Featuring special guest Securities lawyer Robert Cornish, – Hosted by Kurt Reuss and Rupy Cheema
Discover how broker/dealers benefit Issuers, especially from a risk-mitigation standpoint. EB-5 investors, learn why a broker/dealer can be an advantage in investment selection. Find out why finders are “always a conundrum” for attorneys and Issuers — and the perils of monitoring a foreign associate. Bob discusses the “really dangerous game” of marketing for Issuers — and how a broker/dealer can help.
Whether you’re an Issuer or investor, this podcast can help you avoid critical EB-5 pitfalls.
Kurt Reuss: To start, what is a broker/dealer?
Bob Cornish: A broker is a person or entity engaged in the business of affecting transactions in securities for the account of others. A dealer, on the other hand, is an entity that buys and sells securities for its own account. The two create the term broker/dealer.
Kurt: In EB-5 we are only working with brokers. What is the normal role of a broker/dealer in the sale of private placements?
Bob: Broker/dealers have obligations under three different bodies of law and regulation. One is U.S. federal securities laws, meaning the 1933 Act, the 1934 Act, the Investment Advisors Act, and to some extent, the Investment Company Act. And there are parallel state securities regulations and laws.
Kurt: From the point of view of state
securities laws, are there certain states you’d consider to have more onerous
securities laws than others?
Bob: Certainly the state of Florida is very active in enforcing its securities regulations and laws. There are other states that are also very active in the enforcement of their regulations in terms of people not taking their Regulation D exemption obligation seriously.
Kurt: What about California? I hear a lot about California having fairly
Bob: California’s rules are indeed complex and onerous. Their enforcement of them is certainly robust, but I wouldn’t say it appears as continuous as the state of Florida. California’s supervision of broker/dealers tends to be more on the basic side than Florida’s.
Enforcement people tend to get involved when something happens
after the fact, not before or during, which is also the case with many state
Kurt: So, first, we’ve got federal securities laws and, second, parallel state securities laws, and, thirdly, we’ve got self-regulatory organizations; typically, FINRA is the one that we hear most about.What FINRA oversight applies to broker/dealers?
Bob: As a member of FINRA, each broker/dealer agrees to adhere to the rules and regulations that they put forth to govern the conduct of broker/dealers and their registered people.
Kurt: Why should investors and Issuers of EB-5 offerings care whether or not a broker/dealer is involved in an EB-5 offering?
Bob: Issuers have several reasons to work with broker/dealers, both from business and risk-management standpoints. From a business standpoint, broker/dealers are engaged in the business of distribution.
Kurt: But my experience in EB-5 has been that not many broker/dealers have a Rolodex of foreign individuals that necessarily want to migrate to the U.S. Does that negate a lot of the value a broker/dealer brings to an Issuer?
Bob: Absolutely not. Broker/dealers bring risk management and compliance to the table that EB-5 Issuers ought to leverage. First and foremost, looking for a broker/dealer that will actually place your product means that that broker/dealer is going to have to perform due diligence and make a determination, what FINRA calls a reasonable basis suitability determination.
Another benefit is having an intermediary assume the role of
sales agent, acting as an intermediary between a customer and the Issuer.
In return for that payment of commission or placement agent fees, the Issuer gets peace of mind that virtually all of the sales process liability is really shifted from the Issuer to the broker/dealer, meaning the Issuer ‘s obligations for omissions and misstatements are essentially limited to the offering documents themselves. So I think from a risk mitigation standpoint, it makes a lot of sense.
Kurt: And from an investor’s standpoint, how important is it to have a broker/dealer involved?
Bob: Investors in the EB-5 world have typically not had the opportunity
to review investments side by side in an objective manner. As we know, many
people will be solicited directly via Issuers, or they’ll go to a conference
and ultimately they’re going to be taking a pile of material home and trying to
sift through it and make a decision as to which one suits their needs.
Broker/dealers provide the added financial and corporate expertise that an immigrant investor may need to make a reasonable business decision by looking at things that matter, for example, the likelihood of immigration benefits. What has the broker/dealer seen in other transactions (whether it’s real estate, technology, or any other sector)?
The broker/dealer brings its experience in transactions, generally, and can offer clients guidance in terms of what the pluses and minuses are for each transaction, and do it in a transparent manner that enables someone to make a reasoned decision.
Kurt: Let’s talk about finders for a moment. When do you typically see
finders involved in an EB-5 transaction and what is their role?
Bob: The issue of finders has always been a conundrum for securities attorneys and Issuers. I can’t think of a year in my practice when someone hasn’t come to me and said,”somebody wants to get paid for referring a client, but they’re not registered with a broker/dealer and they’re not licensed anywhere. How do I pay them?”
What most people tend to fall back on is considering such a
person a finder, meaning that they’re just identifying somebody for the purpose
of earning a fee for that identification.
Now, in most transactions and in virtually all states, finders are subject to U.S. broker/dealer laws.
