eb5exclusive

                                                                                By Michael G. Homeier, Esq.

Last week’s strongly bipartisan (73-26) passage of the “Jumpstart Our Business Startups” (JOBS) Act by the Senate on March 22, 2012 included an amendment regarding crowdfunding, but otherwise hewed closely to the version (H.R. 3606) passed on March 8 by the House of Representatives on an even more resoundingly bipartisan 390-23 vote. With the legislation intended to ease the regulatory burden on smaller companies and facilitate raising capital for startups and small businesses, the JOBS Act’s impending signing by President Obama is being hailed by EB-5 industry businesses as meaning that the pesky, expensive, time-consuming, and above all complicated compliance with the arcane U.S. securities laws can pretty much be dispensed with. The excited word on the “EB-5 Street” is that, thanks to the Act, no longer do the prior securities restrictions on public solicitation of investment into EB-5 projects apply.

Not surprisingly, many EB-5 regional centers and related U.S. business principals are now happily ordering their securities lawyers (seemingly always cast as Cassandra, trying to get clients to comply with securities law regulations on their overseas marketing offers and solicitations for their EB-5 investments) to get the heck out of the way so that businesses can get back to the business of raising money—at last, in as free-wheeling a way as desired.

The problem with Cassandra was that she was right – just cursed to never be believed in her warnings. Similarly, the point with the JOBS Act is that while it removes some impediments to marketing EB-5 securities, it most emphatically does not suddenly exclude the application of U.S. securities laws to EB-5.

 Securities law marketing limitations

 All EB-5 participants should certainly know by now that an investment opportunity into an EB-5 project constitutes a security, and that sales of securities are regulated by the securities laws (in particular, the Securities Act of 1933 (the “Securities Act”), and the Securities Exchange Act of 1934 (the “Exchange Act”), both as amended.

Generally speaking, the Securities Act requires that all offerings of securities be registered with the Securities & Exchange Commission (the “SEC”) through a very complicated, time-consuming, and expensive process, unless the offering fits within one or more existing exemptions from the registration requirement. The two primary exemptions utilized in EB-5 offerings are Regulation D (“Reg D”), shorthanded as the “small or private offering exemption,” and Regulation S (“Reg S”), for “exclusively overseas offerings.”

 Regulation D itself broadly consists of three “sub”-exemptions, all considered “private,” with the primary one being the “Rule 506” exemption for offerings of any dollar size amount. In the EB-5 world, almost all offerings exceeding $5M (and most of those under that amount) seek to comply with the Rule 506 requirements.

 Most notably, in order for an offering to be exempt as “private,” these requirements prohibit the use of general solicitation or advertising to market the securities. General solicitation or advertising are defined (Rule 502) as including significantly, without being limited to use of any of the following:

1. Any advertisement, article, notice, or other communication published in any newspaper, magazine, or similar media, or broadcast over television or radio; and

2. Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising

 The prohibition on general solicitation and advertising is a significant limitation on an offeror’s ability to sell its investment opportunity. To comply while simultaneously reaching out to investors ideally requires a pre-existing relationship between the offeror and the investor. Since most offerors lack their own network of sufficient numbers of investors to fund their offering, they have no choice but to reach out to outsiders: previously unknown investors. How else to reach these folks, other than through some kind of marketing? But it is easy to inadvertently turn a private offering into a public one, which then defeats the exemption and requires registration—and/or return of investors’ money.

 Thus, the Reg D marketing prohibitions are viewed as significantly hamstringing EB-5 businesses’ ability to market their projects as widely (and as wildly) as they wish. In an industry seen as being flooded with markedly increasing numbers of competing investment opportunities, EB-5 regional centers and project principals have chafed at their securities lawyers’ persistent advice that they must take seemingly convoluted steps to establish relationships with previously unknown potential investors, rein in their overseas brokers’ own solicitation activities to avoid general solicitation and advertising, and wait a protracted period of time before accepting investment monies.

Nothing would so warm the hearts of EB-5 principals than if their marketing job could suddenly get easier. The JOBS Act is seen as exactly the kind of cardiac thawing that the doctor ordered.

 Alas, this is only partially true. As always with securities law compliance, “the devil is in the details.” Missteps can be fatal. Understanding what changes JOBS will actually afford, and what it will not, is crucial.

 The JOBS Act—or Acts

 Rather than being one law, the JOBS Act is actually more broadly understood as a set of six related laws, Titles I through VI, combining a series of different proposals all addressing the same broad theme of easing restrictions on small business capital raising.

