The EB-5 program provides foreign investors who demonstrate that their investments create a minimum level of required job creation in the United States with a potential avenue to lawful permanent residency, also known as a “green card.” Specifically, a foreign national who places a certain amount of money at risk and creates or preserves a minimum number of jobs in the United States is eligible to apply for an initial two-year period of conditional lawful permanent residency that may subsequently be upgraded to unconditional permanent residency by demonstrating sustained job creation. However, what may not appear immediately obvious from this exchange is that the EB-5 program raises a number of federal securities laws considerations, the most important of which is whether the investment transaction must be registered with the Securities and Exchange Commission (the “SEC”), or completed pursuant to an exemption from the SEC’s registration requirements. The answer depends on whether the investment falls within the definition of a “security” pursuant to the Securities Act of 1933 (the “Securities Act”).
What is a Security?
The substantive provisions of the Securities Act begin with the following definition:
Section 2 (a) Definitions.—When used in this title, unless the context otherwise requires—
(1) the term “security” means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing (emphasis added).
The item that has created much of the consternation in this area is the investment contract. In SEC v. W.J. Howey Co., the Supreme Court devised a test for determining the existence of an investment contract: “The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” For purposes of this discussion, it is helpful to divide the test into the following four elements:
- investment of money;
- common enterprise
- expectation of profits; and
- solely from the efforts of others.
The following provides a brief overview of each Howey test element.
Investment of Money
The Court in Howey adopted the Minnesota Supreme Court’s definition of investment from State v. Gopher Tire & Rubber Co., which states: “[t]he placing of capital or laying out of money in a way intended to secure income or profit from its employment is an ‘investment’ as that word is commonly used and understood.”  In United Housing Foundation, Inc. v. Forman,  a case concerning the offer and sale of interests in a cooperative housing project, the Court made it clear that the desire to secure income or profit is a determining factor in whether allocated funds can be appropriately characterized as an “investment.” In addition, the Court determined that such interests were not “securities,” partly because “the investors were attracted solely by the prospect of acquiring a place to live, and not by financial returns on their investments (emphasis added).”
This element of the Howey test has been subjected to multiple interpretations,  which have not yet been definitively ruled on by the Supreme Court. The vertical commonality approach, however, is the most commonly used test to determine the definition of “common enterprise.” A Ninth Circuit case, SEC v. Glenn W. Turner Enterprises, Inc., described the vertical commonality approach as follows: “[A] common enterprise is one in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment of third parties.”
Expectation of Profits
SEC v. Edwards involved an expectation of profits in connection with a sale-and-leaseback of pay telephones. Justice O’Connor, writing for the majority, highlighted that, in its previous decisions, the Supreme Court “…used ‘profits’ in the sense of income or return, to include, for example, dividends, other periodic payments, or the increased value of the investment.”
Solely from the Efforts of Others
Although the Supreme Court has yet to decide a case in which this element is in controversy, it is clear from related precedent that the Court has chosen not to read the term “solely from the efforts of others” literally. In Robinson v. Glynn, the First Circuit noted that no firm line can be drawn between member-managed and centrally managed companies, but that determinations must be based on the specific circumstances of the investors’ level of participation.
Application to EB-5 Investments
In view of the foregoing, EB-5 investments will generally be characterized as “securities” pursuant to the Securities Act.
First, under the EB-5 program, foreign citizens must make a qualified investment of at least $1,000,000 (or $500,000 if the project is in a targeted employment area). Thus, this requirement satisfies the first element of the Howey test because the investment of money is required under statute.
Second, the investment must be made in a specified project that creates or preserves at least ten jobs for U.S. workers. Since foreign nationals’ investments are usually pooled together or, at the very least, directed toward a single entity, the common enterprise analysis is satisfied regardless of whether the vertical or horizontal commonality approach is applied. Therefore, the fortunes of the foreign national are sufficiently interwoven and dependent upon the efforts and success of those seeking the investment (or of affiliated third parties) to satisfy the second element of the Howey test.
Third, one of the requirements of the EB-5 program is that an investor’s capital contribution must be at a complete risk of loss and gain. In view of the fact that the EB-5 program has become so popular and investors will generally have the opportunity to be selective regarding projects, an investor’s review of a potential project undoubtedly include a review of the rate of return that project offers. Projects with low rates of return or projects that do not suggest a high probability of success will be passed over in favor of more promising projects. Accordingly, the foreign national is in a situation where he or she not only expects to receive a green card, but expects a return on his or her investment, thus satisfying the “profits” component of the Howey standard.
Fourth, EB-5 projects are generally structured to permit EB-5 investors to have a limited management role in the corresponding company as non-managing members/limited partners, usually leaving the bulk of the day-to-day management decisions to the managing members/general partners who have more experience in the particular project. Consequently, the foreign national is able to satisfy the EB-5 program’s minimum management requirements while still allowing those with the most knowledge and experience to guide the project successfully for the benefit of the EB-5 investor.
Based on the foregoing, it is evident that in most cases an EB-5 investment constitutes a “security” as it is defined pursuant to the Securities Act. In fact, the SEC has been treating EB-5 investments as “securities” subject to the Securities Act for some time. As a result, issuers who raise and/or deploy capital under the EB-5 program generally must either register the transaction with the SEC or find an exemption to the registration requirements under the Securities Act, such as Regulation D or Regulation S. Issuers must also review applicable state securities laws. When sold through a broker-dealer, the securities sales must be made in accordance with FINRA rules.  Failure to comply with the Securities Act or state securities laws may lead to substantial civil liability and penalties, including enforcement actions by the SEC, FINRA and/or state securities regulators and rescission actions by investors. Thus, EB-5 investors should carefully consider the securities-related aspects of their investment and retain experienced immigration and securities counsel to assist in navigating this complicated area of law.
 328 U.S. 293 (1946)
 W.J. Howey Co., 328 U.S. at 301.
 146 Minn. 52, 56, 177 N.W. 937 (Minn. 1920).
 Id. at 938.
 421 U.S. 837 (1975).
 Id. at 853.
 See SEC v. Koscot Interplanetary, Inc., 497 F.2d 473 (5th Cir. 1974) (discussing the vertical commonality formula). See also Milnarik v. M-S Commodities, Inc., 457 F.2d 274 (7th Cir. 1972) (discussing the horizontal commonality formulation).
 474 F.2d 476 (9th Cir. 1973).
 Id. at 482 n.7.
 540 U.S. 389 (2004).
 See Glenn W. Turner at 482. See also Koscot at 480.
 349 F.3d 166 (4th Cir. 2003).
 See Kristen W. Ng & Matthew Virkstis, U.S. Securities and Exchange Commission Investigates Washington-based Regional Center, https://www.eb5insights.com/2015/08/25/u-s-securities-and-exchange-commission-investigates-washington-based-regional-center/; William Mack, SEC Charges Two Businesses for Acting as Unlicensed Broker-Dealers in EB-5 Sales, https://www.eb5insights.com/2015/06/24/sec-charges-two-businesses-for-acting-as-unlicensed-broker-dealers-in-eb-5-sales/; Joshua Gallu, SEC Says Chicago Man Lured Chinese Investors in Citizenship Scam, http://www.bloomberg.com/news/articles/2013-02-08/sec-says-chicago-man-lured-chinese-investors-in-citizenship-scam.
 William Mack, U.S. Securities Regulators Take Notice of EB-5, https://www.eb5insights.com/2015/04/07/u-s-securities-regulators-take-notice-of-eb-5/