Proposed EB-5 Senate Bill Draft – Securities and Corporate Matters

Arnstein & Lehr Attorney Ronald Fieldstone

Ronald R. Fieldstone

Response to Proposed EB-5 Draft Bill

After reviewing the proposed Senate legislation EB-5 draft bill prepared by counsel to the Senate, here are my thoughts regarding corporate and securities matters which have been changed or omitted altogether from the bill as drafted in its current form. This post will not address detailed immigration issues.

  1. Business Plans for Regional Center Investments. Contained in subparagraph (F), there are various proposals that contain many inconsistencies and problems. a. In subsection (IV)(cc), there is disclosure concerning material litigation or bankruptcy or adverse judgments. For some reason the criminal background is not included in that disclosure which seems like an omission. b. In subsection (IV)(dd), there is an obligation to disclose ongoing interest, compensation and any amounts paid to agents, finders, broker dealers and the like. The problem here is that when an offering is prepared for distribution, many of these items will not be known at the time the offering documents are prepared and only ranges of compensation could be provided since in many situations, the actual compensation to be paid is not finalized at that time. It is typical in an EB-5 offering that the interest to the investor is disclosed and that there is a range of compensation paid to marketing agents that is disclosed which includes the regional center and the marketing agents, since in many cases the amount being paid is variable and the breakdown of the payments is not established in advance. Furthermore, contained in subsection (CC) is a requirement to provide the names and contact information of such persons, which again is not necessarily known at the time that the offering is completed. c. Concerning subsection (VI), there is a required certification from a regional center, new commercial enterprise (“NCE”) and the job creation entity (“JCE”). In many cases all three parties may not be actively involved in the securities offering process and therefore may have a difficult time providing the certification. This is especially true in the case where a regional center is not involved at all in the offering process, but merely sponsors the project. The new legislation put the burden on the regional center to be completely responsible for the content of the offering documents, which is currently not market practice. Accordingly, this would increase the cost of utilizing regional centers, increase the cost of regional center compliance, and require regional centers to in effect have their own securities and immigration counsel for review and verification of all information provided for the ability to comply with the certification. Furthermore, it should be clarified that the certification initially relates to 1933 Securities Act compliance with respect to disclosure since it is impossible to certify 1934 Act marketing issues where the marketing activities has not even begun to take place.
  2. In Section (G)(i)(V), there is an accounting of all foreign investor capital in the regional center, NCE and job-creating entity. This is somewhat of a misnomer. There is no foreign capital invested in a regional center pursuant to an EB-5 program. The money is almost always invested in the NCE, with the invested capital loaned to the JCE. In a direct program where an NCE does not exist, the investors can invest directly in the JCE, but this needs to be clarified since the investors would never invest in both an NCE and a JCE.
  3. In Section (G)(i)(VI)(ff), there is an accounting of all fees collected from alien investors. The investor only pays administration fees and they are typically paid directly to the regional center or agent. Typically, the JCE would pay the loan monitoring fees or related fees on an ongoing basis. The language itself is confusing and should be clarified.
  4. With respect to subsection (H)(i)(I), there are restrictions on who can be involved with a regional center. There is exclusions for persons having criminal or civil violations involving fraud or deceit within the previous 10 years. What does a violation mean? There really needs to be an adjudication or finding in a judiciary tribunal that is final and not appealable. In addition, a criminal offense could include, a minor traffic violation or some other type of criminal activity that is not relevant to EB 5 program or the person’s involvement in a regional center.
  5. Subsection (ii)(aa) provides a further restriction where the person has committed fraudulent, manipulative or deceptive conduct. I question whether there should be a materiality standard in connection with this standard, maybe a dollar amount should be stated to result in exclusion.
  6. Section (IV), subsection (bb), provides a person during the prior 10 years that received a reprimand or has otherwise been publicly disciplined by a state bar association is also excluded. It singles out attorneys compared to any other professional. Furthermore, a reprimand by nature is not nearly as relevant as a disbarment. In addition, a disciplinary proceeding which is no longer active where the party disciplined has been reinstated should not serve as a standard for barring an attorney from being involved in a regional center. The purpose of reinstatement by a state bar association confirms the fact that the attorney meets the standard necessary to practice law. It is not up to the Legislature to countermand the standards imposed by a state bar association.
  7. Concerning subsection (ii), Foreign Involvement in Regional Center, there is a complete bar for any involvement by a foreigner. There could be distinction between management and possibly a majority ownership. It seems highly irregular to impose restriction on foreigners investing in United States entities that are not involved in national security matters.
  8. In Section (I), Compliance with Securities Laws, concerning subparagraph (i) – In general – I think there should be clarification that this compliance relates to the 1933 Act with respect to United States jurisdiction since the law should imply that the SEC is trying to regulate broker-dealer transactions abroad that are clearly exempt under existing law. Subsection (ii) specifies that the Regulation S exemption still applies, but that does not otherwise address the broker-dealer issues with respect to foreign agents that are actively involved in the sale of EB-5 securities, should be clarified as well.

In addition to the above, there are numerous immigration problems with the proposed legislation including:

  1. Retroactivity to June 1, 2015
  2. TEA definition – almost eliminates urban projects
  3. Retroactive increase in investment amounts.

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