EB5 Investors Magazine Volume 2 Issue 1 | Page 63

Securities in the EB-5 context Regional centers have come up with several models of forming the investment mechanisms for their investors. However, because of the broad scope of the Securities and Exchange Act of 1933 (hereinafter the “Securities Act”), practically all of these models and their offerings fall into a definition of a security. The Securities Act defines “security” as any note, stock, bond, “investment contract” or, in general, any interest or instrument commonly known as a “security.” An “investment contract” is made when a person (i)invests money, (ii)in a common enterprise, (iii)with an expectation of profit, (iv)to be earned solely from the effort of others. The SEC has determined that interests in a limited partnership are an investment contract, and therefore, a security. After some debate, the SEC has considered limited liability company interests to be securities, as well, especially if a limited liability company offers unregistered interests in a limited liability company to a large number of investors. Given that the investor’s main objective in making an EB-5 investment is U.S. permanent residency, and not profit derivation, one may argue that investments for EB-5 purposes are not securities. However, the definition of security still applies to EB-5 investments. Therefore, regardless of whether a regional center forms a limited partnership or a limited liability company—in which the EB-5 investor would become a limited partner or member, respectively—the regional center offers an EB-5 investor a “security” as defined in the Securities Act. As such, a regional center must comply with federal and state laws in conducting the offering of securities. Interestingly, many regional centers are not aware of serious implications of failure to comply with securities laws. Others try to qualify for exemptions to avoid the filing with the SEC. In our practice, we have seen cases where regional centers initially made an effort to qualify for exemptions; however, they ignored all the rules when a non-accredited investor approached them with his ready-to-invest funds. Investors themselves rarely think they are being offered or sold a security and fail to inquire about their rights and protections. Even though regional centers get their designations from USCIS, most of the projects, and investment vehicles offered by them, are not registered with the SEC or any state regulator. However, only such registration triggers the stringent disclosure requirements of a wide range of key information about the company’s finances, management, products, and services. Therefore, investors are advised to request additional information about the project, to help ensure that the investment opportunity is viable, and so expect this type of inquiry from interested investors. 5 (17 CFR § 230.501 et seq.) An accredited investor is a person whose: (i) individual net worth, or joint net worth including that person’s spouse, at the time of the purchase of the securities, exceeds $1 million; (ii) individual income exceeded $200,000 in each of the two most recent years, and who expects to reach that income level in the current year; or (iii) joint income, including that of the investor’s spouse, exceeded $30