Legal Overview of EB-5 Immigrant Investor Program Offerings and SEC Compliance
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The EB-5 Investment Program — What Is it?
The U.S. market offers the largest consumer market on earth and boasts the highest global household expenditure. On top of that, the U.S. has one of the most open markets and best investment climates in the world. So it’s no wonder that the U.S. is the top destination for foreign business investors.
Foreign nationals who want to live and work in the United States have a fast track to permanent residence if they are also investors. In 1990, Congress established the “EB-5 Immigrant Investor Program” (referred to herein as “EB-5,” the “EB-5 Program,” or “the Program”) to allow foreign investors and their families (spouse and unmarried children under the age of 21) to obtain permanent residency (a green card). The EB-5 Program — named for the visa received (“employment-based fifth preference”) — can be the fastest way to become a permanent U.S. resident.
If, that is, you can qualify for the Program.
Administered by the U.S. Citizenship and Immigration Services (USCIS) within the U.S. Department of Homeland Security (DHS), the EB-5 Program is codified in Section 203(b)(5) of the Immigration and Nationality Act (INA; 8 U.S.C. §1153(b)(5)).
In brief, investors must invest a minimum of $1,050,000 USD or $800,000 USD in a new commercial enterprise located in rural areas with high unemployment and create or preserve 10 full-time jobs for qualified U.S. employees. Capital used to invest must be lawfully acquired, and investors must be able to prove where their capital came from.
EB-5 offerings can be made by foreign investors in one of two ways: either the investor makes a direct (or standalone) investment in a commercial enterprise in the United States, or the investor invests through a regional center approved by the USCIS (the “Regional Center Program”).
If the investment qualifies for the Program, the foreign national and his immediate family members will be eligible to apply for and obtain a green card. This is beneficial for both the foreign investors and U.S. residents. Foreign investors get a fast track to citizenship through EB-5 offerings, and the U.S. economy gets a boost from the injection of capital and job creation.
While it may seem like a simple setup, the EB-5 Program is made up of complex and complicated rules and specifications. So, it’s critical for issuers to be conversant with some of the compliance issues surrounding EB-5 offerings.
What are the Key Compliance Requirements Issuers Need to Know about the EB-5 Program?
The EB-5 Program may be a fast track to becoming a U.S. citizen, but it has specific and often complex rules and requirements that issuers need to be aware of. Below, we touch on some of the key requirements.
(Because this is a very complex area of law, please note that this is not a complete, detailed recitation of all of the requirements, merely a brief overview. Thus, readers interested in applying for an EB-5 visa are advised to consult with appropriate professionals for assistance.)
The program has some unique investor qualification criteria.
The EB-5 Program has unique investor eligibility requirements. In brief, there are two criteria an applicant must meet:
Making a direct investment of $1,050,000 USD, or $800,000 USD in a rural or high-unemployment area (referred to as a “Targeted Employment Area” (TEA)), and
Creating 10 full-time jobs which can be filled by eligible U.S. residents.
But there’s more…
The investment, as noted, must be in the amount of $1,050,000 USD or $800,000 USD and in an area considered to be a TEA. In addition, the investment must be made in a lawful, for-profit new commercial enterprise or restructured/expanded business that was established after November 29, 1990. A number of different business structures can qualify, including corporations and sole proprietorships. The capital used to make the investment can be in the form of money or tangible property. However, it must have been obtained by lawful means, and the investor must be able to prove it.
Importantly, the investment must be one that is considered to be “at-risk.” This means that the investment must have the potential for loss or gain. If any portion of the investment has a guaranteed return, it won’t qualify for the EB-5 Program.
In addition, the investment must create, or preserve, 10 full-time jobs in the U.S. The jobs must be for U.S. citizens or other lawful permanent residents and cannot be for the applicant’s family members.
In 1992, Congress modified the job creation requirement when it established the “Immigrant Investor Pilot Program,” also known as the “Regional Center Program,” which allows EB-5 investors to comply with their requirements through the use of an approved regional center. Through regional centers, the USCIS authorizes the pooling of funds from many EB-5 investors to invest in projects designed to stimulate the U.S. economy and create jobs. Generally, these projects consist of large commercial developments.
Assuming an investor meets the investor criteria, how does one make an EB-5 investment?
We’ll look at that next.
There are two ways to make an EB-5 investment.
There are two main pathways to making a qualified EB-5 investment. They are:
Make a direct investment, or
Invest in a new commercial enterprise through a qualified regional center.
Which path an investor chooses depends on that investor’s objectives. However, once an investor decides which route to take, there is no going back. In other words, you can’t change from one type of investment to another.
Each investment pathway has its own specific requirements, procedures, and level of risk.
Direct Investments
Direct or standalone investments require that the investor put capital directly into a new commercial business. With this avenue, the EB-5 investor generally takes an active part in running the new business. Direct investors cannot pool their money with other investors.
In addition, direct investors must create — and be able to prove that they have created — 10 full-time jobs that will last at least two years.
