Articles Posted in Private Securities Offerings

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The Basic Rules of Website Advertising for EB-5 Securities Offerings

By Catherine DeBono Holmes, Esq. and Victor T. Shum, Esq.

EB-5 securities issuers, sponsors and others who market EB-5 securities often want to use websites to provide information to potential investors regarding their past and current EB-5 projects.  When using these websites, it is important to understand the U.S. securities laws that apply to internet marketing of securities within and outside the U.S.  The purpose of this article is to provide a brief explanation of these securities laws and guidelines to consider when using websites to identify or market EB-5 securities offerings.

  • Using websites to advertise EB-5 offerings is considered a form of “general solicitation” under U.S. securities laws, unless guidelines to restrict access to non-U.S. persons are followed.  Since 1995, the Securities and Exchange Commission (“SEC”) has held the position that posting offering materials on a website in a way that can be accessed by any viewer is a general advertisement or general solicitation, unless some restrictive access measures are implemented to allow access only to permitted persons.  In 1998, the SEC issued an interpretation on the use of internet websites to offer or advertise securities outside the U.S., providing guidance on specific measures that can be taken to retain the Regulation S exemption for offerings made to non-U.S. persons outside the U.S., and concurrently retain the right to make an offering under Regulation D to persons located in the U.S. at the time of the offering.  The guidelines provided in this article are derived in part from that SEC release.

 

  • If an EB-5 securities issuer intends to accept any U.S. investor, it is necessary to meet the requirements of Regulation D, including the restrictions on use of websites to advertise the offering.  Although EB-5 securities offerings are generally offered to investors outside the United States, it is not unusual that some investors making an EB-5 investment will be located in the United States at the time they receive information about an EB-5 offering, or they receive or sign EB-5 offering documents.  Such investors may be international students attending university in the U.S. or other temporary U.S. visa holders.  All of those types of persons are considered “U.S. Persons” under Regulation S, and issuers are not qualified to rely on the Regulation S exemption with respect to EB-5 securities sold to those U.S. Persons.  For that reason, most EB-5 offerings rely on SEC Regulation S for investors who are outside the U.S. when they are solicited, or they receive or sign offering documents, or on SEC Regulation D for sales to U.S. Persons.  When an issuer of EB-5 securities intends to rely on Regulation D to accept some investors who are “U.S. Persons,” the issuer and its agents must take care to assure that all websites used to promote the EB-5 offering – including those of the issuer and those of all of the agents promoting the offering – will meet the requirements of Regulation D.

 

  • Regulation D now has two options: use general solicitation with verification of “accredited investor” status for all U.S. Person investors or use no general solicitation for U.S. Person investors.   In July 2013, the SEC implemented aspects of the Jumpstart Our Business Startups Act (JOBS Act) and amended Regulation D under Rule 506(c) to allow the use of general solicitation for investors who are U.S. Persons, if the issuer requires verification of every U.S. Person investor’s status as an “accredited investor,” by requiring that investors submit copies of their tax returns, bank statements or other recognized means of verification.  However, the SEC also allows issuers to follow the old Regulation D requirements under Rule 506(b), which do not require verification of accredited investor status from U.S. Person investors, as long as no general solicitation is used for the offering. This means that if an EB-5 securities issuer wants to use general solicitation with no restriction, including no restrictions on websites offering the securities, it can do that, as long as it required every U.S. Person investor to provide one of the recognized means of verification of their status as an “accredited investor.”

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This article is the second in a series of articles on how EB-5 regional centers and sponsors can evaluate broker-dealer, investment company and investment adviser registration requirements under U.S. securities laws.

You may want to read: Part 1 – EB-5 offerings do not fit standard SEC registration requirements

Check back soon for the rest of the series, or subscribe to the Investment Law Blog, and you will be notified when the next article is published.

Part 2: Securities Broker-Dealer Registration Requirements and Hiring U.S. and Non-U.S. Brokers

As mentioned in Part 1 of this article,EB-5 offerings do not fit standard SEC registration requirements” the Securities and Exchange Commission (“SEC“) is studying the EB-5 investment market, but there is no indication whether or when it will issue any guidance regarding the registration requirements applicable to the sale of EB-5 investments.  At the May 2014 annual conference of the Association to Invest In the USA (“IIUSA“), the trade association for the EB-5 regional center program, representatives of both the SEC and the Financial Industry Regulatory Association (“FINRA“) gave presentations regarding the potential application of registration requirements to EB-5 regional centers and others engaged in the marketing and sale of EB-5 investments, but there was no indication that the SEC or FINRA had developed any policies specifically addressing the unique characteristics of the EB-5 market.

There are exemptions from broker-dealer registration that are available to EB-5 regional centers and entities which act as general partners or managers of EB-5 investment funds.  In addition, there are exemptions that apply to non-U.S. broker-dealers in connection with the sale of U.S. securities that could be applied to the sale of EB-5 investments.  However, there is a lack of clear guidance specifically applicable to the broker-dealer registration requirements that apply to persons engaged in the marketing and sale of EB-5 investments outside of the U.S.  Until such time as the SEC provides specific policies, the EB-5 community is in need of practical advice on how to conduct their business in compliance with U.S. securities laws, and in a way that fits the realities of the EB-5 market. Continue reading →