 Although for EB-5 businesses the Title II revision of Reg D has captured the most attention, each one of the six Titles promises to have a likely impact on EB-5 issuers. Title II may have the most “up-front” impact in that its effect should be to markedly ease the fundraising process, yet, as the EB-5 issuer moves forward in its life after the initial raise, through the project creation process, and then into the operational life of its project, it will remain an issuer with outstanding securities held by individual owners, albeit a private “unregistered” issuer, and thus subject to ongoing compliance with “post-raise” securities regulations. In this sense, the entirety of the JOBS Act and the specifics of all provisions need to be understood, as application of the provisions of most Titles will likely come to apply, or at least matter, to almost all EB-5 issuers over time.

Generally speaking, each Act is summarized (in the interests of brevity) next:

1.  Title I, the “Reopening American Capital Markets to Emerging Growth Companies Act,” creates a new type of issuer called an “emerging growth company” and facilitates initial public offerings (“IPOs”) by such issuers. An emerging growth company is an issuer with total gross revenues of less than $1 Billion. In the event such an issuer desires to conduct an initial offering of its securities to the general public (an IPO), Title I simplifies the process for the issuer, and allows it other benefits, including easier communication with potential investors and the opportunity to “test the waters.” While almost all start-up EB-5 issuers conducting private offerings under Reg D will have revenues less than $1 Billion, nevertheless almost none will be affected, unless and until they decide to assume the challenge of a public offering (not the typical model of the standard EB-5 issuer, in particular those that redeem their owners at the usual 5 year timeframe).

2. Title II, the “Access to Capital for Job Creators Act,” is the one causing the most excitement, as it primarily provides for the elimination of the Reg D proscription of general solicitation or general advertising by making the Rule 502 prohibition inapplicable to Rule 506 offerings. The vast majority of EB-5 offerings claiming the Reg D exemption do so using Rule 506, so this change will greatly facilitate the offering and solicitation process, and hence fund-raising. However, the new rule changes also require that, for the prohibition to be avoided, all investors must be accredited, and issuers must take “reasonable steps” to verify investor status.

 Presently, issuers and their marketing agents usually rely on self-certification by investors as to accredited investor status; so do most online platforms. It remains highly advisable that, once a solicitation moves forward (and prior to actual investment), the issuer should obtain detailed representation and warranties from each prospective purchaser regarding his or her accredited investor status. This is typically accomplished through “affirmative” eligibility questionnaires requiring active completion by each investor (and not a mere signature alone). It is anticipated that continuing to obtain these detailed “reps and warranties” via such questionnaires will in turn continue to suffice to discharge the issuer’s duty; however, pending further SEC guidance, it cannot be conclusively stated that obtaining these shall indeed suffice.

 Title II further provides that persons who maintain certain online or other platforms to provide what are called “matching services” (in effect, mechanisms for pairing potential investors with available offerings) for Rule 506 offerings using general advertising or general solicitation will not, solely by virtue of this activity, be required to register as a broker or a dealer—provided those persons do not receive transaction-based compensation and do not take possession of customer funds or securities.

3.  Title III, the “Entrepreneur Access to Capital Act,” is the “crowdfunding” exemption from securities registration allowing for the pooling of money raised in small amounts from large numbers of individuals via internet social media. Absent an exemption from SEC registration (or actual registration), crowdfunding efforts involving sales of securities were previously seen as illegal, and they also raised parallel issues with state and foreign laws. Under this Act, as amended by the Senate, an issuer is permitted to sell up to $1 Million in a 12-month period (with a limit on each investor’s purchase of either $2,000, or a percentage of annual income or net worth, up to a maximum of $100,000). Issuers must meet specific conditions to rely on the exemption, including filing (and periodically updating) information with the SEC, and, significantly, are prohibited from advertising the terms of the offering, other than notices directing investors to “funding portals.” Defined as an intermediary who does not offer investment advice, solicit purchases, compensate persons for solicitations or sales, or handle investor funds or securities, funding portals will not be subject to registration as broker-dealers, but will be governed by an alternative regulatory regime (yet to be established).

 Significant costs are likely to result with crowdfunding offerings, including upfront and ongoing disclosure obligations and charges by funding portals and brokers, while fiduciary and other legal duties will continue to be owed by issuers to their investors, in crowdfunding offerings likely to be quite a crowd. Most importantly for the EB-5 issuer, the low ceiling (capped at $1,000,000) likely leaves Title III as, at best, an occasional and supplementary financing tool—but an available tool, nonetheless.

4. Title IV, the “Small Company Capital Formation Act,” amends existing laws to allow for larger total dollar raises under what are known as “Regulation A offerings.” Regulation A was intended to provide a simple and relatively inexpensive process by which small businesses could raise limited amounts of capital (previously, up to $5 Million), while ensuring investors had access to current information about their investment. “Reg A” is not a private placement, rather it is a mini-registration, requiring the filing of an offering statement with the SEC (subject to its qualification), delivery of an offering circular to prospective investors, and filing of period reports of sales post-offering. The primary upside of Reg A is that the securities purchased are not “restricted,” and under federal law may be freely re-sold and transferred; however, state “blue sky” securities law compliance is still required.

