On March 22, 2012 Washington, DC, "Jumpstart Our Business
Startups" (JOBS) Act was passed by the Senate, following its passage on March
8, 2012 by the House of Representatives.
The purpose of the said legislation is to ease the
regulatory burden on small companies for raising capital. This article provides
an in-depth analysis of what the new law means to the EB-5 world and to
One immediate misunderstanding is that the JOBS Act gives
a regional center a green light to go ahead and ignore that SEC lawyer's
rantings! Do regional centers indeed no longer need to comply with the
securities law? The truth is that the JOBS Act gives the regional center more
leeway to market EB-5 securities. However it does not exclude the
regional center and the EB-5 projects from continuing to comply with the
securities law. This article focuses on the practical implications for the JOBS
Act for the regional center and EB-5 Projects.
Understanding the JOBS Act
The JOBS Act consists of six separate Titles. These
different proposals are to address the issue of easing restrictions on capital
raising activities of small companies.
Title I - Reopening American
Capital Markets to Emerging Growth Companies Act
It is designed to facilitate the initial public offering
(IPO) for a new category of companies called "emerging growth company", an
issuer with total gross revenue of less than $ 1 billion US dollars. To such
companies to conduct an IPO, the JOBS Act simplifies that registration process.
So far almost all EB-5 projects conduct private offerings exclusively, this
Title does not affect the existing EB-5 world, until some adventurers decide to
take on the challenge of complete an IPO.
Title II - Access to Capital
for Job Creators Act
The author believes that Title II of the JOBS Act is the most
relevant for EB-5 projects. This section provides a loosening of the rule
on general solicitation and advertising rules for EB-5 offerings. This new rule
makes Rule 502 prohibition on general solicitation inapplicable to Rule 506
small and private offering.
For a project to be qualified under this exemption the
investors must be accredited. Under Rule 501 under Regulation D, "the
accredited investor" is defined as:
One of the noticeable changes of the new rule under JOBS
Act is it requires the issuers to take "reasonable steps" to verify that the
investor is actually "accredited". Presently the regional center and other
stand-alone EB-5 projects conduct the process through investors' suitability questionnaires,
or a loose internal self-reporting system.
Without specific SEC guidance on implementation of the
new rules, it is hard to predict whether such practice is sufficient to satisfy
the "reasonable step" requirement. It is highly recommendable that the regional
center and the EB-5 projects should continue to obtain representation and
warranties from the investors as the solicitation proceeds.
Title III - Entrepreneur Access
to Capital Act
This section permits securities registration exemptions for
raising capital in small amounts from large numbers of individuals via internet
social media. The specific requirement under Title III is:
This section is the least relevant to the EB-5 context,
because the obvious minimum capital investment requirement is $500,000 for TEA
areas and $1,000,000 or non-TEA areas. However, for the sake of a complete
elaboration of the JOBS Act, the author feels this section should not be
Title IV - Small Company
Capital Formation Act
This section permits a public offering to have a
relatively simple and inexpensive registration process, if the amounts of
capital are limited; if up to $50 million US dollars is raised the company
qualifies under the Regulation A exemption. Regulation A permits the securities
purchased by the investor to be transferrable. Under the current federal law,
all securities offered under Regulation A can be freely resold and transferred.
Another advantage of this section is that the solicitation and general
advertising is not prohibited.
The author believes this section will bring delightful
changes to the EB-5 community. Currently the overwhelming majority of EB-5
projects claim Regulation D exemption for registration. Thus there is a
significant limitation on the manner of offer and resale. Rule 502(c) under
Regulation D prohibits a general solicitation. Rule 502(d) prohibits the resale
Since this section of the JOBS Act increase the offering
ceiling to $50 million ($5 million under the former Regulation A) though with
registration process, significantly simplified compared to the regular
registration process, some EB-5 issuers may choose to opt for the Regulation A
offering simply for its loosened rules on the transferability of the securities
and the fact that there is no prohibition on general solicitation.
Title V - Private Company
Flexibility and Growth Act
The current federal securities law requires an issuer
with more than $10 million in assets AND whose securities are held by 500 or
more owners to register with the SEC. The registration requires the issuer to
conduct periodic reporting and certain reporting of the individual owners. That
means if an EB-5 project satisfies the $10 million in assets requirement at the
same time, it solicitants more than 500 (inclusive) investors, it must
registered with the SEC. In other words, to avoid the registration requirement
under this provision the EB-5 project can have a maximum of 499 investors and
to raise $ 249,500,000 from the capital market.
Title VI - Capital Expansion
This section has similar effect with Title V, but it
applies to banks and bank holding companies with different standards.
EB-5 and Securities Law Before the JOBS Act
To obtain a potential investor for an EB-5 project,
either for a project company or an EB-5 regional center, is essentially the
sale of securities. This activity is regulated by the federal securities law,
namely the Securities Act of 1933, which focuses on the offering and the sales
of the securities, and the Securities Exchange Act of 1934, which focuses on
the selling the securities by the broker-dealers.
