Questions EB-5 Regional Centers Should Be Asking When Purchasing D&O Coverage

Questions EB-5 Regional Centers Should Be Asking When Purchasing D&O Coverage

As the EB-5 program continues to expand and regional centers have attracted increasing attention from foreign investors seeking to become permanent lawful U.S. residents, there has been a corresponding increase in regulatory scrutiny of EB-5 investments. The increased attention has resulted in civil lawsuits brought by the Securities and Exchange Commission (SEC), and criminal prosecutions by the Department of Justice (DOJ).

To minimize exposure and unwelcome scrutiny by regulators, as a starting point, it is critical to develop and implement a robust compliance program, particularly where the investments qualify as state or federal securities. Compliance, however, is not enough. Even if a strong compliance program is in place, there is no guarantee that an EB-5 regional center will be immune to a regulatory investigation and accompanying legal proceedings, or a suit brought by a disgruntled investor. The center’s exposures in these situations can be enormous, and therefore, it is imperative that regional centers purchase (and annually renew) directors and officers (“D&O”) insurance policies. Broadly speaking, a D&O policy protects an entity (here, the center), and its officers and directors from Claims alleging Wrongful Acts against them, by indemnifying the covered parties for (i) legal expenses in defending against the claim and (ii) amounts paid in settlement or adverse judgment.

D&O policy terms vary widely, as does the coverage provided. It is error to view these policies as standardized and off-the-shelf, and hence not amenable to negotiation of terms by the prospective policyholder. In fact, an experienced broker can assist a center in expanding the coverage and tailor it to particular risks and exposures. Here are several of the key questions the centers and their D&Os should be asking when pursuing this critical coverage:

1. How broad is the “Claim” definition? – D&O policies provide coverage for “Claims” made against directors and officers, therefore, the center should ensure that “Claim” is drafted in the broadest manner possible, and specifically defined to include coverage for regulatory/SEC investigations, securities claims, employment claims, foreign extradition requests and derivative shareholder requests and their foreign equivalents.

2. How broad is in the investigation coverage? – Coverage for a government investigation should be triggered by a subpoena, formal order of investigation, or any formal investigative proceeding where an Insured is the subject or target of the investigation. Coverage should not hinge on whether the Insured is identified in writing as a person (or entity) against whom a proceeding may be commenced, because in reality, investigative documents rarely state as much.

3. Is there coverage where fraud is alleged? – Fraudulent or criminal behavior are always excluded from D&O coverage. However, policies will generally indemnify costs in defending against a claim alleging such fraudulent or criminal conduct, albeit subject to a final adjudication of the fraudulent or criminal conduct. To ensure the broadest coverage, the trigger of the fraud/conduct exclusion should be conditioned on the establishment of a “final, non-appealable adjudication”, which should ensure defense costs are covered up until that point. In addition, words without a distinct legal definition, such as “dishonesty” should be removed from the exclusion.

4. Does the policy cover alleged Wrongful Acts in connection with a securities offering? – Some D&O policies specifically exclude coverage for claims relating to securities offers or sales. This exclusion should be removed, or a different policy should be purchased.

5. Are Insureds covered for Wrongful Acts that predate the policy’s inception? – Many D&O policies contain a Retroactive Date Exclusion. Coverage is eliminated for all wrongful acts that precede this date. Often, the insurer attempts to make the retroactive date coincide with the policy’s inception date, thereby drastically reducing the coverage. This date and exclusion should either be removed entirely, or pushed back as early as possible to minimize the exclusion’s impact.

Given the complexity surrounding the state and federal securities laws governing investments, and the serious nature of a regulatory investigation, EB-5 regional center D&Os should consider hiring legal counsel prior to placing their D&O coverage to confirm that broad coverage is obtained and gaps are eliminated, and to ensure that compliance programs are adequate and up to date.



  • New York

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