This article reflects an immigration lawyer’s view on securities law and its role in the EB-5 offering from the investor perspective. Its important to remind the reader that in order to be fully SEC compliant, regional centers and Eb-5 projects need to seek the advice of a securities lawyer in putting together their offering materials and marketing plans.
Typically, EB-5 investors will become partners, or members, in a limited partnership or limited liability company formed by a regional center. The offer by a regional center to invest in a limited partnership or a limited liability company is a called a security. Ordinarily, an issuer, such as a regional center, who offers or sells securities must “register” the offering with the U.S. Securities and Exchange Commission (SEC) in the United States unless the offering falls within an “exemption.” Because the registration process is time consuming and expensive, regional centers typically rely on Regulation S or Regulation D for the purposes of EB-5 offerings.
Relevant Securities Laws; How do they come into play in the Eb-5 offering?
Under Section 5 of The Securities Act of 1933 (the “Securities Act”), all offers and sales of securities must be “registered” with the SEC. This registration process requires issuers to prepare and file a preliminary prospectus with the SEC for review and comment. The Section 5 registration process is both burdensome and expensive for the regional center. However, regional centers can avoid the strenuous registration process associated with Section 5 if the offering falls within a narrowly defined exemption under Regulation D. Specifically, Rule 506 of Regulation D permits a regional center to sell their offering to “accredited investors.” The definition of an “accredited investor” is set forth at Rule 501 of Regulation D and includes, but is not limited to:
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Any natural person whose individual net worth, or joint net worth with that person's spouse, exceeds $1,000,000;
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Any natural person who had an individual income in excess of $200,000 in each of the two most recent years and has a reasonable expectation of reaching the same income level in the current year; or
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Any natural person who had joint income with that person's spouse in excess of $300,000 in each of the two most recent years and has a reasonable expectation of reaching the same income level in the current year.
Even if an EB-5 investor meets the definition of an accredited investor, whether a regional center can rely on the Regulation D exemption depends on the physical location of the EB-5 investor at the time the subscription agreement is filed. Typically, the EB-5 investor would be physically present in the United States at the time the subscription agreement is signed by the EB-5 investor. If an EB-5 investor is outside of the United States at the time the subscription agreement is signed, then a regional center likely will rely on the Regulation S exemption for offshore offerings, which does not necessarily require the ‘financial sophistication’ analysis outlined above. Once the regional center has determined that an EB-5 investor is an “accredited investor” under Rule 501, the next step in the investment process is for the regional center to provide the offering materials to the investor.
Appropriate disclosures must be made to Investors
While a regional center can avoid the lengthy and burdensome registration process of Section 5 by relying on Regulation D, they nevertheless must provide disclosure documents to the accredited EB-5 investor. These offering materials typically include a private placement memorandum and a subscription agreement, which outlines material information about the investment. In practice, the private placement memorandum for an EB-5 offering contains substantially the same material that would be contained in a prospectus for a registered offering. Specifically, the private placement memorandum outlines the risk factors for an accredited EB-5 investor, including financial, project and immigration-related risks associated with the EB-5 investment. The private placement memorandum should include a discussion on conflicts of interest, a detailed description of the project, and the limited liability company or limited partnership agreement, among other relevant information.
Conclusion
Regional centers likely will continue to rely on the Regulation D, and other exemptions for the purposes of EB-5 offerings. While the primary purpose of the EB-5 process is to obtain permanent residency in the United States, EB-5 investors and their legal representatives should be aware of SEC rules which are in place in order to protect investors and ensure they make informed decisions regarding their investment options.