“at risk” the EB-5 investor must face both a risk of loss and a
chance for gain relative to his or her investment. Although
we expect further guidance on both the “sustainment” and
“at risk” requirements in the form of a Policy Memorandum2
from the USCIS, which is forthcoming, present guidance from
USCIS has not provided sufficient clarification. Some new
commercial enterprises have determined that a prudent use of
Repayment funds is to invest such funds into an additional job
creating entity (an “Additional EB-5 Project”).3
EB-5 Investment Redeployment and Securities
Law Issues
New commercial enterprises that elect Redeployment of
EB-5 investor funds into Additional EB-5 Projects for the
purpose of sustaining “at risk” investments should consider
several securities law issues, depending primarily upon how the
Redeployment is effectuated. The key consideration is whether
Redeployment causes EB-5 investors to face a new investment
decision for purposes of the Securities Act of 1933, as amended (the “1933 Act”) and, if investment company issues are
involved, whether the Redeployment will continue to provide
an exemption under the Investment Company Act of 1940, as
amended (the “1940 Act”). Additionally, a Redeployment of
funds may necessitate analysis of the Investment Advisers Act
of 1940, as amended (the “Advisers Act”) and applicable state
investment adviser laws.
1933 Act Guidance
The Securities and Exchange Commission (the “SEC”)
has not provided any specific guidance on structuring a
Redeployment in the context of EB-5 offerings. The SEC,
however, has provided guidance in other related situations
that are of some assistance in providing securities law guidance
involving such restructurings. This guidance in some cases
relates to registered offerings, but remains relevant because it
also r elates to guidance as to whether there is deemed to be the
sale of new securities for which an exemption must be available
if not registered.
The first to look to relates to blind pool offerings, which
have generally involved real estate and oil and gas offerings.
Registered blind pool offerings that describe the parameters
of investments to be made by an issuer after investors have
made their initial investment decision do not require that a
new investment decision be made if the investments are made
in accordance with the parameters set forth in the related
offering document and if such investments are determined by
the general partner or managing member, as the case may be.
Likewise, in the context of registered asset-backed financings
where the assets are not fully identified at the time of the
initial offering, new investment decisions are not deemed to
be made when those assets are later identified, so long as the
parameters of such assets are identified in the offering materials
and investors do not vote on their selection or inclusion. In
these two situations, the SEC has taken the position that
no new investment decision is being made upon the later
purchase of assets by the issuer and, thus, a new offering of
securities has not occurred for 1933 Act purposes.
Perhaps the most relevant guidance from the SEC with
respect to Redeployment relates to how the SEC has historically treated assessments,4 particularly with respect to oil and gas
offerings. Assessments, in this context, can either be deemed
mandatory or voluntary. Mandatory assessments generally
arise as the result of the initial investment decision made by
investors if they initially agreed to such further payments
to the issuer within the parameters set forth in the offering
materials. Thus, no new investment decisions are made when
investors later determine whether or not to pay mandatory
assessments.
The above-described scenarios all have one thing in
common: no new investment decision is deemed to be made
by investors when assets are later acquired or a mandatory
assessment is subsequently called by the issuer and, therefore,
there are no 1933 Act implications arising as a result thereof.
However, there are other situations where new investment
decisions are being asked of investors that do raise significant
1933 Act securities law issues, and that should be considered
when structuring a Redeployment. These situations occur
when, as a result of a Repayment made to a new commercial
enterprise, investors are given a choice of (a) a dissolution of
the new commercial enterprise and the receipt by investors of
a proportionate share of the Repayment proceeds or (b) the
approval of a new investment into a new and different job
creating entity in order to preserve the sustained “at risk” and
job creating requirements of the EB-5 Program.
The implications of making a new investment decision
at the time of a Redeployment requires an analysis of the
requirements for a new offering of securities at the time of
making that decision.5 This raises many securities law issues
for issuers, such as whether Regulation D, Regulation S, or
Regulation A+ would then be available as an exemption for the
new securities offering. Regulation D would be problematic
because of the lapse of time since the original offering and
determining whether all investors would then be accredited,
and Regulation S would have related issues in determining
whether all conditions of the Regulation could then be
satisfied, which is unlikely since the EB-5 investors will most
likely then be in the United States.
1940 Act Considerations
If a Repayment is made and the new commercial enterprise
originally relied upon an exemption under the 1940 Act, then
the new commercial enterprise will be required to consider a
new 1940 Act exemption or operate so as not to be deemed an
investment company when structuring a Redeployment.
If the new commercial enterprise initially relied upon the
exemption provided by Section 3(c)(1) of the 1940 Act, then
it will need to ensure continued reliance or find another
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