Investment through Regional Centers
The other EB-5 investment path is through approved regional centers. In 1992, the federal government introduced a program in which public or private entities could be designated by the USCIS to sponsor capital investment projects under the EB-5 Program.
The USCIS authorizes these centers to pool funds from multiple EB-5 investors to fund projects in the United States that will create jobs and boost the economy. Strict requirements exist for an entity to qualify as a regional center.
With regional center investments, the EB-5 investor does not play an active role in the running of the business or project. Rather, the regional center decides which projects to support with the funds from multiple investors. Using a regional center makes it easier for most investors to comply with the “job creation” requirement because with regional center investments, both “indirect” and “direct” jobs can be counted towards the job creation requirement.
Although the program allows the use of regional centers, in recent years, regional centers have come under close scrutiny from the Securities and Exchange Commission (SEC) and the USCIS.
3. SEC compliance is critical
The next important thing to know about EB-5 offerings is SEC compliance is critical for issuers. Although the purpose of the EB-5 Program is to provide a way for immigrant investors to obtain a visa, EB-5 investments themselves may constitute “investment contracts.” In addition, the financing of an EB-5 offering involves the purchase and sale of securities. As a result, the SEC considers EB-5 offerings to be securities, making SEC compliance key for all EB-5 offerings. It also means that EB-5 offerings made within the U.S. are subject both to state “blue sky” laws and the following federal laws:
The Securities Act of 1933 (see The Securities Act).
The Securities Exchange Act of 1934 (see The Securities Exchange Act).
The Investment Company Act of 1940 (see The Investment Company Act).
Moreover, EB-5 offerings must either be registered with the SEC or come within an exemption (see below). The SEC actively enforces the securities laws against EB-5 issuers for offerings that are not registered or properly exempt.
Further, even if an EB-5 offering is exempt from registration, investors still must comply with all anti-fraud rules and requirements, including all disclosure requirements and broker-dealer rules.
According to experts, there has been a rise in the number of frauds related to the EB-5 Program recently. In response, the SEC has identified several common securities laws violations stemming from the EB-5 Program. These include:
false and misleading statements,
theft or misuse of funds, and
improper solicitation.
To protect investors, the SEC has issued guidance and investor alerts to educate investors about the dangers of EB-5 investing. In addition, the SEC actively enforces violations. Noncompliance with the securities laws can lead to sanctions being imposed by the SEC and USCIS.
4. EB-5 investments can be exempt from registration with the SEC
Although EB-5 offerings are regulated by the SEC like any other security, like other securities and private placements, they can qualify for registration exemptions.
Two of the most often used registration exemptions for EB-5 offerings are: Regulation D (“Reg. D”) and Regulation S.
Subject to restrictions on advertising and accredited investors, Rules 506(b) and 506(c) of Regulation D allow investors from any country to make private offerings that are exempt from registration. While this can be a viable option for EB-5 issuers, using a Reg. D exemption for EB-5 offerings is often complicated and tricky.
On the other hand, Regulation S is intended to exempt securities that occur outside of the United States from registration. The purpose of Regulation S is to protect U.S. capital markets and those who invest in them — whether U.S. citizens or foreign nationals. As such, this is often the more appropriate exemption for EB-5 offerings. The types of “safe harbors” allowed by Regulation S vary depending on the offer and other factors. For a more detailed explanation of Regulation S and how it works in EB-5 situations, see here.
5. EB-5 issuers have disclosure obligations
Even though an EB-5 offering may be exempt from registration with the SEC, issuers of EB-5 offerings still have specific disclosure requirements, emphasizing the importance of SEC compliance in this area of the law.
First, the EB-5 Program itself requires investors to disclose a significant amount of information. Among other things, under the Program, issuers must disclose information establishing:
the source of their funds
the type of funds to be used,
details about the investment,
the business plan,
how the investment is “at-risk,”
how it will create jobs, and
any past or pending judicial proceedings or monetary awards against them.
Under the securities laws, issuers of unregistered securities — including EB-5 offerings — must make certain disclosures to investors. As noted above, even if they are exempt from registration, EB-5 offerings are still subject to the anti-fraud rules. Thus, issuers must disclose all material facts concerning the investment that a reasonable investor would need to know in order to decide whether or not to invest. Making misleading or fraudulent statements or omitting material information can lead to SEC enforcement.
It bears repeating that despite the fact that the EB-5 Program was designed to encourage foreign investment, it does involve the offer and sale of securities. Therefore, EB-5 offerings are subject to the same rules and regulations applicable to other securities.
Finally, please be aware that this is a highly specialized and complex area of law. Therefore, if you are considering applying for an EB-5 visa, please consult with all appropriate professionals.
Whether an investment is being made by a U.S. citizen or a foreign national trying to become a U.S. citizen, understanding the securities laws is critical for both issuers and investors. The U.S. securities laws touch on a vast number of financial and investment issues of importance to all investors and issuers. VerifyInvestor.com makes verifying accredited investors easy, cost-effective, secure, and reliable. Our services (which also include qualified purchaser and qualified client verification), are always code-compliant and confidential. We help companies fully and easily comply with their legal obligations to verify accredited investors.