Who Can Source Investors For EB-5 Projects: The World of Finders, Consultants, Attorneys, and Broker Dealers
Use of EB-5 as part of the capital stack for an EB-5 project is a highly complicated prospect. Identifying the right Regional Center or forming a Regional Center and structuring the project so that it is compliant with the myriad of USCIS/DHS rules is a daunting endeavor.
The other very real concern for these projects is how to actually find the investors and fill the EB-5 raise. Most of the EB-5 investors come from China, but other countries are beginning to also see their citizens apply for the U.S. EB-5 program.
How does a project successfully source EB-5 investors? This is something that really needs to be considered before diving into the EB-5 world and has been the topic of numerous articles and blogs (visit Greenberg Traurig’s EB-5 insights blog). Businesses need to beware of resorting to “finders” to help locate investors. Except in very limited circumstances, paying a commission or “success fee” to a finder that is not registered as a broker-dealer violates federal and state securities laws. A company that hires a finder, as well as the company’s directors, officers, and owners, can be liable to investors and sanctioned by regulators for such violations.
This article focuses on the potential pitfalls in sourcing investors from immigration and other attorneys or consultants that are not properly registered.
EB-5 offerings are securities offerings. Those that seek to be compensated for sourcing investors for these projects must generally be registered as broker-dealers. Under the Securities Exchange Act of 1934 and state securities laws, a “broker-dealer” is “any person engaged in the business of effecting transactions for the account of others.” It is unlawful for any broker-dealer to “effect any transaction in, or induce or attempt to induce the purchase or sale of, any security” without first registering as a broker-dealer with the Securities and Exchange Commission (SEC) and applicable state regulators. Registered broker-dealers must also be members of a self-regulatory organization– generally the Financial Industry Regulatory Authority (FINRA, formerly known as the National Association of Securities Dealers) and comply with SEC regulations regarding financial responsibility and market conduct.
Attorneys who seek to source investors for a fee. Recently we have seen attorneys and other professionals offer to introduce their clients to projects for a “referral fee.” This type of referral fee is often prohibited by local bar rules which do not allow splitting of fees. Yet we are seeing more and more instances of this type of direct referral. The SEC has also been looking at these types of arrangements (as highlighted in Bloomberg Business). There are also many immigration lawyers who try to skirt the rules by negotiating side deal clients for the provision of “legal services,” when the arrangement is really a payment for referrals. This type of circumvention of the broker-dealer rules and ethics rules will continue to come under heightened scrutiny as focus on the EB-5 program continues to command the attention of lawmakers on the Hill, the GAO, the USCIS, and the SEC.
The more murky and convoluted areas are the self-proclaimed unregistered EB-5 market consultants. Consultants who take transaction based compensation – e.g., compensation based on the number of investors they source – are clearly violating U.S. broker rules. These groups sometimes cloak themselves in consultant verbiage but are just doing an end-run around the SEC rules. Some of these EB-5 market consultants claim that they will connect the project with the right players and investors. It would behoove any project seeking to utilize a third party to source investors to fully vet the “consultant” and be certain there is no circumvention of the U.S. broker-dealer rules. Indeed there may be instances where lawyers are trying to avoid ethics issues by establishing “consulting” businesses that claim to be able to connect investors to a project.
Should investors be sourced improperly, even if the project company had no knowledge of such impropriety, the investors could have a claim against the project company and a right of rescission to withdraw from the investment. We would suggest doing your due diligence on any entity that holds itself as one that connects you to investors in the EB-5 world. In this day and age of heightened oversight of the EB-5 program, project companies don’t need the added risk of an SEC investigation.
- Laura Reiff
- Greenberg Traurig, LLP
- U.S. Citizenship and Immigration Services
- UNITED STATES SECURITIES AND EXCHANGE COMMISSION
- FINRA - Financial Industry Regulatory Authority
- New York
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