The EB-5 Immigrant Investor Program (the “EB-5 Program”) administered by the U.S. Citizenship and Immigration Service (USCIS) has been a significant source of capital for various real estate and other development projects throughout the United States. Because capital contributed by foreign nationals under the EB-5 Program typically takes the form of an investment in a limited partnership, the sale of these interests can have securities law implications. Not surprisingly, the SEC has begun to look at some of these issues. This Alert will discuss the broker-dealer registration issues presented by projects that use the EB-5 Program.
The EB-5 Program offers visas allowing residence in the United States to qualified immigrants who make an investment of at least $1,000,000 (or at least $500,000 for investments made in a “Targeted Employment Area”) in a new commercial enterprise that will create full-time jobs for at least ten qualified individuals, or maintain that number of existing employees in a “troubled business.” Investments in EB-5 projects most often are made through “regional centers,” which are economic entities approved by the USCIS to oversee raising funds from foreign investors and creating jobs through the U.S. development project.
Typically, to take advantage of these potential investment dollars, a regional center forms a special purpose vehicle that raises funds through the EB-5 Program, and provides these funds to the developer as part of the financing for the development project. An EB-5 project developer through the regional center typically raises funds from would-be immigrants through overseas “finders.” Those foreign investors typically become limited partners in a limited partnership or limited liability company formed by the regional center to provide financing for the development project.
In a conference call held on April 3, 2013, among the SEC staff and various stakeholders of the EB-5 Program, the SEC discussed the circumstances under which regional centers or finders raising funds under the EB-5 Program are required to register as broker-dealers or associated persons under the federal securities laws. According to the SEC staff, whether registration is required depends principally on whether potential investors are solicited, how the sellers of investment interests are compensated, and the nature of the activities undertaken by an issuer and its “associated persons” in connection with the offer and sale of an investment under the EB-5 Program, including whether such activities comply with the safe harbor for “associated persons” under federal securities laws.
The consequences of the failure to comply with broker-dealer registration requirements are potentially severe; using unregistered broker-dealers in connection with the offer and sale of EB-5 investments could trigger enforcement investigations or actions involving the issuer, the regional center and other associated persons. Government scrutiny could jeopardize the success of the project and raise reputational issues for any developer, financial institution or other lender associated with the project. A failure to satisfy broker-dealer registration requirements also might give rise to a right of rescission for investors who seek to terminate their investments.
To learn more, read our full client alert.