Whyte & Co. agrees, better to be safe, compliant and transparent.

The  sale of interests in EB-5 offerings is a securities transaction that involves direct or pooled investments sold through private placements that raise many of the same concerns as those associated with sales of any private placement securities transaction. Yes, the rules are changing for EB-5, and will become clearer over time, but one thing is certain, using a securities team to oversee your project will only be an advantage to your success, and may soon be an EB-5 requirement.

We must ensure all transactions fit the changing EB-5 rules. As you find EB-5 investors, you are selling US based securities, and as such you MUST follow all the rules within the United States. In this regard, the SEC has recently filed a number of civil actions in federal court alleging securities violations, including fraud, in connection with several EB-5 programs.  Using an experienced broker dealer that conducts thorough due diligence on your EB-5 project could help prevent some of the abuses and violations that the SEC has uncovered in various cases thus far.  Identifying and correcting potential issues before they become problems could be the key to success or failure for your EB-5 project.  Additionally, proper disclosures to your  EB-5 investors and documenting their acknowledgement would go a long way to protecting your EB-5 project and keeping you compliant.

The applicability of FINRA Rule 2111, the suitability rule,  to EB-5 program suggests securities transactions should be considered when completed EB-5 capital raising. The EB-5 Program is designed to allow foreign nationals to obtain U.S. residency through investment in domestic projects under the USCIS rules. FINRA’s response is limited to members’ recommendations of securities or investment strategies involving securities to foreign nationals seeking, among other things, U.S. residency. However, one thing is sure, the SEC is looking at EB-5 projects for more than fraud, they are considering these capital raising activities to be the selling of US securities and therefor, these projects must follow all the rules of the Securities Act of 1933 that relate to the selling of securities.

To the extent that a FINRA member firm recommends a security or investment strategy involving a security to a foreign national in connection with the EB-5 Program, the suitability rule would apply to the recommendation. The safeguards provided by the suitability rule are no less important where the FINRA member’s customers are foreign nationals seeking investment returns and a path to U.S. residency.

The main concern centers on two suitability obligations: reasonable-basis and customer-specific suitability. Under the reasonable-basis obligation, a broker-dealer must perform reasonable diligence to understand the nature of a recommended security or investment strategy involving a security, including its potential risks and rewards, and then determine whether there is a reasonable basis to believe the recommended security or investment strategy is suitable for at least some investors. See FINRA Rule 2111.05(a).

FINRA has provided guidance on what constitutes reasonable-basis as it relates to private placements and Regulation “D” offerings. FINRA has stated that, when recommending a privately-placed security, a broker-dealer; “should, at a minimum, conduct a reasonable investigation concerning the issuer and its management; the business prospects of the issuer; the assets held by or to be acquired by the issuer; the claims being made; and the intended use of proceeds of the offering.” In the context of a private placement related to the EB-5 Program that a broker-dealer intends to recommend to foreign nationals seeking investment returns and U.S. residency, these same issues should be explored, issues that address the legitimacy and viability of the issuer’s enterprise. A broker-dealer also should analyze whether the private placement is consistent with the requirements of the EB-5 Program, such as whether it constitutes an investment in a domestic project that will create or preserve at least 10 jobs per investor for U.S. workers.

As to the investor/customer-specific obligation, a broker-dealer must have a reasonable basis to believe that a recommended security or investment strategy involving a security is suitable for a particular customer based on the customer’s investment profile. See FINRA Rules 2111(a); 2111.05(b). A customer’s investment profile includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance. See FINRA Rules 2111(a); 2111.04. In addition to these specific factors, a customer’s investment profile also would include any other information the customer may disclose to the member or associated person in connection with a recommendation, such as particular goals with respect to an investment. For instance, when a customer is a foreign national who discloses to the FINRA member that he or she is seeking U.S. residency by investing in an EB-5 Program securities transaction, such information would become part of the customer’s investment profile and must be considered when determining whether the recommended investment is suitable for the particular customer. In this situation, among other customer-specific considerations, the member should evaluate the investment in the context of the customer’s goal of obtaining U.S. residency through purchasing an investment that is consistent with the requirements of the EB-5 Program.