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.

 

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Photo of William Mack William Mack

William B. Mack is a co-chair of the Financial Regulatory & Compliance Practice. He is experienced in advising companies on regulatory and compliance matters relating to the Securities and Exchange Commission regulations, the Exchange Act, Anti-Money Laundering laws and Financial Industry Regulatory Authority

William B. Mack is a co-chair of the Financial Regulatory & Compliance Practice. He is experienced in advising companies on regulatory and compliance matters relating to the Securities and Exchange Commission regulations, the Exchange Act, Anti-Money Laundering laws and Financial Industry Regulatory Authority (FINRA) rules.

William’s practice involves all aspects of broker-dealer regulation, including Self-Regulatory Organization (SRO) membership, supervision, employment, research, soft dollar arrangements, chaperoning of foreign broker-dealers, social media, use of foreign finders, anti-money laundering rules, alternative trading systems (ATS), exchanges, and market making issues. He also provides regulatory guidance to investment banking clients in connection with securities offerings and related trading issues.

William advises firms in the FINRA new membership (NMA) and the continuing membership (CMA) processes. William assists firms to develop or amend their written supervisory procedures and compliance manuals.

William routinely represents clients who are negotiating placement agent agreements, foreign finders agreements, clearing agreements, agreements with registered representatives and expense-sharing agreements.

William assists broker-dealers and their associated persons to respond to regulatory examinations and inquiries and provides effective representation in a range of enforcement proceedings with the SEC, FINRA, NYSE, state and foreign regulatory authorities. He regularly prepares and defends witnesses in FINRA on-the-record interviews and SEC testimony. Enforcement matters have involved issues including market manipulation, supervision, customer defalcations, insider trading, anti-money laundering, distribution of unregistered securities, direct market access, market making, soft dollar arrangements, cross border trading, electronic intrusion and customer impersonation, sales practices, supervision, private placements, ETFs, indexes, and other securities products.

William regularly addresses questions with respect to what activities require or are exempt from broker-dealer registration. William assists firms in obtaining guidance, interpretive letters, and no-action relief from FINRA and the SEC with respect to novel securities issues and the creation of new products and services. William also advises clients on cryptocurrency, tokenization, NFTs, DeFi structures, and digital asset exchanges and trading.

Prior to joining the firm, William was a Principal Counsel for Enforcement at FINRA. Before FINRA, he was the Director of the Executive Secretariat in the Office of the U.S. Trade Representative. William also served as a Deputy Associate Counsel at the White House, advising primarily on appointments and investigations. Before the White House, he practiced at large firms in New York. William clerked for Judge Robert L. Carter in the Southern District of New York.