It wasn’t so long ago that any action by the SEC related to the EB-5 field was worth an article just for the sheer novelty of the event. Unfortunately, those days are long gone as enforcement actions for purported garden variety fraud or broker-dealer violations now occur with regularity. Securities and Exchange Commission v Hui Feng et al. (case number 2:15 -cv-09) should have fallen into the unnoteworthy bucket if not for the defense being mounted by immigration attorney Hui Feng’s counsel. As described in the May 9th article published by Law360, Mr. Feng apparently does not dispute that he received commissions with respect to the EB-5 based transactions that took place, what he disputes is whether the investments should be treated as securities under the Securities Act of 1934.
At first blush, it seems a foolish argument. The Securities Act applies to “investment contracts” by its own terms. In the precedent setting case Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293 (1946), the Supreme Court defined an “Investment Contract” in which there is the “investment of money from an expectation of profits arising from a common enterprise depending solely on the efforts of a promoter or third party.” It seems that all EB-5 investments (at least in Regional Centers) would be securities for the purposes of the Securities Act given that under 8 C.F.R. § 204.6(e), all capital must be made in ‘at-risk’ investments for the purpose of generating a ‘return’ (aka profit), as Regional Center based investments are always pooled investment vehicles where the investors have no role, hence relying solely on the efforts of a promoter. See USCIS Policy Memo PM-602-0083 at Pg 5.
At second blush, maybe there is something to the counter argument that EB-5 investments are not securities. The Law360 article describes an argument made by Mr. Feng’s attorney that there was no expectation of profit as the ‘return’ (which was undoubtedly capped) was in all cases going to be less than the fees and costs associated with the investment. In essence, the argument is that the EB-5 investors’ expectations was that of a guaranteed loss, not a ‘profit’ as required under the Howie Test.
Another possible argument (not raised in the case, but which I’m sure they will be happy to borrow) relates to the word ‘solely’ in the Howie Test. EB-5 investments cannot be completely passive investments. In 8 C.F.R. § 204.6(j), all I-526 petitions are required “To show that the petitioner is or will be engaged in the management of the new commercial enterprise, either through the exercise of day-to-day managerial control or through policy formulation, as opposed to maintaining a purely passive role in regard to the investment…” It seems almost definitional that if an EB-5 investor cannot be ‘purely passive’ than that the investment into which the investor invested cannot be based ‘solely on the efforts of a or promoter or third party”.
I won’t speculate on which way the court will rule, the important point is that this issue and ruling may affect far more than Mr. Feng as at least one large Regional Centers is under active investigation for federal securities law violations. Moreover, generally accepted ‘integrity’ language in draft EB-5 bills (that never seem to get their day in the sun) would explicitly define Regional Center based investments as securities under the Federal Securities laws. If Mr. Feng were to win, it could provide added impetus for Congress to finally act on long awaited and longer needed EB-5 reforms. This is a case to watch.
Matt Gordon is a noted policy expert in the visa-based investments field and is an authority on structuring visa-based investments. Mr. Gordon’s career spans business operations, finance and law. He is the editor of the EB-5 Book, the legal treatise on the EB-5 program and a frequent lecturer to immigration attorneys. Mr. Gordon has participated in policy events, including those hosted by the White House and Harvard University’s Kennedy School of Government. Prior to founding E3iG, Mr. Gordon was an investment banker for a decade and ran the US division of a Swiss multi-national corporation. Mr. Gordon is a licensed attorney, having practiced mergers and acquisitions law at the beginning of his career with the largest and most reputable Wall Street firms including Fried Frank and Sullivan & Cromwell. Mr. Gordon received his B.S. in Policy Analysis from Cornell University and his J.D., cum laude, from the University of Pennsylvania School of Law.