Articles Posted in Securities Broker-Dealers

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Good for raising capital in California, but contrary to current SEC policy for transactions outside California

On October 10, 2015, the Governor of the State of California approved California Assembly Bill 667, which will legalize the payment of finder’s fees by an issuer of securities to a person who introduces one or more accredited investors who purchase securities of the issuer and who complies with the requirements of new Section 25206.1 of the California Corporations Code, as described below. This new law will take effect on January 1, 2016, and will create a fundamental change in California securities law. However, it will also create a conflict between California law and the current policy of the Securities and Exchange Commission (“SEC”), which considers payments of finder’s fees to persons not registered as securities broker-dealers as violations of Section 15(a) of the Securities Exchange Act of 1934 (“Exchange Act”).

The new California law recognizes the widespread practice of payment of finder’s fees to unregistered persons and acknowledges the need to legalize this practice to promote capital formation in small business.

The new California law was proposed by the Business Law Section of the California State Bar in 2012, for the purpose of legalizing what the Business Law Section acknowledged was already a widespread practice of payment of finder’s fees by businesses seeking to raise capital, both in California and nationwide. In recommending the change in California law, the proposal commented that percentage-based compensation is often the only type of compensation that an issuer can afford to pay to a finder. The proposal noted that the penalties for payment of finder’s fees to unregistered persons included rescission of sales of securities, which potentially harmed both issuers and investors in companies which raised capital using unregistered finders. The proposal concluded that legalizing finder’s fees was a necessary action to promote capital formation for small businesses and eliminate the risks caused to issuers and investors resulting from the treatment of this common practice as illegal under California securities laws. Continue reading →

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By Catherine DeBono Holmes, Esq.

On June 23, 2015, the Securities and Exchange Commission (“SEC”) announced that it had entered into an Offer of Settlement with Ireeco, LLC and Ireeco Limited, finding that their activities constituted a violation of Section 15(a)(1) of the Securities Exchange Act of 1934 (the “Exchange Act”) because they acted without registration as a broker-dealer with the SEC.  By entering into an Offer of Settlement, the Ireeco entities waived their rights to an administrative hearing, and without admitting or denying the findings, they consented to the entry of the Order.  The Order requires that the Ireeco entities cease and desist from committing or causing any further violations of Section 15(a), censures the Ireeco entities, and orders further proceedings to determine whether to require disgorgement of ill-gotten gains and/or civil penalties, and if so, the amount of such disgorgement or penalties.

The Order provides several important insights into the SEC’s views of what constitutes marketing activities that require broker-dealer registration in the EB-5 investment market.  We offer our analysis of these issues here.

According to the Order, the SEC found that the following activities violated the Securities Exchange Act:

  • Ireeco LLC was formed in 2006 as a U.S. entity with an office in the U.S., where a small staff of 4 to 5 people worked, including the two principal owners, Stephen Parnell and Andrew Bartlett.  They operated primarily through a website, whicheb5.com, which offered to help foreign individuals determine if the EB-5 Visa Program would work for them and to help them find EB-5 regional centers and projects.
  • Ireeco Limited was formed in 2012 as a Hong Kong entity, and replaced Ireeco, LLC as the company that solicited foreign investors for EB-5 investments. It listed a “U.S. Admin Office” address for the company in Greenville, South Carolina, and continued to rely on the same small staff of 4 to 5 people located in the U.S., including Parnell and Bartlett, that operated Ireeco, LLC.
  • In at least 10 instances, potential investors were already residing in the U.S. on some other type of temporary visa when they were solicited by Ireeco, LLC or Ireeco Limited.
  • Ireeco would give each investor one or more EB-5 regional center projects as possible choices, and claimed to perform “due diligence” on each of the regional centers it selected for its customers.
  • Ireeco would give each investor one or more EB-5 regional center projects as possible choices, and claimed to perform “due diligence” on each of the regional centers it selected for its customers.
  • After each investor identified which regional center they wanted to work with, Ireeco would “register” the investors with the regional center. The investors then dealt mostly with the regional center, received offering documents from them, and only occasionally dealt with Ireeco after that.
  • Ireeco LLC and Ireeco Limited had “referral partner agreements” with regional centers, who compensated them for each registered investor who invested funds in an EB-5 offering, which was generally $35,000 per investor paid through the Administrative Fee.

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This article is the second in a series of articles on how EB-5 regional centers and sponsors can evaluate broker-dealer, investment company and investment adviser registration requirements under U.S. securities laws.

You may want to read: Part 1 – EB-5 offerings do not fit standard SEC registration requirements

Check back soon for the rest of the series, or subscribe to the Investment Law Blog, and you will be notified when the next article is published.

