It is well settled that loans (even if just a single loan) are securities under the Investment Company Act of 1940 (“ICA”) and that the definition of “security” under the ICA is much broader than that definition under the Securities Act of 1933 and the Securities and Exchange Act of 1934. Aside from treatises and no-action letters discussing the fact that promissory notes are securities for purposes of the ICA, below are some references that you can review regarding the subject:
1. Protecting Investors: A Half Century of Investment Company Regulation, a report prepared by the Division of Investment Management of the Securities and Exchange Commission (1992). Specifically, footnote 251 of Chapter 1 (page 67) which provides, in relevant part:
“. . . notes representing the sales price of merchandise, loans to manufacturers, wholesalers, retailers and purchasers of merchandise or insurance, and mortgages and other interest in real estate are investment securities for purposes of the Act).”
2. ICA Section 3(c)(5) (dealing with certain equipment or mortgage backed loans) and ICA Rule 3a-7 (dealing with certain structured financings). Specifically, if promissory notes were not securities under the ICA, there would have been no reason to adopt such section or rule . . each of which provides qualifying issuers of securities an exemption from registration as an investment company with the Securities and Exchange Commission (“SEC”) under the ICA.
3. SEC Release No. IC-18736 (proposed rule and request for comment) regarding Exclusion From the Definition of Investment Company for Certain Structured Financings (June 5, 1992); and SEC Release No. IC – 19105 (final rule) regarding Exclusion From the Definition of Investment Company for Structured Financings (November 19, 1992).
As a result of being a security under the ICA, parties involved in raising and/or deploying capital under the EB-5 Program must register (or find an available exemption from registration) with the SEC as an investment company and/or as an investment adviser under the ICA and Advisers Act, respectively. Finding an exemption from registration under the ICA, however, does not mean that there is an available exemption from registration under the Advisers Act. Further, even if an adviser is exempt from registration under the Advisers Act, the adviser must still determine whether it is also exempt from state investment adviser registration or regulation. It is well settled that the general partner of a limited partnership and the manager of a limited liability company are investment advisers under the Advisers Act if the limited partnership or limited liability company is an investment company (e.g., a pooled investment vehicle that makes a loan to a project company).
Failure to comply with the ICA or the Advisers Act may lead to substantial civil and criminal liability and penalties, including enforcement actions by the SEC and rescission actions by investors.
The views expressed in this publication are those of the author and not necessarily those of Greenberg Traurig LLP. The comments contained herein do not constitute legal opinion and should not be regarded as a substitute for legal advice.