The EB-5 Reform and Integrity Act of 2022 (RIA) requires regional centers to supervise the securities activities of agents and provide explicit disclosure of promoter’s fees to investors. EB-5 funds should be mindful of this increased attention in engaging foreign agents, advises Mark Katzoff, senior counsel at Seyfarth Shaw LLP.
The following is a review of some of the more salient requirements relating to foreign agents (promoters) as the EB-5 industry moves into a new era of heightened compliance requirements.
Regional center requirements regarding promoters
Before an investor files their I-526 petition, the regional center supervising the offering must file an investment application that identifies:
- Conflicts of interest which might occur between the regional center, new commercial enterprise (NCE), job-creating entity, and anyone involved in promoting the EB-5 offering.
- Any fees paid or to be paid to promoters including fees or other compensation paid by the regional center, the NCE or the job-creating entity.
- Services offered by promoter along with the promoter’s name and contact information if known at the time of filing.
Regional center annual statements must reiterate all compensation paid out to promoters and the regional center must maintain copies of the written agreements with promoters.
Rules and standards for promoters
Subparagraph (K) of the EB-5 Reform and Integrity Act of 2022 addresses the rules and standards for EB-5 promoters and the penalties for violation. Rules include:
- Registration The promoter must be registered with U.S. Citizenship and Immigration Services (USCIS).
- Accurate representation of visa process Promoters must be accurate in how they describe the Green Card process to investors.
- Permissible fee arrangements Any compensation arrangements must comply with both immigration and securities laws.
Background checks on promoters
Agents and promoters must comply with rigorous provisions in subparagraph (H) “Bona Fides of Persons Involved with Regional Center Program”, of the RIA. Some notable participation prohibitions include:
- Individuals that have committed a criminal or civil offence involving fraud or deceit in the past 10 years, or a civil offence involving fraud or deceit in the last 10 years with a liability of over $1,000,000 or a term of imprisonment of over a year or subject to a final order based on a fraud, manipulative or deceitful conduct, or debarment
- Have been involved with illicit trafficking, espionage, sabotage, theft of intellectual property, money laundering, terrorist activity, human trafficking or a human rights offense, or violation of foreign financial transaction regulations.
- During the past 10 years have been on the Department of Justice’s List of Currently Disciplined Practitioners or have been reprimanded or disciplined for fraud or deceit by a state bar association.
DHS is tasked with monitoring overseas promotional activities
DHS will conduct investigations outside of the United States, monitoring program-related events and promotional activities. If a promoter breaches the rules and standards of the RIA, the Secretary of Homeland Security can suspend or permanently bar the individual from the EB-5 program.
SEC anti-fraud provisions
Security and Exchange Rule 10b-5 was created under the Securities and Exchange Act of 1934 to address securities fraud, and is the primary anti-fraud provision regarding EB-5 funds and investment communications.
“10b-5 applies to EB-5 funds — and potentially the agents,” says Katzoff. “The general anti-fraud provisions of Rule 10b-5 apply both to oral and written communication and prohibit persons from making untrue statements in either format.”
Communications must provide context
Truth isn’t always enough. Katzoff explains that EB-5 funds and the people representing them, are subject to rules requiring the offering documents be truthful and provide a balanced context for material facts.
“Even if an EB-5 fund makes technically accurate statements,” Mark advises, “they cannot mislead by omission, leaving out a statement that might provide crucial context for investors to understand the statements made.”
Misleading statements can result in a right of rescission
Investors can get their money back if a promoter makes misleading statements. “To the extent agents engage in misrepresentations in marketing EB-5 funds, investors may be entitled to rescission rights — getting their money back — if they feel they have been misled,” warns Katzoff.
This is bad news not only for the issuer — who may have to find money to repay one or more defrauded investors, but can also threaten the stability of the company other EB-5 investors are relying on.
Katzoff acknowledges that there are risks in engaging foreign agents and finders due to the limited ability to monitor their activities.
“It is hard for a fund to police the activities of foreign promoters and agents engaged by them given the geographic distance and language barriers,” says Katzoff. “A fund may not be aware that an agent is making misleading statements until it receives complaints directly from investors.”
How to guard against agent misrepresentations
Issuers must take steps to protect themselves against agent misrepresentation. Katzoff advises that agents only use fund-approved materials in marketing the fund, and the issuer should have a provision in the fund investment documents that investors may only rely on statements contained in the offering documents (and that the English versions of the documents are the controlling versions).
Still, this may not always be enough if an agent oversteps his or her bounds, and these precautions may do little to dissuade a disappointed investor, notes Katzoff.
In this new EB-5 era of heightened compliance and integrity measures, vigilance is the watchword when it comes to foreign agents soliciting EB-5 investments. A communication misstep can cost the regional center and a migration professional the ability to ever work again in EB-5.
An experienced EB-5 broker-dealer should provide all the supervisory services required to enable a regional center to certify RIA compliance.