Do EB-5 investments have to conform to regulatory requirements for selling securities in the U.S.? The short answer is yes. If you participate in the program, make sure to follow these guidelines.
The U.S. EB-5 program (“EB-5”) has been in effect since 1992, and, because of this important immigration program, billions of dollars of investments have been made in companies and projects throughout America by non-U.S. persons.
However, many professionals in the EB-5 community have questioned whether EB-5 financings must fully conform to the regulatory requirements for selling securities in the U.S.
Some have argued that standard securities laws and regulations are not applicable because:
- EB-5 transactions are part of an immigration program, not just a financing;
- EB-5 investments are sold primarily to non-U.S. persons outside the U.S. and, therefore, outside U.S. regulatory jurisdiction; and
- EB-5 program management is conducted by the United States Citizenship and Immigration Services (“USCIS”), so the SEC doesn’t have jurisdiction in the manner that they would for the same transaction outside the program.
Based upon recent EB-5 legislation by the U.S. Congress and numerous EB-5-related enforcement actions by the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”), this viewpoint is clearly incorrect.
EB-5 financings involve the issuance of securities that are subject to the same regulatory requirements, both federal and state, as all other securities offerings in the U.S.[1] There is no special treatment for the securities offered through EB-5 financings.
Emphasizing this point, the EB-5 Reform and Integrity Act of 2022 (the “RIA”) states repeatedly throughout the statute that EB-5 financings must comply with federal as well as state securities laws (see Sections 2(b)(E)(iii)(II)(aa), 2(b)(F)(i)(V), 2(b)(I)(i)(I), etc.).
Furthermore, for over 15 years, the SEC and FINRA each have imposed enforcement actions repeatedly and consistently that have been upheld in courts against organizations and persons engaged in non-compliant EB-5 financings.
Summary Guidelines
- EB-5 financings involve the issuance of securities and, as such, are subject to federal and state regulatory compliance.[2]
- To be exempt from public registration with the SEC, an EB-5 offering within the U.S. should be conducted with a “manner of offering” following SEC Regulation D, Rule 506, the SEC’s private placement “safe harbor” provisions.
- The process of originating securities (setting the security’s terms, Issuer due diligence, offering document preparation) for an EB-5 financing within the U.S. should involve a FINRA-registered broker-dealer assigning investment banking professionals to the transaction who have passed either a Series 79 or Series 82 exam or, to the extent that the offering involves only a direct participation program, individuals with a Series 39 and/or 22 FINRA license.
- EB-5 offerings involving solicitations exclusively outside the U.S. by non-U.S. brokers can rely on Regulation S, while EB-5 offerings involving accredited investors temporarily present in the U.S. can rely on Regulation D.
- If there is any form of solicitation to or resulting investment by a person located in the U.S., a U.S. broker-dealer must sponsor the EB-5 financing, except in special circumstances.
Carofin has prepared this material to help participants in EB-5 financings (EB-5 Regional Centers, immigration attorneys, project sponsors, and potential EB-5 investors) better understand and comply with U.S. securities laws when determining whether they should engage a FINRA-registered broker-dealer to support their EB-5 financing. For a more comprehensive description of these requirements, please see Carofin’s U.S. Security Law Compliance for EB-5 Offerings. (link to come).
[1] United States Securities and Exchange Commission v. Feng. 935 F.3d 721, 725 (9th Cir. 2019).
[2] SEC Charges Unregistered Sales of Securities Issued under EB-5 Immigrant Investor Program, Sept. 21, 2018
