A fundamental tenet of the federal securities laws is that all purchases or sales of securities must either be registered under the Securities Act of 1933 (the “Securities Act”) or qualify for an exemption from registration. The primary exemption relied upon by issuers seeking investors pursuing a visa under the EB-5 Program is provided by Regulation S under the Securities Act.[i]
Regulation S generally provides that the registration requirements of the Securities Act do not apply to offers and sales of securities if both the offer and sale occur outside the United States. Additionally, Regulation S requires that the issuer not offer or sell securities to U.S. citizens or residents even if those persons purchase the securities abroad. Determining whether an offer or sale occurs outside the United State is a rather simple test– namely, whether the investor is physically located outside of the U.S. both at the time he or she is first solicited to purchase the securities and at the time he or she executes the subscription agreement or other contract to purchase those securities. For example, if the investor is a student attending school in the U.S. on a F-1 Visa, the student may not be approached to make an investment while he or she is within the U.S. To do so would fail the above-described prohibition on offers within the U.S. Further, soliciting a student’s parents offshore who, then in turn, send the subscription material to their child for signature while he or she is in the U.S. also will not qualify because the offer (and sale to the extent the subscription agreement is also signed) to the actual investing person (the student) occurs when the student is physically located within the U.S. in contravention of Regulation S. It should be noted that if a parent signs the investment documents on behalf of his or her child while that child is physically located in the U.S., the parent would be doing so as the child’s agent (i.e. attorney-in-fact) and the offer should be considered made to the student while in the U.S. In other words, the longstanding securities law tenant that you can’t do indirectly what you can’t do directly comes into play.