More often than not, that finder needs to be registered and the
finder exemption that people tend to lean on really doesn’t have much support.
However, if somebody is being paid for a list and providing names of people
that you ultimately talk to and solicit investments from, that’s perfectly
There are a lot of people out there who have gotten somewhat
creative and have pushed the envelope with the finder’s exemption. This is
especially so when you’re dealing with people overseas.
People tend to believe that you are somehow absolved of your broker/dealer regulatory obligations if you go overseas. However, there are ways by which a finder that is overseas may be paid by a U.S. Issuer in a compliant manner, but it has to be done carefully.
Kurt: I work for a broker/dealer so I’m familiar with these rules. One aspect of finders is that they are not involved in making any recommendations or being involved in any way in the determination of what the right investment is.
Bob: That’s correct.
Kurt: Now, that’s different from foreign associates. Can you talk a little
bit about what is a foreign associate.
Bob: A foreign associate can at least talk in some reasonable manner
about the bonafides of the deal to prospective investors.
Foreign associates present supervisory issues for broker/dealers because, necessarily, they’re far away. It’s very difficult to gauge what some of these folks are doing on a day-to-day basis, so firms that do have foreign associates certainly charge a premium to the investors.
I think one of the things that investors ought to be asking is
“who is involved as an intermediary in the transaction?” and understand the
role of each of the parties.
Kurt: The broker/dealers that I’ve worked with in the past, in the EB-5 context, none of them have been willing to take on the burden of the foreign associate. As I understand the rule, foreign associates can act just like a registered representative but they don’t need to be registered but they have all the other responsibilities, and the broker/dealer has the responsibility to make sure they’re doing everything appropriately.
That seems to be a pretty dangerous position to put a broker/dealer in — to monitor a foreign associate, unless they have offices overseas and those people are checking into the office. Otherwise, I don’t think broker/dealers are likely to take on a person who’s outside the U.S., earning transaction-based compensation and being involved in any sort of recommendation or advice relating to an offering.
Bob: The firms that do have foreign associates either cannot obtain errors and admissions (E&O) insurance, or pay very high premiums. This is very important because a lot of EB-5 Issuers don’t have E&O insurance in place, and the Issuer may want to shift some of their economic and risk liability to a broker/dealer when using that intermediary for facilitation of their sales practices.
Kurt: Bob, let me throw you a little bit of a curve ball here. A
securities attorney this week sent me a link to a website, and she was outraged
by the claims that are on the front page. Let me just read some of them to you. It says,”10% plus annual
returns, 100% approval rate, safe asset classes, Green Card guarantee,
retrogression protection, no redeployment risk.”
Any chance this website is being overseen by a broker/dealer firm?
Bob: I certainly hope not because that broker/dealer would be facing the wrath of FINRA and the SEC.
One of the benefits of working with a broker/dealer is that broker/dealer has obligations to review advertising and marketing materials for compliance with securities laws, and for their truthfulness.
Not knowing what this website may be referring to, one of the
things that people often get confused with in securities law is whether
something is false or whether something is misleading. Something can be true
but misleading. And misleading can be just about as troublesome as false.
So if somebody is misleading people into believing that certain
things may occur, or certain things are the case with an EB-5 investment in
their sales and marketing materials, they are indeed subject to scrutiny under
the securities laws for those statements, with the idea that making those
statements would cause somebody to actually write a check.
Messing around with those kinds of things on websites, marketing materials and the like, is a really dangerous game for Issuers to be involved with. A lot of marketing and advertising in the broker/dealer world is reviewed very carefully by compliance personnel of a broker/dealer, and in some cases, FINRA itself, depending on where the firm may stand in its regulatory and advertising review cycle.
Kurt: So looking at this website, and as I read these six claims, every
one of them seems misleading. “A Green Card guarantee.” It’s impossible.
“No redeployment risk.” I guess it depends on who they’re accepting; if
they’re accepting anyone from certain countries then they’re definitely going
to be facing a potential redeployment risk. “10% + annual returns, 100%
approval rate, safe asset classes…”
It strikes me that these hold out a lot of potential liability, but I don’t think FINRA is going to be looking at this because these people, in my mind, there’s no way they could be affiliated with a broker/dealer. And FINRA only oversees broker/dealers.
Who would be responsible to look at something like this and what
is the potential damage that can be done to the Issuer or to the investors if
somebody should go wrong in the future?
Bob: More likely than not the SEC and or a state securities regulator
will be going after the publisher of this website. And the Issuer will be
facing the problematic decision of whether to fight with the regulators in what
will be likely an action that would argue that they have been making false and
misleading statements. If they are publicly distributing their investments and
they happen to be in violation of offering exemptions, then they may face
It really isn’t worth it if you are an Issuer to push the
envelope with sales and marketing materials that may arguably blow out your
506(c) exemption or to take claims to a level that are on the edge of being
misleading, simply because you believe other firms are doing it and getting
away with it.
