EB-5 Webinar Series: Certain Disclosure Obligations Related to EB-5 Offerings

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

The EB-5 Webinar Series hosted by EB5 Diligence consists of a one hour webinar every other week and deals with very critical topics involving the securities, corporate and financing aspects of the EB-5 Program.

The webinar on April 1, 2015 was titled “You can’t run from trouble. Disclosure of prior conduct of individuals and litigations.” It addressed the issue of EB-5 required disclosures for failure to disclose certain background information as the principals related to an EB-5 Offering. It also addressed the treatment of SEC subpoenas and the disclosure obligations related thereto. The panel members of the webinar had a very active debate on many of these issues and the following items were of interest:

1. The difference between a regional center that is actively involved with EB-5 Programs that manage EB-5 companies (“NCE”) vs. a regional center that is only sponsoring the Program, but not providing any services or marketing activities related to the Program. With respect to the latter situation, disclosures related to the regional center appear to be less material, and, therefore, only those disclosures that would affect the viability of the regional center would be more relevant.

2. Follow the Money Trail. Any party having control over funds becomes more critical of the disclosure process. There are very specific disclosure obligations that have otherwise been established such as the SEC Rules and Regulations, including Section 229.401, Subpart 229.400-Management of Certain Security Holders. This involves SEC offerings and deals with specific mandatory disclosures of background information upon certain key executives or directors of a public company or a public offering. These disclosures could likewise apply in the EB-5 context. In a nutshell, the disclosable matters involve the following:

     (1) Bankruptcy. The bankruptcy of certain principals or executives, including affiliated entities of the principals. There is a ten year look back based upon when the bankruptcy was discharged or when the bankruptcy was filed, depending upon certain circumstances.

     (2) Criminal Background of the Principals, excluding traffic offenses. (10 year look-up).

     (3) Legal proceedings. Legal proceedings involving actions by state or federal governments concerning specific matters, including those of a financial nature, are required to be disclosed (10 year look-back).

     (4) General Rule 10(b)(5). Concern over the issue of materiality and the disclosure and any information that would have a material impact on the position of the investor who is investing in the EB-5 Program. It is arguable that with respect to a loan Program, disclosures related to the project developer, especially if unaffiliated with the regional center, has the most importance since it is the project developer who receives the loan proceeds and ultimately is responsible to pay back the loan since they have to repay investor capital.

     (5) For a regional center that organizes the Program, manages the EB-5 NCE and undertakes the marketing of the project and has active control over the money being raised and disbursed, the background of its principals is likewise very material.

     (6) SEC Subpoenas. There was a lengthy discussion as to the nature of SEC subpoenas. Subpoenas generally have a matter and case number attributed to them. If a party is being directly investigated, then the existence of the SEC subpoena becomes far more material with respect to a mandatory disclosure. However, if the subpoena issued by the SEC is to gather information in connection with the investigation of other parties, then to the extent the applicable party receiving the subpoena, such as regional center or other service provider, has not been actively involved in any potential improper conduct, then the subpoena itself could be considered to be more of an administrative matter since the SEC is gathering information rather than providing a basis for an SEC action. The disclosure of same could have a very adverse effect on the credibility of the disclosing party even if it is totally disassociated with the subpoena process.

     (7) It is always easier to disclose any action brought by the SEC including a subpoena. However, the counter balancing in factor is that the actual disclosure will clearly have a very negative marketing effect on the offering and the reputation of the party receiving the subpoena, which party may be otherwise totally innocent and just caught up in the documentation request issued by the SEC. It is obviously advisable for parties receiving subpoenas to discuss same with qualified professionals for more detailed guidance on the disclosure obligation.

Please click here to view the webinar.

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