Ever since the Securities and Exchange Commission (SEC) lifted the ban this July on general solicitation pursuant to the Jumpstart Our Business Startups Act (JOBS Act), it was expected that the threshold for disclosure would be raised. What does this mean to EB-5 projects and EB-5 regional centers?
The New SEC Rules
The new SEC rules require EB-5 projects that seek to conduct general solicitation and general advertisement must file advance disclosures divulging their advertisement efforts. All sales and marketing materials need to be filed with the SEC. Failure to comply with the rules will trigger a disqualification from selling shares for one year.
Many have misunderstood the new SEC rules and believed lifting the general solicitation ban means that the commission payment can be made to unregistered brokers/dealers without the prior restrictions. This couldn’t be further from the truth. The new SEC rules do not change the securities laws regarding broker/dealer relationship. The US based brokers/dealers must be registered with the SEC and FINRA (Financial Industry Regulatory Authority). The commission payment can only be wired to the US brokerage firm’s account rather than the brokers’ personal account.
The new SEC proposed rules tighten the current directions for notification. Under the current rules, Form D is required to be filed within 15 calendar days from the first sale of securities. However, under the new rules, EB-5 issuers are required to release a fundraising plan and file a notice 15 calendar days prior to conducting the general solicitation.
EB-5 projects and regional centers that are conducting general solicitation must take reasonable steps to verify the “accredited investor” status. The rules regarding accredited investors remain unchanged: annual income exceeding $200,000 or a joint income with spouse exceeding $300,000 or net worth of $1 million excluding a primary residence.
The new notification form also increases the amount of information companies must disclose, including additional details on the usage of proceeds. Misrepresentation of the usage of proceeds, which can be fairly common in the EB-5 industry, could result in serious securities law violations. The issuers who fail to meet the said requirements could be banned from conducting a similar offering for a year.
Will the SEC start to regulate EB-5 Expos?
Investors Expos, venture fairs are common practice in the EB-5 industry. That is often referred to as “demo days” in the securities industry, where the issuers meet with individual investors and agents replying on chance introductions and sales pitches to sell their investment. The EB-5 projects attending these Expos traditionally do not file any notice to the Commission.
These Expos or “demo days” conducted within the United States violate Regulation S private offerings. The North American Securities Administrators Association (NASAA) commented on September 17, 2013 that the SEC needs to clearly define “general solicitation” or to set out registration exemptions for the “demo days”. It remains unclear how the commission would respond to the market place’s confusion.
Market for Private Offerings
In the United States, private offerings are the biggest source of funding for small and medium companies. The U.S. market for private offerings was $903 billion last year, according to an SEC statistics published in July 2013.
SEC Chairman Mary Jo White stated last week that the Commission would consider criticisms on the new SEC proposal passed in August 2013. White stated that SEC will continue to contribute to investor protection and market monitoring. The fear is that general solicitation may lead to more fraud.
Due to poorly enforced SEC rules in the past, private offerings are more likely to lead to fraud lawsuits and enforcement actions, such as private offerings that typically reveal limited information on management backgrounds and the uses of finances. The SEC has started enforcement actions within the EB-5 industry which has led to an unwelcome backlash. The notorious A Chicago Convention Center (ACCC) case has significantly slowed down the market in China. The author has witnessed on-going SEC investigations within current EB-5 regional centers on securities fraud and broker/dealer violations. Will the new SEC rules help or burden the EB-5 companies to raise capital? The new rules obviously raised more questions than providing answers.
Mona Shah & Associates reserve and hold for their own use, all rights provided by the copyright law, including but not limited to distribution, producing copies or reproducing, sales of this document. 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.
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