Securities Compliance under the Newly Proposed Legislation: Participant and Promotor 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 article is the second in a two-part series.  Part One of the article focused on clause (i) above.  This article will focus on clauses (ii) and (iii) above.

Limitations on Program Participants

Apparently, the drafters of the proposed legislation believe that those who have committed fraud in the past, may be likely to commit fraud in the future.  In an effort to maintain high integrity standards in EB-5 offerings, the proposed legislation would bar certain people (referred to as “bad actors”) from participating in a regional center affiliate, if they:

• have committed crimes involving fraud or deceit in the past ten (10) years;
• have a civil violation resulting in liability in excess of $1 million, involving fraud or deceit; or
• have been imprisoned for more than one year.

In addition, there are limitations on anyone subject to a final order, for the duration of any penalty imposed by such order, of any Federal or State securities commission or other relevant state agency that regulates securities, banking, insurance, or other financial matters, that:

• prohibits fraudulent, manipulative, or deceptive conduct; or
• bars the person from;
  • association with an entity regulated by such commission, authority, agency, or officer;
  • appearing before such commission, authority, agency, or officer;
  • engaging in the business of securities, insurance, or banking; or
  • engaging in savings association or credit union activities.

Furthermore, the proposed legislation would ban any person who was found to be engaged in, or has ever been engaged in, or seeks to engage in:

• any illicit trafficking in any controlled substance or illegal drugs;
• any activity relating to espionage, sabotage, or theft of intellectual property;
• any activity related to money laundering;
• any terrorist activity;
• any activity constituting or facilitating human trafficking or            a human rights offense;
• any activity which would be grounds for the inadmissibility of a foreign national; or
• the violation of any statute, regulation, or Executive Order regarding foreign financial transactions or foreign asset control.

Additionally, anyone who is, or during the preceding 10 years has been, included on the Department of Justice’s List of Currently Disciplined Practitioners; or during the preceding 10 years has received a reprimand or otherwise been publicly disciplined for conduct related to fraud or deceit by a State bar association of which the person is or was a member, will be prohibited from participating in the EB-5 Program.

Finally, only U.S. citizens, permanent residents, or U.S. nationals can be involved in a regional center. Foreign government agencies are barred from any direct or indirect involvement with a regional center, new commercial enterprise or job creating entity.  However, it is doubtful if this provision is motivated by fraud prevention.  It could simply be a desire to make sure that the EB-5 Program is only beneficial to the US economy.

In order to enforce these new requirements, USCIS will conduct background checks on all persons involved with a regional center affiliate, and will notify the applicable regional center if there are any persons involved with the regional center affiliate who are bad actors.  The regional center will have 30 days to terminate their relationship with the prohibited individual. USCIS may terminate regional centers that knowingly involve a barred individual or foreign government entity.

Compliance by Promoters of EB-5 Offerings

The proposed legislation would require all direct and third party promoters (such as offshore migration agents) of the issuer of securities in an EB-5 offering to comply with the rules and standards which may be prescribed by USCIS and any applicable Federal or State securities laws, to oversee regional center promotion, including rules related to:

• registration with USCIS, which
  • may be limited to identifying and contact information of such promoter and confirmation of the existence of the written   agreement required below and
  • shall not include any requirement that USCIS approve the registration of such promoter;
• minimum qualifications for promotors, to be determined by USCIS;
• guidelines for offering investment opportunities and representing the visa process to prospective investors; and
• permissible fee arrangements.

If the Secretary of the Department Homeland Security determines that a direct or third-party promoter has violated this proposed legislation or any rules proposed in furtherance of the proposed legislation, the Secretary shall suspend or permanently bar such individual from participation in the EB-5 program.  The Secretary can also make the list of registered promoters publically available.

In order to make sure that promotors are aware of their obligations, each regional center must maintain a written agreement between the appropriate regional center affiliate and each promoter of the project securing investors for the EB-5 offering.  This written agreement must outline the rules and standards prescribed under the proposed legislation.  The written agreement requirement of the proposed rules effectively places the burden on regional center affiliates to (i) inform their promotors of the promotor obligations under the proposed rules and (ii) contractually obligate promoters to comply with them.  Third party promotors who refuse to agree with the relevant provisions of the new rules, as they are set forth in the written agreement, will not be able to enter into a compliant written agreement with a regional center.  Competent counsel is essential in assisting regional center compliance with these provisions, by insuring that the written contracts (1) contain every provision that is necessary, and (2) are not then compromised by promotors unfamiliar with the new rules who seek to revise language in the documents that is necessary for compliance. 

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 adopts a multi-pronged approach to bolstering securities law compliance among the people involved in an EB-5 Offering, which is expected to reduce fraud and improve investor confidence.  In addition to making sure that “bad actors” are eliminated from participation in the EB-5 Program, the proposed legislation also seeks to make sure that those remaining, who are directly in communication with EB-5 Investors, understand and are in compliance with the laws (including securities laws) which govern EB-5 Offerings.  It is unclear how much ability the SEC or USCIS will have to pursue foreign agents for violations of these proposed rules, however, if USCIS prohibits regional centers from doing business with a particular foreign agent, or the foreign agent refuses to sign a compliant written agreement, this agent will effectively be barred from participation in EB-5 Offerings.  Regional centers that do not take these provisions seriously may also be barred from the EB-5 Program.  It will be important for the experts, advisors and lawyers servicing the EB-5 community to thoroughly understand the new rules, as they are eventually implemented, 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.

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