The general misconception in the EB-5 practice is that securities
law is the last thing the project should pay attention to. One EB-5 blogger
even commented that the general attitude towards securities law within EB-5
community is: "we will pay attention to the SEC when they come knocking on the
The securities law requires that the offering of
securities be registered with the Securities & Exchange Commission (the
"SEC"). Most EB-5 projects are exempted from registration under Regulation D.
Regulation D covers the small offering and the private offering. Regulation S
is for exclusive overseas offerings.
Regulation D consists of sub-exemptions, such as Rule 506
and manages an offering that is no more than (or the issuer reasonably believes
that there are no more than) 35 purchasers of securities from the issuer in any
offering. There is no restriction on the dollar size amount under Rule 506.
Another provision under Regulation D is Rule 502. Rule
502 governs general solicitation or advertising to openly market the
securities. General solicitation or advertising are defined as including but
not limited to:
Because the Regulation D permits "private offering" to be
exempted from registration, any "general solicitation" defeats the spirit of
the law. However, the issuers can claim a "pre-existing relationship" between
themselves and the investors. Other regional centers utilize overseas brokers'
own solicitation activities to avoid "general solicitation" on the part of the
issuers defined under the federal securities law. This rule applies to conduct
in the United States and abroad.
What Remains the Same in Securities Law
Compliance Despite the JOBS Act?
The regional center and the EB-5 projects shall note that
neither the Anti-Fraud provisions nor the Potential Broker-Dealer
Liability provisions have changed, despite the passage of the JOBS Act.
Even though the rule on general solicitation is significantly expanded the
marketing opportunities, during the process of the solicitation, the project
still needs to provide "full and fair disclosure" in compliance with the
section 10(b) under securities law.
What is "the full and fair disclosure"? It requires the
issuers to provide disclosure to potential investors prior to the investment
decision of all "material facts", that a reasonably prudent person would
consider important in making an investment decision, and the issuer must not
omit to disclosure any material facts. Failure to meet this disclosure standard
Unregistered Broker/Dealer Liability
Repealing the general solicitation rule does not negate
the potential broker-dealer liability and possible rescission. The federal
securities regulation states it is unlawful for any broker or dealer to "effect
any transactions in, or to induce or attempt to induce the purchase or sale of,
any security" unless that broker or dealer is registered with the SEC. Regional
center and EB-5 projects are still prohibited from utilizing unregistered
brokers to solicit investors. If a third party who introduced investors to the
regional center and EB-5 project and receives transaction based compensation, including
some attorneys who make the "introduction", such party is regarded as a
The law regulates conduct and activities of the
broker/dealer, not labels. Some regional centers simply label their
unregistered agent as an "investor finder", which does not completely shield
them from liability. All registered broker/dealers should be located on the
Financial Industry Regulatory Authority ("FINRA") website. FINRA is the largest
independent regulator for all registered broker and brokerage firms.
Similarly the prohibition of selling securities through
unregistered agents rule is also reflected in some state securities law. The
state securities law regulate broker/dealer is generally referred as "blue sky
laws". The regional center or EB-5 projects are prohibited to use unregistered
broker/dealer. Any sales of securities conducted by unregistered broker/dealer
shall be disclosed to the investors. Failure to do so constitutes a failure to
disclose material information.
According to New York Securities Act Rule 352.C.1(c), any
false representation made regarding engaging in to induce or promote the
issuance, distribution, exchange, sale, negotiation or purchase within or from
this state or any securities or commodities, when the party made such
representation could have known the truth with reasonable effort, or made no
reasonable effort to ascertain the truth, or did not have knowledge concerning
the representation or statement made.
There are adverse legal consequences for unregistered
broker/dealers engaged in the sale of securities as well as for the regional
center. The unregistered broker/dealer could be subject to injunctive or disciplinary
action, the prohibition of such person or company from registering as a
broker-dealer in the future, and exposure to investor suits, fines, and
penalties, and even criminal prosecution. If a regional center or stand-alone
EB-5 project utilizing the unregistered broker/dealer, they could be subject to
investor suits and possibly criminal prosecution, increased scrutiny of the
regional center and its securities offerings.
The JOBS Act expands the marketing opportunities for
small companies in regards to raising capital. It is good news for the EB-5
communities. As the projects and deal structures grow ever-more complicated,
the securities compliance by no means loosens in the field of EB-5 practice.
For large scale investment projects and the regional
center, it is not surprising if an RC consider long term development and
eventually actually register with the SEC because it provides more investment
options for the securities holders/investors. The author believes that the
fierce competition and the ever changing legal regime also raise standards for
EB-5 attorneys. EB-5 practice not only requires the mere understanding of the
relevant immigration laws, it also increasingly requires a comprehensive
understanding of the economic impact of each project, securities law, financial
due diligence to be able to advise the regional center how to build a long
lasting reputation and to manage successful projects.
is an associate attorney at Mona Shah & Associates in New York City. Her
practice focuses on EB-5 and securities law. She is a graduate of the
Georgetown University Law Center.
Mona Shah & Associates reserves and holds
for its own use, all rights provided by the copyright law, including but not
limited to distribution, producing copies or reproducing, sales of this
rights reserved by Mona Shah & Associates©