People rarely correlate immigrant visa programs with securities law, but the EB-5 visa program is creating precarious situations for businesses that leverage it to raise capital. The US created the EB-5 visa program in 1990 to inject needed capital into economically depressed areas. The program allows foreign residents to invest $900,000 – 1.8 million (these amounts become effective on November 21, 2019) into certain job-creating “new commercial enterprises” and receive a green card in exchange. In many instances, an EB-5 “regional center” will package multiple EB-5 investments together for a single project. The number of EB-5 investors allowed into a project is capped at a certain level based on the number of jobs it will create. For more information on the program, you can visit the US Citizenship and Immigration Services’ website.
The EB-5 visa program was thrust into the spotlight recently in response to the Hudson Yards project in New York City. The project raised at least $1.2 billion in EB-5 capital and exposed pitfalls related to the visa program’s politicization. While many of these problems have been addressed in amendments set to go into effect later this year, at least one major issue remains: federal and state securities laws.
Recent enforcement actions by the U.S. Securities and Exchange Commission (SEC) are exposing cracks in many regional center’s operating procedures. The Securities and Exchange Act prohibits unlicensed “broker-dealers” from, among other things, soliciting the sale of securities. 15 U.S.C. § 78o. When an unlicensed broker-dealer is involved, the purchaser of the security—here, an EB-5 investor—may have the right to rescind the sale. 15 U.S.C. § 78cc(b). The SEC has, however, carved out a narrow “finder’s exception” that generally allows an unlicensed person to introduce a potential investor to an investment. Finders can even, in some situations, earn a fee for the introduction. The line between a finder and a broker-dealer is fine and evolving. One of the many factors the SEC analyzes when making this determination is whether the “finder’s” compensation depends on the investor’s purchase of the security. When a “finder’s fee” looks more like a commission, the SEC may decide that the “finder” is actually an unlicensed broker-dealer.
Why does this matter for EB-5 investors and regional centers? In most cases, the EB-5 investor will buy in to the “new commercial enterprise” through the purchase of a security, such as a membership interest in an LLC. Because this qualifies as the sale of a security, a business that accepts EB-5 investments without considering the securities implications leaves itself at risk. This risk is increasingly apparent as it relates to unlicensed “finders” and their “finder’s fees.” Just last month, the Ninth Circuit affirmed a nearly $2 million judgment against an immigration attorney for receiving undisclosed commissions on his EB-5 clients’ investments. The Court found that the attorney broke securities laws by acting as a broker-dealer without being licensed. This, undoubtedly, exposed many securities transactions to investor rescission actions. The case is U.S. Securities & Exchange Commission v. Hui Feng; Law Offices of Feng and Associates PC, No. 17-56522, in the Court of Appeals for the Ninth Circuit.
At Burford Perry LLP, our Texas securities lawyers have extensive experience with all types of securities matters, including EB-5 visa program-related litigation. Burford Perry recently secured a confidential settlement for a client who had invested in a high rise apartment complex through an EB-5 regional center. We understand the complexities and technicalities of securities laws and work to protect our clients’ best interests to secure a successful outcome. Contact one of our dedicated attorneys today to schedule an appointment to discuss your securities litigation issues.