On July 10th the SEC issued its final rules with respect to JOBS Act section 201(a), which “directs the SEC to remove the prohibition on general solicitation or general advertising for securities offerings relying on Rule 506”. Rule 506 is the heavily relied upon, ‘private placement’ safe harbor that pursuant to which “an issuer may raise an unlimited amount of capital from an unlimited number of “accredited investors” and up to 35 non-accredited investors.” Accredited investors have a net worth (with their spouse) of $1 million, not including their primary residence, or an annual income of $300,000 ($200,000 without a spouse) in each of the last two years and a reasonable expectation of at least that level of income for the current year.
The good news is that in 60 days (the rule is effective 60 days after publication in the Federal Register), it will be legal for EB-5 project sponsors and Regional Centers to use general advertising to solicit accredited investors. That means many, if not most, of the larger Regional Centers that are all violating the Securities Act by having an ‘Investor Click Here For Information’ button on their websites will be in a position to be compliant if they follow the new rule. The new rule requires that:
- The issuer takes reasonable steps to verify that the investors are accredited investors.
- All purchasers of the securities fall within one of the categories of persons who are accredited investors under an existing rule (Rule 501 of Regulation D) or the issuer reasonably believes that the investors fall within one of the categories at the time of the sale of the securities.
There are a couple of important things to note. Firstly, for issuers (aka Regional Centers and project sponsors) to take advantage of the new rule and use the general solicitations they can only accept capital from accredited investors (or at least investors whom they think are accredited). This may create issues for sponsors to accept the growing cohort of adult children, who receive their capital from their parents, as investors.
Secondly, this doesn’t necessarily help with the continuing securities laws issue of unregistered foreign agents’ practices. Based on the SEC-USCIS joint conference call in April of this year, the SEC seems to be giving a pass to sponsors that use foreign agents, who technically need to be licensed as registered representatives of a US Broker Dealer, if their activities are conducted off-shore, are fully disclosed to investors and are otherwise complaint with the anti-fraud provisions of the Securities laws. It may be that the SEC is considering (without explicitly saying it) that these offerings come under Regulation S, the safe harbor for totally off-shore offerings, despite their more narrow view on Regulation S contained in recent no-action letters.
The question remains on whether an issuer’s unregistered agents will be able to avail themselves of the ability to advertise and generally solicit. This last point becomes amplified based on the first requirement that the issuer take ‘reasonable steps’ to verify investors’ accredited status as there have been widely reported problems of being able to appropriately monitor and control agents’ behavior, in particular among some of the larger Chinese migration agents.
At the very least, for project sponsors who can stick solely to accredited investors, the rule finally brings the legal regime (in this respect) into a degree of conformity with the needs of the modern business world. This should greatly facilitate the EB-5 project sponsors’ ability to reach the (wealthy) masses.
Matthew Gordon – Managing Director