In connection with an EB-5 program, foreign investors are offered a special subset of private funds and securities offerings made through regional centers and non-regional centers approved by the USCIS. In certain instances, when the securities are offered or sold by an intermediary, these transactions are subject to US securities laws. There is a significant concern among regulators that the means used to make the offers and sales of the securities involved in some EB-5 programs do not comply with securities laws; specifically, that some of those compensated in connection with these transactions do not appear to be properly licensed.
Fee-based compensation structures are commonplace among those who source EB-5 investors for approved EB-5 projects. Typically, these individuals are not registered with securities regulators in the U.S. As long as an individual or offering falls into one of the established exceptions to the registration requirements, this is acceptable. Whether registration is required depends principally on where potential investors are solicited, how the sellers of investment interests are compensated, and the nature of the activities undertaken by an issuer in connection with the offer and sale of an investment under the EB-5 program.
As of late, regulators seem to be sending a strong message to those who are not covered by an established exception to the registration requirements but intend to offer or sell securities and receive compensation for their efforts: register as a broker-dealer or become associated with a registered firm. (See In the Matter of Ranieri Partners, LLC and Donald W. Phillips; File No. 15243; March 8, 2013.) According to the SEC staff, “if you’re being paid for finding investors, there’s a potential problem if you’re soliciting investors here or abroad. . . .” Consequences of conducting activities that require licensure without the proper registrations can include regulatory sanctions and penalties (fines and substantive limitations of business activities), and investor claims (including recession of securities transactions conducted without appropriate registrations). Unlicensed activity can also create limitations on the ability of the organization to register at a later point in time and restrictions on the ability of the organization to engage in other business activities in the United States. These consequences can seriously hamstring an EB-5 project or derail it completely. Issuers, broker-dealers, finders and associates unsure of their status should seek advice from counsel before taking any action.