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By Mona Shah, Esq.
Good news for EB-5 issuers. On August 26, 2020, the Securities and Exchange Commission, by a 3-2 vote, redefined the term “accredited investor” to remove the requirement that managers of certain high-risk funds are obligated to accept capital from investors with assets of $1 million or more.1
Most EB-5 investments utilize Regulation S and Regulation D registration exemptions to raise capital. Regulation S is the “offshore exemption” that does not allow “directed selling efforts” within the United States and does not include an accredited investor requirement. However, with the increase in domestic EB-5 petitioners, such as investors residing in the US on a H1-B or other nonimmigrant visa, EB-5 investment issuers have turned to Regulation D to raise capital. This requires additional onus on EB-5 issuers and regional centers, as Reg D securities may only be sold to “accredited investors”, and the issuer is required to take reasonable steps to verify the accredited investor’s status.2
The recent amendment, which was originally proposed in December 2019, allows a wider variety of investors to participate in private offerings by adding additional categories of natural persons that may qualify as accredited investors based on their professional knowledge, experience, or certifications. The amendment also expands the list of entities that may qualify as accredited investors by, among other things, allowing any entity that meets an investments test to qualify.
Chairman Jay Clayton pointed out that: “the current test for individual accredited investor status takes a binary approach to who does and does not qualify based only a person’s income or net worth…Modernization of this approach is long overdue.”
The amendment allows for an expansion of the list of entities that qualify as an accredited investor and qualified institutional buyer. In addition, there is a catch-all category for entities owning investments in excess of $5 million and that are not formed for the specific purpose of acquiring the securities being offered. Indian tribes, which did not qualify as accredited investors under the old rule, will have the ability to qualify under this provision. I would have preferred an approach that allowed tribes to qualify by counting their assets, instead of just their investments.
Commissioner Hester M. Peirce in a public statement stated: “Why shouldn’t mom and pop retail investors be allowed to invest in private offerings? Why should I, as a regulator, decide what other Americans do with their money?”
The alleged justification for the accredit investor test is investor protection. The amendment certainly makes sense in the current COVID-19 market as concern over the erratic behavior of capital markets over the past seven months has continued to grow. (In the wake of COVID-19, the SEC altered other regulations to temporarily allow the crowdfunding of established small business.)
Commissioner Peirce suggests that some people argue that the public markets are the only ones in which non-accredited investors should participate.3 Private markets, however, are where a lot of the economic growth is happening. For decades, the SEC has permitted wealthy people to make private investments under the theory that their financial sophistication and ability to sustain the risk of loss of investment or fend for themselves render the protections of the Securities Act unnecessary.
“The accredited investor concept assumes that individuals cannot be trusted to exercise proper due diligence before making an investment decision and therefore bars individuals from having the investment opportunity in the first place. Freedom and responsibility are inseparable, so it is no surprise that a regulator that does not acknowledge an individual’s ability to bear the consequences of her actions does not respect her liberty interests.”4
“Today’s changes are rooted in a recognition that wealth and income are not always great proxies for an investor’s sophistication.”5
About the Authors:Mona Shah, Esq.U.K. born, Mona Shah is a dual-licensed attorney and former British Crown Prosecutor. Shah has over 27 years of legal experience with extensive knowledge of all facets of U.S. immigration law. Her expertise ranges from specialist business law to complicated, multi-issue federal deportation litigation before the U.S. Courts of Appeal. Recognized as one of the industry leaders in EB-5, Shah has received many accolades for her work, including being voted a top 25 EB-5 attorney in the U.S. six years in a row; Top lawyer by Who’s Who International; and Top attorney of North America. A part-time adjunct professor at Baruch College, Shah is also a published author, a Lexis Practice Editor and co-editor of the Trade & Invest magazine (BLS Media). Shah regularly speaks worldwide and has been interviewed by mainstream news channels, including Fox Business News and Al Jazeera, and quoted in major newspapers, including the New York Times. hosts and produces EB-5 Investment Voice Podcast series (119+ episodes). Shah is a member of the Presidential Advisory Board and Public Policy Committee of IIUSA.
1. https://www.sec.gov/news/press-release/2019-265. 2. According to Rule 501 of the Securities Act of 1933, A natural person is an “accredited investor” if that person: (i) Earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, or (ii) Has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).Rule 506 of Regulation D allows two options for EB-5 projects. Rule 506 (b) offerings cannot use general solicitation but can have up to 35 non-accredited investors participate as long as EB-5 investors are provided extensive information about the issuer. The Jumpstart Our Business Startups Act (JOBS Act) enacted Rule 506(c), which allows general solicitation, but the securities must only be sold to “accredited investors”. 3. Statement on Amending the “Accredited Investor” Definition. August 26, 2020. https://www.sec.gov/news/public-statement/peirce-accredited-investor-2020-08-26. 4. Id. 5. Id.