EB-5 and Securities Law
The Securities Exchange Act of 1934 (the “Act”) was passed in the aftermath of the 1929 Wall Street Crash, where many investors discovered they had purchased worthless shares from fraudulent salesmen. Several laws and licensing requirements have followed from the Act and subsequent legislation, including creation of the Securities and Exchange Commission (SEC) and state securities agencies. The SEC designated Financial Industry Regulatory Authority (FINRA) to manage individuals and firms in the securities business.
- A “Broker-Dealer” is a company that sells investments (or “securities”) to others, but cannot advise investors on which investments to acquire. In an attempt to prevent fraudulent or misleading sales, broker-dealer representatives are required to pass licensing exams and register with FINRA, which brings extensive requirements and oversight.
- A “Registered Investment Adviser” (RIA) is a company that advises investors on appropriate investments but does not transact the actual exchange. RIA’s are registered either with the SEC or their home state securities agencies, depending on their market and size. RIAs and their licensed representatives are bound to strict fiduciary responsibilities, up to personal liability for loss of investments and prison time.
How Does This Affect EB5 Visa Investments?
With very few and difficult exceptions, regional centers and/or sponsors who sell EB-5 investments more than once in any 12-months are required to register as broker-dealers. When EB -5 Regional Centers properly offer investments as licensed broker-dealers, it removes a number of risks to the EB-5 investor, including:
When EB-5 Regional Centers properly offer investments as licensed broker-dealers, it removes a number of risks to the EB-5 investor, including:
- Rescission. Courts have used the Act to declare securities transactions entered into with unregistered broker-dealers to be void. Issuers may be required to make a rescission offer to the purchasers of those securities, which allows each investor to withdraw with a full refund of their investment. Obviously, this would be catastrophic for an illiquid investment such as real estate, possibly resulting in the liquidation of the project and loss of the EB-5 job creation.
- Loss of Exemption from Registrations. Small investment offerings such as EB-5 projects cannot withstand the multi-million-dollar compliance costs of a registered (or listed) offering. Accordingly, the sponsor may have a difficult time obtaining a legal opinion from its counsel in connection with that transaction or a future transaction.
- Aiding and Abetting Liability. Use of an unregistered broker-dealer may also subject a sponsor to civil and criminal penalties, as the company aided or abetted the unregistered broker-dealer. Obviously, this would be catastrophic for the EB -5 investment.
- Violations of State Securities Laws. In addition, various state laws may provide stockholders with rescission rights as well, even where the unregistered finder did not contract directly with investors.
Benefits to working through a licensed broker-dealer include:
- The offering has been reviewed by the broker-dealer with the high due diligence standards expected by the Financial Industry Regulatory Authority, Inc. (“FINRA”); and
- FINRA has performed its own review of the offering for deception and securities compliance, and
- Sales of the offering transpire under the supervision of the broker-dealer, reducing the likelihood for misrepresentation; and.
- In the case of US Freedom Capital EB-5 investments, the broker-dealer is a member of the Securities Investor Protection Corporation (SIPC), which protects customers if their brokerage firm fails. If it happens, SIPC protects the securities and cash in your account up to $500,000. The $500,000 protection includes up to $250,000 protection for cash in your account to buy securities.
How can you tell if an EB-5 investment is offered through a licensed broker- dealer?
All EB-5 investments offered by a licensed broker-dealer must be filed with FINRA under Rule 5123. Simply require a FINRA Rule 5123 Filing Receipt as a required due diligence item before engaging with an EB-5 promoter.