This is always one of the conundrums of compliance personnel at broker/dealers — how far is far enough?
It’s safe to say that the six statements that you mentioned on that website — I don’t think would be tolerated by any broker/dealer. But those are business risks that broker/dealers and Issuers need to make on their own and investors have to understand that when they see representations like this, it’s more indicative of a lack of compliance rather than soundness of their product.
Kurt: I would imagine that someone reading this article might understand
that claims like this point to an unsophisticated Issuer.
Kurt: I would also imagine people that come across a site like this and
see all of these guarantees might feel much more comfortable with the offering.
Bob: Yes, and there’s the issue. One reason a lot of EB-5 Issuers don’t want to get involved with broker/dealers is a FINRA prohibition of making guarantees against losses. Generally, broker/dealers cannot make those sorts of guarantees. Now the loss of a Green Card, arguably, may or may not fall into that realm.
Kurt: My experience with broker/dealers has been that they deem the Green Card as part of the return on investment and therefore a Green Card guarantee would be an element of guaranteeing a rate of return.
Bob: That’s correct. And that is opening the door to a flood of issues.
You obtain investors, and low and behold, one of them gets
rejected. Does that mean all of your sales material is somewhat false and
misleading? I strongly believe a regulator would say yes. It’s just not worth
Kurt: In structuring their offering, is there a decision that an Issuer should make early on whether they’re going to work with a broker/dealer or not?
Bob: I think it’s an important aspect to consider in the deal-formation
stage for any EB-5 Issuer. Guidance on the capital stack in terms of what terms
and conditions they seem comfortable with, and what they’ve seen the market
accepting, is very useful guidance for an Issuer.
It’s not necessarily available out there from peers because those Issuers may not be talking to the same pools of investors or the same types of products that a broker/dealer may be dealing with.
With that being said, I think the Issuer needs to consider what role the broker/dealer is going to play in the offering. That should be done at the outset.
Kurt: What about the issue of arbitration?
Bob: Most broker/dealers, as part of their membership agreement with FINRA, agree that disputes between their firms and customers are to be arbitrated before FINRA.
Now, FINRA has a very robust arbitration program and hearings in over 40 cities, and I think at
last count there were over 8,000, arbitrators from which panels are set. There
are advantages and disadvantages to arbitration. I think in the EB-5 context
there are more advantages than disadvantages.
Kurt: When you say advantages or disadvantages, to whom?
Bob: To investors and to Issuers, versus being in court for the
resolution of disputes.
One of the benefits is that you will have experienced people
from the securities industry hear your case. The process tends to be much more
streamlined than in court. And
unlike court proceedings, which can go on for years, the Issuer and the
investor have an interest in arbitrating.
Let’s face it — a lot of customers and broker/dealers have disputes that probably ought not to be aired in public in court, whether it’s redeployment or something else. Those disputes probably ought to be privately resolved. The Issuer has an interest in keeping its name out of the papers, and I think the Issuer also has an interest in litigation being handled in a streamlined manner.
I will, in fair disclosure, say I am a FINRA arbitrator and I
generally find the process very fair.
However, one major difference between arbitration and court is that
arbitration matters have what is called limited discovery, meaning there is
generally the exchange of documents and information, as opposed to court
proceedings where people are deposed and discovery and the facts are gleaned
through a variety of vehicles. You don’t have all of those in arbitration.
One of the issues that you deal with in EB-5 in particular is
that investors generally don’t have a good grasp of the nature of the U.S.
legal system and how things generally work. There are certain hurdles that I
think these investors personally have to overcome, which can lead to very drawn
out discussions when things go wrong between attorneys for Issuers and
attorneys for investors.
Kurt: I’m aware of many fraudulent offerings in EB-5 over the years. Have you ever experienced a fraudulent EB-5 offering that involved a broker/dealer?
Bob: I have not.
Kurt: So to wrap up the importance of broker/dealers. One, you’ve got an entity that is helping you with your offering documents. They’re providing proper due diligence and they’re probably providing a legal review of your offering documents to make sure that all your disclosures are clear.
Bob: Broker/dealers will rely on past experience of what they expect an offering document to have and if your offering document is missing things or there are things that the broker/dealer thinks are important but aren’t mentioned, that broker/dealer will bring those to the Issuer’s attention and offer some guidance.
Kurt: So the broker/dealer is going to provide some guidance on the offering; they’re going to provide some protections between the Issuer and the investor, so that investor complaints would typically be made against the broker/dealer who’s managing the offering.
Broker/dealers should, to some extent, be marketing the offering, and certainly the way our broker/dealer manages offerings, have a number of offerings in order to bring more breadth to the evaluation process, and do it on a like-terms basis, so we are comparing deal terms in a systematic way to help investors to compare offerings.
Bob: I would agree with that.
Kurt: And then you’ve got the duty of good faith and fair dealing that a broker/dealer brings to an offering.
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Securities law in EB-5
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