EB5 Investors Magazine Volume 3 Issue 3 | Page 12

Avoiding the Inadvertent Investment Company by Mark Katzoff, Angelo Paparelli, Christopher Robertson, and Gregory White While the Village People warbled that “it’s fun to stay at the YMCA,”1 when it comes to the ICA, the Investment Com pany Act of 1940 (the “ICA” or the “1940 Act”), the better advice may be to “run, run away.”2 Most people who consider investment companies, to the extent they think of them at all, probably associate them with mutual funds. Conceivably, while keeping company with Fidelity or T. Rowe Price might put an EB-5 fund in the vanguard of the EB-5 industry, as this article will explain, there are compelling reasons why an EB-5 fund would try to avoid investment company status under the securities laws. This article will explore what it takes to be dubbed an “investment company” under the 1940 Act, and provide an overview of some of the common methods for avoiding inadvertent status as an investment company. The article will also describe the unpleasant potential consequences of inadvertently being tagged as an investment company, including possible rescission, ineligibility to satisfy the EB-5 “at risk” capital rules and a duty to register as an investment advisor. While recent enforcement 10 actions by the Securities Exchange Commission (the “SEC” or the “Commission”) against EB-5 projects have not involved violations of the 1940 Act, focusing instead on fraud, and in some instances on the sale of unregistered securities or violations of the investment adviser and broker-dealer rules, the Commission – as this article will show – retains full authority to enforce the ICA and pursue non-compliant EB-5 industry participants as well. Hence, attention to the requirements of the 1940 Act is essential. What Is an Investment Company? Section 3(a)(1) of the 1940 Act defines an investment company in pertinent part as a company which: “is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities” or “is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40 per centum of the value of such issuer’s total EB5 INVESTORS MAGAZINE