EB5 Investors Magazine | Page 27

The next part of review will be a search of public records. Most companies will engage an outside investigator for this purpose. Some of these searches should be tailored – for example a check for good standing with FINRA may be sufficient for a broker dealer. But in general the search should include: • Confirmation of identity and all names used by the covered person • Search engines (e.g. Google), social networking sites and news databases • Federal criminal databases • Disciplinary records of the SEC, CFTC, federal banking authorities and the U.S. Postal Service • The issuer should also consider whether conducting more targeted searches in the area or industry of the red flag activity is warranted. It would also be advisable to broaden the search of state criminal records and regulatory agencies to include additional states where the covered person may have lived or worked, and criminal records and disciplinary records of securities, banking and insurance regulators in states where the covered person lived or worked during the past ten years. Criminal records and disciplinary records of securities, banking and insurance regulators in states where the covered person lived or worked during the past ten years The searches should include not just the individual’s name, but the individual’s employers. The investigator should give careful thought as to what other names and aliases the covered person may have used to provide confidence that the searches conducted would have reasonably disclosed any of the bad acts in the U.S. and states where the individual reasonably may have lived. Any positive findings should be discussed with securities counsel to determine if it is a bad act that disqualifies the covered person or requires disclosure. Phase Two: Review: The issuer should initiate a Phase Two investigation into the details of any bad act detected during Phase One. In addition, further investigation is warranted if any other “red flags” appeared during Phase One. Red flags will vary by business or industry, and officers of the issuer should discuss with investigators specific issues to watch for. Some of the more common red flags would be: • Unexplained loss or lapse of a professional license in the securities or financial industry • ★ A “near miss” – finding an act by the covered person that would have been a bad act under Rule 506(d) if it had occurred more recently or in a different industry • Conclusion No investigation is perfect – even the most exhaustive investigation may fail to discover a covered person’s bad acts, even as it depletes the issuer’s resources. Fortunately, the due diligence defense under Rule 506(b), and the regulators enforcing it, do not require perfection; rather a reasonable inquiry is all that is required. Advance planning and careful formulation of the investigation process can assure that reasonably detectible bad acts are, in fact, detected and that the proceeds of the offering benefit the issuer and not its investigators and lawyers. Civil suits or criminal proceedings alleging fraud or deception in industries not involving finance or securities • Jor Law Serving as an officer, director or employee of an entity charged or sued for fraudulent acts, especially a pattern of such acts. If Phase One identified any red flags, and the failure to disclose the red flag on the questionnaire was a false response, the issuer should follow up with the individual to understand the reason for the omission, to make further inquiries and (apart from offering concerns) consider whether grounds exist to terminate the individual’s employment or engagement by the issuer. Charles Kaufman 1 Jor Law practices corporate and business transactional law in Los Angeles and is a founding shareholder of Homeier & Law, P.C. In addition to his regular practice of representing companies of all sizes and individuals in the areas of finance, secured and unsecured lending, mergers and acquisitions, licensing, securities, venture capital, internet and new media, technology, e-commerce, and other corporate transactions, Jor routinely advises on corporate and securities aspects of EB-5 related transactions. Charles Kaufman, Counsel at Homeier & Law P.C., is a member of Homeier & Law’s prominent EB-5 practice. Charles has advised numerous companies in raising capital under the program. As EB-5 transactions have become part of the financial mainstream, but also come under unprecedented scrutiny, clients have sought out his combined expertise in U.S. securities laws and regulations and in the specialized demands of EB 5 financing. 17 CFR § 230.506, Instruction to paragraph (d)(2)(iv). WWW.EB5INVESTORS.COM 25