Securities Compliance under the Newly Proposed Legislation: Regional Center Requirements By Clem Turner & Jor Law

Some lawmakers believe that the EB-5 Program, has become plagued with fraud and abuse, and is in need of reform.  To address this concern, on Friday, September 9, 2016, U.S. Representative Bob Goodlatte, chair of the House Judiciary Committee, released a draft EB-5 reform bill.  The bill contained many substantive changes designed to increase transparency and integrity of the EB-5 Program.  This article provides a summary and initial analysis of those  provisions related to enhanced disclosure and securities compliance contained a draft EB-5 reform bill.  These provisions include: (i) enhanced disclosure and reporting requirements for regional centers, (ii) prohibition of “bad actors” and others from participation in the EB-5 Program, and (iii) additional requirements for people who find investors for EB-5 Offerings (such as agents, finders or promoters).  This is the first article in a two-part series.  This article will focus on clause (i) above.  Part Two of this series will focus on clauses (ii) and (iii) above.

Compliance Required for each EB5 Offering

Increased Disclosure

Whenever a regional center wishes to undertake a new project and launch a corresponding securities offering, certain information must be provided to USCIS prior to the adjudication of any investor petition related to this project.  In addition to those materials and documents which are currently required (such as a business plan and economic report) or typically provided (such as management biographies, investment risk factors and potential conflicts of interest), the proposed legislation specifies several new items that must be disclosed to investors prior to their investment.  Some of the additional disclosure items are set forth below:

• pending material litigation or bankruptcies affecting the regional center, the new commercial enterprise, or affiliated job-creating entity (collectively a “regional center affiliate”), or any companies affiliated with a regional center affiliate;
• compensation that has been paid, or will be paid (if known), to any person in connection with the EB-5 investment, including;
  • the name and contact information of any person being paid such compensation;
  • a description of the services which entitle the person to such compensation;
• a description of the policies and procedures reasonably designed to foster compliance with the securities laws (such as internal and external due diligence policies); and
• documentation demonstrating that the regional center consulted with a local economic development agency or municipality regarding the project, which shall address:
  • the number and type of jobs anticipated to be created; and
  • whether the project is consistent with the agency or municipality’s plan for economic development in the region.

In addition, after their investment, the proposed legislation would require every EB-5 Investor’s I-526 petition to include a statement signed by that investor which acknowledges all the fees, ongoing interest, and other compensation paid to anyone as a result of that EB-5 investor’s investment.

Additional Regional Center Obligations

It should be noted that the last two bullet points in the list above do more than just mandate additional disclosures.  These two items actually impose new obligations on regional centers.  A regional center must first have a securities compliance program and a community/municipal development outreach program in place before the regional center can disclose them.  Regional centers should be sure to retain qualified counsel and other consultants to make sure their new policies and procedures will be sufficient. 

In addition, the proposed legislation also requires regional center operators to provide a certification that the regional center and its employees, agents, advisors and attorneys are in compliance with applicable securities laws, to the best of the certifier’s knowledge after a due diligence investigation.  In addition, any new application for a regional center must also include a similar certification.

These certifications place an affirmative obligation on regional centers to make sure they have comprehensive knowledge of a proposed project and are comfortable it.  The certification requires a regional center operator to conduct their own due diligence regarding a project and confirm that the material provided to investors is consistent with this due diligence investigation.  They must also make sure their own regional center policies foster securities compliance.  It is unclear if regional center operators will have personal liability for the certifications required in the proposed legislation, especially in the absence of fraud.  However it is clear that the regional center will face consequences if there are problems related to these certifications or with the projects that such regional center “sponsors” for EB-5 Program participation.

Compliance Required Annually

In addition to the project related measures that are set forth above, regional centers must file annual reports with U.S. Citizenship and Immigration Services (USCIS), designed to keep USCIS abreast of all developments related to any regional center sponsored projects. The reports shall include an update of certain items previously reported in connection with a new EB-5 Project offering as well as certain other items, including:

