SEC, Ireeco LLC, originally located in Boca Raton, Florida, and its successor Ireeco Limited, a Hong Kong-based company and 100 percent owner of Ireeco, LLC, failed to register with the SEC and acted as unregistered broker-dealers in connection with sales of securities involving the EB-5 Program. The two brokers operated their business primarily through their website. Through the website, the brokers offered to assist foreign investors with choosing the right EB-5 projects, and took steps to direct potential investors to regional centers. (See http://www.sec.gov/litigation/admin/2015/34-75268.pdf.) The SEC found that these regional centers had entered into "referral partner agreements" with the brokers, and that the brokers received compensation from the regional centers based on a fixed portion of the "administrative fee" the investors paid to the regional center. According to the SEC, the brokers were paid fees for actively soliciting over 158 foreign investors who together invested a total of $79 million in the regional centers.
The SEC concluded that the brokers willfully violated Section 15(a) (1) of the Exchange Act for engaging in the business of effecting transactions in, or inducing or attempting to induce the purchase or sale of, securities for the accounts of others without registering as a broker-dealer with the SEC or without associating with a broker-dealer registered with the SEC. The brokers agreed to a settlement with the SEC consenting to the SEC’s order to cease-and-desist from committing or causing similar violations in the future. They also agreed to administrative proceedings to determine whether they should be ordered to return their allegedly ill-gotten gains, pay penalties, or both.
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