Part 2: Securities Broker-Dealer Registration Requirements and Hiring U.S. and Non-U.S. Brokers

As mentioned in Part 1 of this article, “EB-5 offerings do not fit standard SEC registration requirements” the Securities and Exchange Commission (“SEC“) is studying the EB-5 investment market, but there is no indication whether or when it will issue any guidance regarding the registration requirements applicable to the sale of EB-5 investments.  At the May 2014 annual conference of the Association to Invest In the USA (“IIUSA“), the trade association for the EB-5 regional center program, representatives of both the SEC and the Financial Industry Regulatory Association (“FINRA“) gave presentations regarding the potential application of registration requirements to EB-5 regional centers and others engaged in the marketing and sale of EB-5 investments, but there was no indication that the SEC or FINRA had developed any policies specifically addressing the unique characteristics of the EB-5 market.

There are exemptions from broker-dealer registration that are available to EB-5 regional centers and entities which act as general partners or managers of EB-5 investment funds.  In addition, there are exemptions that apply to non-U.S. broker-dealers in connection with the sale of U.S. securities that could be applied to the sale of EB-5 investments.  However, there is a lack of clear guidance specifically applicable to the broker-dealer registration requirements that apply to persons engaged in the marketing and sale of EB-5 investments outside of the U.S.  Until such time as the SEC provides specific policies, the EB-5 community is in need of practical advice on how to conduct their business in compliance with U.S. securities laws, and in a way that fits the realities of the EB-5 market. Continue reading →

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This article is the first in a series of articles on how EB-5 regional centers and sponsors can evaluate broker-dealer, investment company and investment adviser registration requirements under U.S. securities laws. Check back soon for the rest of the series, or subscribe to the Investment Law Blog, and you will be notified when the next article is published.

Part 1:  EB-5 Offerings Do Not Fit Standard SEC Registration Requirements

  • The SEC has not provided clear guidance on how to comply with U.S. securities laws requiring registration as a securities broker-dealer, investment company or investment adviser when conducting EB-5 offerings

The U.S. Securities and Exchange Commission (“SEC“) has stated in open meetings with the United States Citizenship and Immigration Services (“USCIS“) and the Association to Invest In the USA (“IIUSA“), the trade association for the EB-5 regional center program, over the past two years that EB-5 investment offerings are subject to U.S. securities laws, even though EB-5 investments are offered primarily outside the United States to persons who by definition are not currently U.S. residents but are seeking to become U.S. residents as a result of making their investment in an EB-5 offering.  However, the SEC has not provided any specific guidance to the EB-5 investment community on the ways in which they can comply with the registration requirements that apply to the registration requirements for securities broker-dealers, investment companies or investment advisers under U.S. securities laws, other than to suggest that they speak to an experienced securities lawyer.  This advice leads to conflicting opinions among lawyers, and makes it difficult for everyone involved in the EB-5 investment market to know exactly what they are required to do in order to comply with these registration requirements under U.S. securities laws. Continue reading →

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Are regional centers really required to register as broker-dealers under U.S. securities laws?

Recent articles have suggested that every United States Citizenship and Immigration Services (“USCIS”)-approved regional center which pools foreign investor funds for EB-5 investment offerings sold to foreign investors may be required to register as securities broker-dealers under U.S. securities laws. In addition, it has been suggested that the principals or employees of regional centers must be registered as licensed “associated persons” of a securities broker-dealer under U.S. securities laws. We agree that it is extremely important to conduct EB-5 investment offerings in compliance with all applicable securities laws, but we believe there are better ways of complying without registration as a broker-dealer. In this article, we will answer some of the most frequently asked questions we receive from our clients using EB-5 financing for their projects, and offer some practical guidelines for regional centers and project developers to conduct EB-5 investment offerings in compliance with the regulations and policies of the Securities and Exchange Commission (“SEC”).

Do broker-dealer registration requirements apply to EB-5 offerings that are exempt from U.S. securities laws?

Yes. Many people do not realize that even if the offering of EB-5 investment securities is exempt from registration under U.S. securities laws, every person who sells EB-5 investments is still subject to the requirements for broker-dealer registration or exemption. In this article, we are focused on the SEC registration requirements and exemptions that apply to people engaged in the sale of EB-5 investments, whether they are selling here in the U.S. or outside the U.S. There are also state laws that apply to registration of broker-dealers, but for securities offerings that take place in more than one state, federal laws and regulations are primary, and we therefore focus on federal requirements in this article. Continue reading →