 Title IV increases the Reg A ceiling to $50 Million in a 12-month period. Since the offering is registered, there are no restrictions on the use of general solicitation or general advertising, and again, the securities are not restricted. Further, there are no limitations on offerees, who need not be accredited investors. The issuer may “test the waters,” and under certain circumstances, the securities will no longer be subject to state securities review.

 However, the Reg A issuer is not an exempt issuer, instead it is actually a SEC-registered company (although not a public issuer). Beyond its filing obligations in connection with the initial issuance itself, the Reg A issuer must also file audited financial statements annually, and it is expected that the Title IV Reg A issuer will be required to make the same kind of periodic “registered issuer-required” disclosures (annual 10-K reports, quarterly 10-Q reports, and “newsworthy happenings” 8-K reports, etc.) that public companies find so burdensome (and expensive). With the raising of the maximum offering ceiling from $5 Million to $50 Million, it is conceivable that an increasing number of EB-5 issuers may opt for the revised Reg A mini-registration, despite the heaving filing obligations, however it seems equally likely that the majority will continue to elect the (now eased) Reg D exemption.

5.Finally, Title V, the “Private Company Flexibility and Growth Act,” and Title VI, the “Capital Expansion Act,” together modify existing securities laws by raising the floors at which an issuer must register with the SEC under Section 12(g) of the Exchange Act. Currently, issuers with more than $10 Million in assets (Rule 12g-1) whose securities are held by 500 or more owners are required to register with the SEC. As always, registration carries with it the periodic issuer reporting requirement (10-Ks, 10-Qs, 8-Ks, 6-Ks, etc.) mentioned above, and adds certain reporting requirements on individual owners. Setting aside Title VI (applying different standards to banks and bank holding companies), Title V raises the number of owners to either 2,000 persons, or 500 who are not accredited investors.

 Many EB-5 issuers will satisfy the minimum $10 Million in assets immediately after their initial fundraise, and continue to do so thereafter, thereby satisfying one prong of the modified “registration required” test. As for the “number of owners” prong, EB-5 offerings pose a complication. The peculiarities of the EB-5 Program involve most offerings raising funding at a reduced $500,000 investment-minimum-per-investor rate, which simultaneously serves as an investor maximum amount—that is, each investor invests $500,000, and that’s it. Consequently, EB-5 offerings typically involve greater numbers of investors than non-EB-5 offerings that lack an investor minimum/maximum: a $10 Million EB-5 offering will involve 20 investors, a $50 Million offering 100 investors, and so forth. At the same time, presently EB-5 offerings are often considered to have, practically speaking, a maximum possible raise of $249,500,000 from 499 investors, in order to avoid the (pre-Title V) 500-owner registration requirement. Post-Title V, if the maximum number of owners is now 2,000 (500 unaccredited investors), at EB-5’s $500,000 per investor rate, this should permit an increased possible raise to a maximum of $1 Billion—or, practically speaking, a maximum raise limited only by market capacity.

Bottom Line: The Securities Laws Have NOT Gone Away

 From the EB-5 perspective, then, the JOBS Act provides significant, immediate easing of certain troublesome securities obligations, most notably voiding the Reg D proscription of general advertising and solicitation. In the nearer term, it also makes crowdfunding a real albeit small-scale option, and makes Regulation A quite a more realistic funding option. In the longer term, larger (and, perhaps, more) offerings are possible before Section 12(g) registration would be required, and ultimately an IPO conducted as an emerging growth company could conceivably be an option.

 However, these are all ongoing reflections of a continuing securities regulation regime—not an ended one. The federal (and, sometimes, state) securities laws continue to apply, and as always their complicated and overlapping requirements remain a minefield of possible missteps that can produce explosively punitive consequences for both the EB-5 issuer and those sourcing investors to facilitate its overseas offerings.

For example, the revision of Reg D to permit general advertising and solicitation will undoubtedly allow for significantly expanded marketing, and, it is hoped, greatly ease, and expedite, the fundraising task for EB-5 projects, allowing financing to be raised more rapidly and in greater amounts. However, even as the EB-5 securities issuer and its agents may now undertake widely expanded marketing, the content of that advertising and solicitation remains strictly governed by the anti-fraud provisions of the securities laws contained in what is called “Section 10(b)”. That is, offerors must still provide disclosure to potential investors prior to the investment decision of all “material facts” (defined generally as any fact that a reasonably prudent person would consider important in making an investment decision), and must not omit to disclose any material facts—with the failure to meet this disclosure standard likely constituting fraud. So, whatever the EB-5 issuer may now much more freely and broadly advertise, solicit, and market (thanks to Title II’s revision of Reg D) must still be accurate and complete (under Section 10(b)).

