Private Placements: Focusing Closely on EB-5 Program
It is well-known in the EB-5 community that the Securities Exchange Commission (the “SEC”) is scrutinizing the EB-5 program closer than ever. The SEC and the Financial Industry Regulation Authority (“FINRA”) each formalized their belief that the EB-5 program needs greater regulation in their 2016 examination letters. Both regulatory agencies annually publish examination priorities that highlight areas of concerns that the agencies plan to focus on particularly in their examinations and investigations in the coming year. Each agency outlined in their 2016 examination letters that they will be focusing closely on private placement offerings under the EB-5 program. The source of the concerns likely stems from the increasing popularity and use of the program, and from recent regulatory changes that allow general solicitation of private placements.
Concerns Expressed in Examination Letters
In the examination letters, the SEC and FINRA specifically stated how their focus for private placements includes, among other things, “EB-5 investment funds”. Although FINRA highlighted its focus on “EB-5 investments funds” in 2015, it reiterated its intent to focus on this area for 2016. This is the first time that the SEC has highlighted the EB-5 program as a priority in its examination letter. Given that the examination priority letter is only five pages, the fact that the SEC specifically chose to highlight the EB-5 program as a priority should strike fear in those projects that are misusing investors funds or engaging in other unethical behavior.
In the 2016 examination letters, the agencies expressed the following:
The SEC Examination Priorities for 2016
“We will review private placements, including offerings involving Regulation D of the Securities Act of 1933 or the Immigrant Investor Program (“EB-5 Program”) to evaluate whether legal requirements are being met in the areas of due diligence, disclosure, and suitability.”  (emphasis added)
FINRA 2016 Regulatory and Examination Priorities Letter
FINRA’s focus on private placements is to address its concerns with suitability, disclosure and due diligence. FINRA stated that its concerns “are relevant regardless of the underlying industry of the issuer or the type of investment…,” specifically naming “EB-5 investment funds” as an example. (emphasis added)
The agencies’ rising concerns for the EB-5 program likely stem from the ability to conduct general solicitations for private placements under SEC Rule 506(c) of Regulation D. Namely, the fear is issuers are targeting unsuitable investors, or failing to provide such investors sufficient information about the underlying risks with private offerings. With that in mind, the central examination focus over the EB-5 program is to ensure the private offerings are being offered to investors after performing proper due diligence, and providing fair and balance disclosures.
Specifics of Changes in the Regulatory Landscape Unclear
It is too early to determine exactly how the SEC and FINRA’s focus on the EB-5 program will affect the EB-5 regulatory landscape. Any drastic changes will likely occur through comprehensive EB-5 reform, such as S.2415 – the EB-5 Integrity Act of 2015. However, it is clear that both agencies find a particular need to review the conduct of issuers making private offerings under the EB-5 program. As both agencies perform their examinations, their findings may encourage heightened regulatory requirements to alleviate the concerns of due diligence, suitability and adequate disclosure.
The SEC and FINRA have made it clear that their examinations for 2016 will have a focus on private placements under the EB-5 program. The concerns that the SEC and FINRA have likely stem from the record popularity of the EB-5 program and from recent regulatory changes that allow general solicitation for private offerings, causing fears that issuers are targeting unsuitable investors or failing to inform such investors of the underlying risks for private placements. The hope is that the increased scrutiny will weed out bad actors from the program, and dissuade many with unscrupulous intentions from entering the program in the first place. As the agencies perform their examinations, their findings may encourage heightened regulatory requirements of private offerings under to the EB-5 program and highlight the need for comprehensive EB-5 reform, such as those called for under S.2415 – the EB-5 Integrity Act of 2015.
 The SEC and FINRA conduct random and periodic examinations of firms or persons to ensure compliance with regulatory requirements or investigate concerns raised that a particular firm may be in violation of regulatory requirements.
 SEC, Examination Priorities For 2016, available at https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2016.pdf.
 FINRA, 2016 Regulatory and Examination Priorities Letter, available at http://www.finra.org/industry/2016-regulatory-and-examination-priorities-letter.
Omar Hakim is an attorney at Mona Shah & Associates in New York City. The firm is an established source for EB-5, assisting numerous Regional Centers/EB-5 Projects and Investors in navigating this complex, nuanced and constantly changing area of immigration law. Omar offers clients years of experience in corporate finance, the financial regulatory system, securities matters and in general corporate governance matters. Additionally, he is able to draw on his experiences at major federal regulatory agencies and bodies, which includes work at the SEC, the United States House of Representatives Committee on Financial Services, and the CFTC. He earned his J.D. at the University of Virginia; his Master of Laws in Securities and Financial Regulation at the Georgetown University Law Center; and his B.A. in Economics at Georgetown University.
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