For the first time, the SEC brought a settled administrative proceeding against sellers of investments through the federal EB-5 Immigrant Investor Program for failure to register as broker-dealers. Previous SEC actions related to the EB-5 program alleged fraudulent conduct in the sales of investments.
The EB-5 program is administered by the U.S. Citizenship and Immigration Services (USCIS). Among other things, it provides an opportunity for legal residency for foreigners who invest in “regional centers” that promote economic growth, improved regional productivity, job creation and increased domestic capital investment in specific geographic areas and industries in the United States.
The SEC found that two affiliated entities, one located in the U.S. and the other in Hong Kong, used a website to solicit foreign investors for EB-5 investments. Neither of the entities was an approved regional center, although they had relationships with regional centers to which they directed investors. In at least ten instances, the SEC said, the potential investors were already located in the United States on temporary visas.
After initial contact by a potential investor, the two firms helped the potential investor determine which regional center would be most appropriate and put the potential investor in touch with the identified regional center. If an investor was successful in obtaining a temporary green card, the firms received a commission from the regional center that was calculated as a fixed percentage of the administrative fee paid by investors to the regional center; in other words, they received transaction-based compensation, which is one of the hallmarks of acting as a broker-dealer.
The firms were censured and ordered to cease and desist from violating the broker registration requirements of section 15(a) of the Securities Exchange Act of 1934. In an unusual move, the SEC and the two firms agreed to additional proceedings to determine if the firms will have to disgorge any ill-gotten gains and/or pay civil money penalties
This enforcement action shows that the SEC is continuing to scrutinize sales of investments pursuant to the EB-5 program, and is looking at regulatory issues as well as fraud. Regional centers participating in the EB-5 program, and entities that solicit potential investors for regional centers and who are paid a transaction-based fee for introducing such investors to the regional centers, are reminded that investing through a regional center may involve the sale of a security. If so, entities and individuals that solicit investors for a regional center may be acting as broker-dealers, and may be required to register with the SEC. In order to avoid this outcome, regional centers should conduct careful due diligence to ensure that none of the activities of a solicitor, including responding to inquiries from potential investors in an EB-5 program, are conducted in the United States and that any potential investor through such a program is not located in the United States. For more information about broker-dealer registration requirements associated with the EB-5 program, see our Client Alert.