To demonstrate compliance with Section 10(b), EB-5 issuers should continue to generate, and supply, the same level of detailed disclosure via offering memorandum, partnership or limited liability company operating agreement, subscription and escrow agreements, corporate documents, transaction (loan or equity) documents, and other documents fully and accurately depicting the entire investment opportunity. Remember: the Reg D revisions only facilitate the broader advertising of the investment, and the marketing of this detailed information to that broader audience of potential investors—they do not eliminate the continuing obligation to provide full and fair disclosure.

Similarly, in considering the JOBS Act’s impact on their ongoing securities compliance obligations, EB-5 professionals must keep in mind the overlapping nature of those duties. The elimination of the solicitation/advertising prohibition (remember: as to accredited investors only) is entirely distinct from other securities law considerations. For example, eliminating the prohibition does not also relieve sales agents of the issuer, or the issuer itself, from potential broker-dealer liability issues and possible rescission. Although they may now use broad-ranging advertising and solicitation to facilitate EB-5 raises, individuals, including matching services providers, will almost certainly still remain broker-dealers if compensated on a transaction-basis. Therefore, even after full implementation of the JOBS Act, EB-5 issuers need to confirm that their unregistered brokers’ activities are exempt, or limit their brokers to those appropriately registered.

 The JOBS Act will certainly make EB-5 easier, and likely much more successful. This is undoubtedly good news, even if the Act only lessens, and does not eliminate, the entire securities compliance regime governing EB-5 (as well as non-EB-5) offerings. EB-5 issuers should continue to work closely with their securities counsel Cassandras to take advantage of the eased advertising (and other financing options) provided under the JOBS Act while maintaining full compliance with the host of remaining securities obligations.

The types of requests we started to receive from our clients make it clear that there exists a certain extent of confusion in the EB-5 market regarding the availability of Premium Processing. Foreign investors are now demanding only the EB-5 Projects that qualify for the Premium Processing of their I-526 Petitions.

Those, who were present during the latest EB-5 Stakeholder Conference, know that the premium processing does not yet exist. While some EB-5 consulting companies and Regional Centers are trying to clarify the situation to their EB-5 clients, others are making it even more confusing by dispensing misinformation.

We recently came across an article about one EB-5 project where the project’s representative was stating that in the near future their project will be able to provide prospective investors with 15-day premium processing. However, the statement is not true and only causes more confusion in the EB-5 investor’s mind.

At the recent EB-5 Stakeholder Conference that took place in Washington DC in September, it was very clear that unfortunately the availability of the premium processing for I-526 petition is something that is still yet to be finalized and will not be available in the near future. Furthermore, when premium processing does become available, it will be available to all EB-5 applicants. Not just to applicants of a few particular Regional Centers.

Moreover, the USCIS Director Mayorkas indicated that the primary focus of USCIS now is to implement premium processing for petitions to create new Regional Centers (I-924 petitions). That will take time because the USCIS is yet to create new forms and hire more EB-5 adjudicators.

Therefore, we believe that the I-526 petitions premium processing is months away not only from becoming reality but also from becoming a primary focus of the USCIS. And even after USCIS shifts attention to premium processing for individual I-526 petitions the department will still need to implement the streamline process.

For more information on the EB-5 visa program, please contact expert EB-5 consultants of Exclusive Visas, Fred Burgess or Joe Sloboda, at info@exclusivevisas.com or 001+1-954-727-9800.

When applying for an EB-5 Visa many people focus just on the approval of the initial part of the process and the approval of the form I-526.  And while the approval of your 526 is critical it is not the final part of the process before you can emigrate to the United States.

Getting your I-526 approved is simply part of the process before you are granted a conditional green card. Once you receive the I-526 approval from the USCIS, you then need to go to schedule a Consulate interview for final approval of the conditional green card.

Why is this necessary, if I already received approval from the USCIS? There are a number of reasons why the Consulate application and interview are still required. However the primary reason is that the U.S. Consulate in your home country must prepare documents for the Visa interview upon approval of the I-526 application. This procedure is required to ensure that the investor is admissible to the United States upon approval of the form I-526, among other things.

Decisions by the consulate are to be made in agreement with regulatory guidance in this process, the consulate has authority under these regulatory procedures and their decisions are final and unreviewable. The investor should seek advice of competent legal counsel regarding visa issuance guidelines and be sure that their immigration attorney has experience in the area of the EB-5 Visa.

For more information about the EB-5 Consular interview process and to seek advice on how to be sure you have retained experienced immigration counsel please contact Fred Burgess or Joe Sloboda of Exclusive Visas via email at info@exclusivevisas.com or by phone at +954-727-9800.