Congress created the EB-5 program in 1990 to benefit the U.S. economy by attracting investments from qualified foreign investors. The program has been reauthorized nine times since 2002, most recently re-authorized through September 30, 2016. Today, 95 percent of all EB-5 capital is raised through regional centers, which are organizations designated and regulated by the United States Citizenship and Immigration Service (USCIS) that facilitate investment in job-creating economic development projects by pooling capital raised under the EB-5 program.
EB-5 investments that are affiliated with EB-5 regional centers are made through private placements, which are governed by federal and state securities laws and regulations. With the growth and expansion of the EB-5 program—investments made through the program in 2014 contributed more than $4 billion to U.S. GDP—the SEC and FINRA have taken note. Particularly in light of some recent high-profile fraud cases against EB-5 regional centers and their officers, attorneys and broker-dealers, attention and scrutiny has been snowballing.
And now, the SEC has made a formal proclamation: “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.” Additionally, FINRA announced: “These [focus on private placement] concerns are relevant regardless of the underlying industry of the issuer or the type of investment (e.g., notes offering, pre-initial public offering investment funds, real estate programs, EB-5 investment funds or start-up companies).” It is clear that the EB-5 program is at the forefront of these regulators’ scrutiny.
Accordingly, EB-5 regional centers and issuers would be wise to:
- confirm that disclosures to investors are adequate and appropriate for the types of investors in your offerings
- make sure that offerings and entities fall squarely within the relevant exemptions and exclusions from SEC registration, or register if necessary
- audit your offering documents, particularly with respect to return on investment, use of proceeds, and prospects and performance of the EB-5 project
- remain vigilant about the payment of commissions and fees and understand when registration is required for such payment
- conduct due diligence on your developers and land owners, as well as migration agents and broker-dealers.
Last, but certainly not least, make sure you have a compliance program in place, clearly documented with policies and procedures demonstrating a commitment to compliance.
To learn more, see the full list of the OCIE and FINRA examination priorities for 2016.
