Holmes Shum EB and US Securities Laws Revised 2-27-2015
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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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OS ANGELES – Catherine De Bono Holmes, Chair of the Investment Capital Law Group at Jeffer Mangels Butler & Mitchell LLP and publisher of the Investment Law Blog, will participate on a panel at the IIUSA 8th annual EB-5 Regional Economic Development Advocacy Conference in Washington D.C. on April 14th.  The topic of her panel is “EB-5 & Securities Law: Compliance in Today’s Market” and her co-panelists include Michael Homeier of Homeier & Law P.C., Ozzie Torres of Torres Law P.A. and Lili Wang of New City Advisors.

“I am honored to be speaking at this conference, which draws international investment and economic development professionals from around the world,” said Holmes. “The EB-5 program has made a contribution to the economic development of the U.S. by creating jobs and providing needed capital for developers and business owners. This conference provides an important platform to discuss the myriad issues that make the EB-5 program a success.”

“Guest of Honor” speakers at the conference include Michael Chertnoff, former Secretary of Homeland Security; C. Joshua Felker, Assistant Director, Enforcement Division of the SEC;  Congressman Darryll Issa (R-CA); Senator Ron Johnson (R-WI); Congresswoman Zoe Lofgren (D-CA); Maria Odman, Ombudsmen, Citizen and Immigration Services; Charles Oppenheim, Chief, Visa Controls Office, U.S. Department of State; Peggy Philbin, Deputy Executive Director, U.S. Department of Commerce; James Wrona, VP and Associate General Counsel of FINRA.
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About the IIUSA Conference
The IIUSA 8th annual EB-5 Regional Economic Development Advocacy Conference, sponsored by Invest in the USA takes place from April 12-14 at the Hyatt Regency Hotel in Washington, D.C.  Click here for more information.

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Cathy HolmesCatherine DeBono Holmes is the chair of JMBM’s Investment Capital Law Group, and has practiced law at JMBM for over 30 years. She specializes in EB-5 immigrant investment offerings and hotel and real estate transactions made by Chinese investors in the U.S. Within the Investment Capital Law Group, Cathy focuses on business formations for entrepreneurs, private securities offerings, structuring and offering of private investment funds, and business and regulatory matters for investment bankers, investment advisers, securities broker-dealers and real estate/mortgage brokers. Contact Cathy at CHolmes@jmbm.com or 310.201.3553.

 

 

 

 

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By Catherine DeBono Holmes and Bruce Baltin

This article was first published in the Winter 2015 edition of EB5 Investors magazine.     

For EB-5 financing of hotel projects, proving that new jobs will be created requires evidence that there is a market demand for an additional hotel in the local market. The basic requirement for any EB-5 financing is to show that a project will create at least 10 new jobs per EB-5 investor. For new hotel projects that use EB-5 financing, it is necessary to show that the new hotel is not merely taking jobs from existing hotels in the area, but actually creating new jobs. That requires evidence that there is enough guest demand in a local market to allow a new hotel to open without causing existing hotels in the area to lose occupancy. If the project owner can demonstrate that the demand for hotel rooms already exists, it can show that opening a new hotel will create new jobs, without taking away the jobs of the existing hotels in the area. How can a project owner demonstrate that this demand for new hotel rooms exists?

Hotel valuation experts have developed a method to determine market demand in a local market that can be used for EB-5 financing. Hotel consultants such as PKF and HVS have developed standards for determining what they consider the natural optimum average occupancy rate for each local market, which we will call the “optimum occupancy rate.” The optimum occupancy rate refers to the percentage of occupancy that will maximize the profitability of the hotel, based on the market conditions in that local market rate. If the average occupancy is 80 percent but the optimum occupancy rate is 70 percent, hotel consultants conclude that there is a demand for hotel rooms that is not being met, because more people are staying in existing hotels in the market than the rate that would allow maximum profitability for all hotels in the market. This article explains how hotel consultants set the optimum occupancy rate for each local market, and why an average occupancy rate in excess of the optimum occupancy rate indicates a demand for additional hotels.

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JMBM and AAEB5 Announce New Publication on EB-5 Financing and U.S. Securities Laws

Jeffer Mangels Butler & Mitchell LLP (JMBM) and Advantage America EB5 Group are pleased to announce the publication of Regional Centers & Sponsors and U.S. Securities Laws: How to evaluate broker-dealer, investment company and investment adviser registration requirements.

“When it comes to the EB-5 investment market, the SEC provides clear guidance in some areas and very little in others,” said co-author Catherine DeBono Holmes, Chair of  JMBM’s Investment Capital Law Group. “The information in this publication covers the complex compliance issues associated with EB-5 offerings.”

Written in response to hundreds of queries received from EB-5 professionals and developers, the articles in the 30-page booklet were first published as a four-part series on the Investment Law Blog.

“Regional Centers and project sponsors are right to be concerned with complying with U.S. securities laws,” said co-author Victor T. Shum, CEO of Advantage America EB-5 Group. “Violations come with penalties that can jeopardize both the project and its investors, so the EB-5 investment must be structured properly.”

Holmes and Shum each have significant experience as securities counsel on a wide range of investments – both public and private – and have many years of experience in the EB-5 arena, representing numerous clients on projects funded in part through EB-5 financing.

