Nov 18, 2013
The Good, The Bad and The Ugly – Getting Bad Actors out of the EB-5 Program SEC Rule 506(d) and Beyond

The EB-5 program is starting to get a somewhat shaky reputation overseas as word spreads on the prosecution of fraudulent project sponsors. First, there was the Chicago Convention Center case in February and then in October, a husband and wife Ponzi-scheme team from Texas.   There is one business broker in Florida who is trying to sell direct EB-5 investments – he is a convicted felon and subject to deportation proceedings.  I have recently heard rumors of one or more principals at major regional centers who have criminal backgrounds.   It’s no wonder that potential foreign investors are becoming aghast at the seeming lack of quality control over who is and is not allowed to participate in the US Immigrant Investor Program.  Given that the prosecutorial interest in the EB-5 program is recent, one could only imagine the number of prosecutions if the SEC and Justice Department would have started looking at practices much sooner.  At this point, these prosecutions are probably the tip of the iceberg.

It’s high time that we get the bad actors out of the EB-5 program.

Fortunately, congress and the SEC have provided the legal infrastructure for doing so.  Under Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, congress required the SEC to create rules to disqualify bad actors from private placements that rely upon Rule 506 of Regulation D, which is the typically relied upon exemption to registration requirements under the Securities Act of 1933. The SEC did so on July 10th of this year:

“‘Bad actor’ disqualification requirements, sometimes called “bad boy” provisions, disqualify securities offerings from reliance on exemptions if the issuer or other relevant persons (such as underwriters, placement agents and the directors, officers and significant shareholders of the issuer) have been convicted of, or are subject to court or administrative sanctions for, securities fraud or other violations of specified laws.”  See, P.7.

The persons covered under this rule are:

  • the issuer, including its predecessors and affiliated issuers
  • directors, general partners, and managing members of the issuer
  • executive officers of the issuer, and other officers of the issuers that participate in the offering
  • 20 percent beneficial owners of the issuer, calculated on the basis of total voting power
  • promoters connected to the issuer
  • for pooled investment fund issuers, the fund’s investment manager and its principals
  • persons compensated for soliciting investors, including their directors, general partners and managing members

See for the full text of the SEC’s compliance guide.

Under the rule: “Disqualification will apply only for triggering events that occur after the effective date of the amendments; however, pre-existing matters will be subject to mandatory disclosure”.  Accordingly, bad actors are getting a free pass for disqualifying events that took place before September 23, 2013.  Disclosure of such act is still required, but is that really enough?

Immigrants under the EB-5 program are held to a higher standard.  An immigrant who seeks admission to the United States as a conditional lawful permanent resident would be denied entry based on a great number of felonies committed before September 23, 2013.  Are we telling the world that it is fair and acceptable to deny entry to felons who have paid their debts to society, but that the same person, if a US citizen, who committed the same crime, is perfectly free to sell EB-5 investments?

If congress will not hold the EB-5 industry to higher standards, then we must impose these burdens on ourselves.  With this article, I am calling on IIUSA, all regional centers and all direct EB-5 investment sponsors to make the following pledge and to certify to all their investors:  That no person who has even been convicted of any felony be allowed to hold the position of an officer, director, general partner, managing member or otherwise have control over a sponsor or issuer of EB-5 investments.

I call on all broker dealers and law firms that work on EB-5 projects to conduct the needed due diligence to ensure sponsor compliance with the existing Rule 506(d) and the heightened standards proposed here for all sponsors who agree to the pledge.

We do not need the SEC, Justice Department and state prosecutors to do this job. We can and should do it ourselves.  If we, the EB-5 sponsors, do this ourselves, we can get rid of both the bad actors and the ugly projects.  Projects can and will fail, that is the essence of risk, which is fundamental to the EB-5 program.  An immigrant’s dream should never be dashed because of the bad-faith and ill-intent of criminals in our midst.  Every immigrant participant in the EB-5 program should have a fair and fighting chance to realize their dream to walk among us on American soil.  Let us work hard, so that the good prevail.

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