Since the Jumpstart Our Business Startups Act
(JOBS Act) was passed by Congress this past April, the EB-5 community has
waited in anticipation for the Securities Exchange Commission (SEC) to revise
its rules to remove the prohibition on general
solicitation and general advertising under Regulation D[1] promulgated
under the Securities Act of 1933 (the "Securities Act") for offerings where all
purchasers of the securities are accredited investors. This article focuses on the status quo of
EB-5 practice and compliance of securities law until the SEC guidelines are
issued.
General Solicitation and General Advertising
Once adopted, the revised rules will give EB-5
regional centers and issuers of securities more leeway to promote their EB-5
projects. However, as was expected, the
SEC announced in early July that it would not meet the July 4, 2012 deadline to
adopt the new rules. During that
announcement, the SEC also informed the public that it will have an open
meeting on August 22, 2012 to consider amendments to Rule 506 of Regulation D, though
it is unlikely the SEC will propose rules at the meeting or adopt interim
rules.
Though the timeline for the new rules is still
uncertain, what is certain is that EB-5 regional centers and issuers who rely
upon Regulation D for an exemption from registration under securities laws are still
prohibited from engaging in general solicitation or general advisement
activities in connection with the offer or sale of securities. Since the current rules in effect prior to
the JOBS Act are still applicable, it is imperative that regional centers and
issuers relying on Regulation D carefully conduct their marketing and promotion
activities in compliance with the prohibition against general
solicitation. In addition, they must
continue to ensure that all parties acting on their behalf also comply with the
prohibitions against general solicitation.
Accredited Investor Status
While the JOBS Act eliminates the ban on general
solicitation, it does require the issuer to ensure that all investors who
eventually purchase the securities are accredited investors. The JOBS Act does not change the accredited investor
standard established by the Securities Act and the Dodd-Frank Act. According to
Rule 501 under the Securities Act, the term "accredited investor" is defined as
any person who comes within specific categories "or who the issuer reasonably
believes comes within" any of those categories "at the time of the sale." On
December 21, 2011, the SEC adopted amendments to the "accredited investor"
standards in its rules under the Securities Act of 1933 to implement the
requirements of Section 413(a) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act). An accredited investor who is an
individual has annual income greater than $200,000 (or $300,000 joint annual
income with his or her spouse) for the previous two years (with a reasonable
expectation that the income will continue in that amount) or a net worth over
$1 million, not including his or her primary residence or debt secured by the
primary residence[2].
Regional Center Compliance
It is anticipated that the SEC will address in its
new rules how issuers need to verify accredited investor status to ensure
compliance with the requirement that all purchasers in an offering conducted
using general solicitation are accredited.
Until the SEC adopts the new rules implementing the changes required
under the JOBS Act, it is unclear how much burden will be on the EB-5 regional
center and issuer to verify that all purchasers are accredited investors. The
current practice of regional centers and issuers is to verify the accredited
investor status via a questionnaire completed by the potential investor, though
few require supporting documentation to support that the investor, in fact,
meets the accredited investor definition. Several public comments to the JOBS
Act suggested that the new guidelines reflect the current practice and not
impose undue burden on the issuers.
The comments[3] posted
by the Business Law Section of the American Bar Association state that
"what might constitute reasonable steps may depend upon particular
facts and circumstances and the applicable accredited investor category, we
believe the Commission's rules should reflect current custom and practice which
take these considerations into account. Especially because the purpose of the
JOBS Act is to encourage and support capital formation, any requirement that
imposes additional burdens on issuers or on purchasers would contravene the
fundamental impetus for the JOBS Act. In this regard, we believe that the
Commission should be sensitive to the legitimate privacy concerns of
purchasers."
Without further guidance from the SEC, it is
unclear whether the issuer will be subject to liability were it to be
subsequently determined that a purchaser of the securities was not an
accredited investor. Therefore, it is
prudent for regional centers and issuers to review their current practice for
verifying accredited investor status to determine what practical measures can
be taken in advance to strengthen their verification process in anticipation of
the new SEC rules.
Yi Song, Esq. is an associate attorney at Mona Shah
& Associates in New York City. She is also licensed to practice law in
People's Republic of China. She has practiced tax law in Beijing, China with a
leading tax firm. She clerked in Beijing, the nation's capital at the Supreme
Court of People's Republic of China. At Mona Shah & Associates, Yi
practices EB-5 law and securities law and works on many successful EB-5 capital
raising projects. She obtained her LL.B. degree from Beijing Foreign Studies
University and she is a graduate from Georgetown University Law Center in
Washington, DC. Yi is a native speaker of mandarin Chinese. She speaks fluent
English and basic French.
Jennifer Mercier Moseley,
Esq. is a partner at Burr & Forman, LLP in its Birmingham Office in
Alabama. She represents companies in capital formation, private placements and
merger and acquisition matters. She also
represents public companies in connection with their Exchange Act reporting
requirements and stock exchange matters. Jennifer is a member of the Alabama
State Bar and the New York State Bar. She is admitted to practice before the
United States District Court for the Southern and Eastern Districts of New
York. In 2012, Jennifer was named an Alabama Super Lawyers "Rising Star" in the
Business/Corporate practice area. Jennifer received her B.A., cum laude, from
New York University, and her J.D. from Cornell Law School. Jennifer speaks
Korean.
This article is a general summary of complex securities law
issues. No legal advice is provided in this article. Please consult the securities attorney for
advice applicable to your particular circumstances.
[1]
17 C.F.R. §230.502(c)
[2]
Definition of accredited investor: http://www.sec.gov/info/smallbus/secg/accredited-investor-net-worth-standard-secg.htm (Last
retrieved on July 14, 2012)
[3]
Public Comments posted by American Bar Association the Business Law Section or
JOBS Act Title II: http://www.sec.gov/comments/jobs-title-ii/jobstitleii-7.pdf
(Last retrieved on July 14, 2012)