• a certification stating that, to the certifier’s knowledge, the regional center affiliates are not “bad actors” (as will be further described in Part II of this series) and are U.S. citizens;
• a certification stating that, to the certifier’s knowledge, the regional center is in compliance with applicable securities laws (and has policies and procedures reasonably designed to confirm compliance), and also including the following additional certifications;
  • the certifier has knowledge of the offers, purchases, and sales of securities or the provision of investment advice by the regional center;
  • to the certifier’s knowledge, all offers, purchases, and sales of securities or the provision of investment advice complied with applicable securities laws; and
  • all records, data, and information related to such offers, purchases, and sales have been maintained;
• a certification stating that, to the certifier’s knowledge, the regional center is in compliance with the provisions of the legislation related to the promoters, finders and agents who procure EB-5 Investors;
• an accounting of all EB-5 investor capital invested in the regional center affiliates;
• for each new commercial enterprise associated with the regional center—
  • an accounting of the aggregate capital invested by EB-5 investors;
  • a description of how such capital is being used;
  • evidence that all the EB-5 capital has actually been committed to the project;
  • evidence of the progress made toward the completion of the project;
  • an accounting of the aggregate direct jobs created or preserved;
  • to the best of the regional center’s knowledge, for all fees collected from EB-5 investors:
    • a description of all fees collected;
    • an accounting of the entities that received such fees; and
    • the purpose for which such fees were collected;
  • any securities offering documentation, if there has  been a material change during the preceding fiscal year; and
  • a certification by the regional center that its statements are accurate, to the best of the certifier’s knowledge; and
• a description of the regional center’s policies and procedures that are designed to enable the regional center to comply with applicable Federal labor laws.

It should be noted, that certifications given to the regional center operator’s knowledge, require the certifier to conduct a due diligence investigation regarding the matters being certified.  USCIS may require regional centers to update or supplement their annual reports and may sanction regional centers that: (1) fail to file annual reports; (2) knowingly submit false statements; or conduct themselves in a manner inconsistent with their designation.  The sanctions include: (1) a fine of up to 10% of the EB-5 capital raised, and payment shall not be comprised of any EB-5 investor funds; (2) temporary suspension from the EB-5 program; (3) a permanent bar from the EB-5 Program; and (4) termination of the regional center’s designation.

The annual compliance reports will require regional centers to implement programs that will make sure that the required information is collected periodically, by both regional center affiliates as well as third party developers (if applicable) and delivered to the regional center.  Regional centers may need to consult with accountants or other auditors to design and implement processes that will streamline their collection and storage of the required information.  In addition, any legal contracts between regional center affiliates and third party developers must contain provisions that give the regional center affiliates the right to access this information and strict remedies upon a default. 

Conclusion

Given that there have only been about a dozen enforcement actions by the SEC for fraud in the EB-5 Program, among the thousands of EB-5 Offerings that have successfully launched over the past twenty years, fraud is actually not a widespread problem within the EB-5 Industry.  However, fraud is a problem that must be contained as much as possible.  The dozen or so instances of fraud have impacted the lives of hundreds of EB-5 investors and their families.  Furthermore, the perception of fraud is dangerous to the integrity of the EB-5 offshore investor market.  This could have the effect of hindering the flow of EB-5 capital into the United States. 

As a result, the proposed legislation requires regional centers to independently investigate potential projects and certify compliance with certain laws and regulations.  Hopefully these provisions will reduce fraud and increase disclosure, improving investor confidence in EB-5 project investments.  However, there will be a burden placed on regional centers as they are forced to design and implement new policies and procedures to meet the proposed EB-5 Program requirements.  It will be important for the experts, advisors and lawyers servicing the EB-5 community to thoroughly understand the new rules, so that they can provide effective guidance to regional center operators on the many new facets of the bill. 

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Clem Turner is a Shareholder of Homeier Law PC and manages its New York office.  Clem practices in the areas of general corporate law, public and private securities law and business transactional law.  Clem has counseled numerous corporations and Regional Centers in a variety of industries raising capital through the EB-5 Program on matters of structuring, strategy, securities law and corporate law.   His experience includes EB-5 offerings ranging from “direct” $1 million raises up to complex $400 million raises and everything in between.  Clem has twice been selected as one of the “Top 25 EB-5 Attorneys” in the United States by EB-5 Investors magazine.  He has been interviewed about the EB-5 program by various media sources and written several published articles related to EB-5.  Clem graduated from Princeton University and Georgetown University Law School and is admitted to practice law in New York and California.

Jor practices corporate and securities transactional law in Los Angeles and is a founding shareholder of Homeier Law PC.  Jor maintains a broad-based general corporate legal practice with an emphasis on mergers & acquisitions and finance.  He is most well-known for his unparalleled expertise in alternative finance, including EB-5 finance and crowdfunding, both industries where he is recognized as one of the foremost and influential transactional attorneys in the world.  In addition, Jor is a co-founder of VerifyInvestor.com, the resource for accredited investor verifications trusted by broker-dealers, law firms, companies, and investors who insist on safety and reliability.  These verifications are required by federal laws for generally solicited Regulation D, Rule 506(c) capital raises.  Jor is frequently sought out as a speaker internationally on the topics of capital raising, investing, EB-5 finance, securities, and other corporate matters relevant to attorneys, entrepreneurs, and investors.

Mentions

• The Law Office of Michael G Homeier PC.
• Clem Turner
• UNITED STATES SECURITIES AND EXCHANGE COMMISSION
• Verify Investor, LLC