Click here to download a copy of the booklet on EB-5 Financing and U.S. Securities Laws.

 

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This article is the fourth 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;
Part 2 – Securities broker-dealer registration requirements and hiring U.S. and Non-U.S. brokers; and
Part 3 – Investment Company Act requirements.

Check back soon for new articles on raising investment capital, or subscribe to the Investment Law Blog, and you will be notified when the next article is published.

Investment Advisers Act or state law registration requirements for investment advisers may apply to managers of EB-5 funds

In a presentation on securities law issues applicable to EB-5 regional centers and sponsors at the May 2014 annual conference of the Association to Invest In the USA (“IIUSA“), the trade association for EB-5 regional centers, a representative of the Securities and Exchange Commission (“SEC“) stated that the registration requirements of the Investment Advisers Act of 1940 (“Advisers Act“) may apply to general partners and managers of EB-5 investment funds. It was recommended that EB-5 regional centers and sponsors consider this issue as part of their efforts to comply with U.S. securities laws. In our view, the Advisers Act should not apply to most EB-5 regional centers or sponsors, for reasons that relate to the characteristics of EB-5 funds in general. However, unless and until the SEC provides further guidance on this issue, it is necessary for every EB-5 regional center and sponsor to analyze the registration requirements of the Advisers Act and determine if they apply. In addition, the regulation of investment advisers is bifurcated between the SEC, for investment advisers with over $100 million in assets under management, and the states, for those with under $100 million in assets under management, and so it is also necessary to determine whether there is a requirement to register as an investment adviser under applicable state law. Continue reading →

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This article is the third 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 and Part 2 – Securities broker-dealer registration requirements and hiring U.S. and Non-U.S. brokers.

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.

As mentioned in Part 1 of this article, “EB-5 offerings do not fit standard SEC registration requirements,” U.S. securities laws were designed primarily for offerings of securities in the U.S. to protect U.S. investors, and these laws are not well suited to the EB-5 investment market. Nevertheless, it is necessary for EB-5 regional centers and sponsors of EB-5 offerings to understand the requirements of U.S. securities laws, and to structure EB-5 offerings in a way that will allow them to qualify for exemptions from the registration requirements. In Part 1 and Part 2 of this article, we discussed the requirements for exemption from registration of securities under the Securities Act of 1933 and exemption from registration as a securities broker-dealer under the Securities Exchange Act of 1934. In this Part 3, we discuss the registration requirements and exemptions under the Investment Company Act of 1940 (“ICA“).

What is an “investment company” under the Investment Company Act?

The ICA generally applies to every public or private company which invests over 40% of its assets in securities of one or more other companies, except securities of its own wholly owned subsidiaries. This definition includes any EB-5 fund, whether it is a limited partnership or limited liability company, that invests in the securities of a project company. For example, in the EB-5 “equity” model, if an EB-5 investment fund consisting of EB-5 investors (the new commercial enterprise or “NCE”, using USCIS terminology) purchases preferred equity interests in the project company (the job creating enterprise or “JCE”), the fund will be investing in securities of the JCE, and will therefore be deemed to be an investment company under the ICA. Loans are also considered securities under the ICA, meaning that in the EB-5 “debt” model, if an EB-5 investment fund makes a loan to a JCE, the fund will be deemed to be an investment company under the ICA. However, if the EB-5 fund itself owns the project (EB-5 investors are direct equity holders of the JCE), or one of its wholly-owned subsidiaries owns the project (EB-5 investors are equity holders in the fund, and the fund’s wholly-owned subsidiary owns the project), then the fund will not be considered to be investing in securities, and so will not be an investment company under the ICA. If an EB-5 investment fund meets the definition of an investment company under the ICA, the fund will be required to meet all of the requirements of the ICA, unless the fund is able to rely on one of several exemptions from the ICA, which will be discussed further below.

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On August 25, 2014, Catherine DeBono Holmes was featured in the GlobeSt.com article, Financing Projects with EB-5 Funds?, posted by Natalie Dolce, national executive editor of the publication:

“Some of the largest real estate developers in the country, including Related Cos., Silverstein Properties, Forest City Ratner, and many others, have raised hundreds of millions of dollars through the EB-5 program to help finance their largest real estate developments,” [Holmes] says. “Smaller real estate developers have also been successful in raising EB-5 financing to support their development projects.”

“There have also been some EB-5 financed projects that have failed, and some cases of blatant fraud by a few bad actors, she notes. “The recent Fortune Magazine article about the Chicago Convention Center case that occurred in 2012 painted a dark portrait, making it appear as if this one case was representative of the entire EB-5 program. The article failed to present an accurate portrayal of the EB-5 program as a whole, failed to mention the multitude of EB-5 financed projects that have succeeded, and caused confusion among real estate developers about whether or not EB-5 financing is a viable source of capital for their projects.”

Dolce wrote:

“In response to the questions real estate developers are asking today about whether they should consider EB-5 financing as a potential source of capital for their projects, we talked with Catherine DeBono Holmes about some key facts about the requirements, timing, marketing, risks and recommended procedures for EB-5 financing.”

In this article, Catherine DeBono Holmes answers the following questions about financing projects with EB-5 funds:

• What are the most important elements of a successful EB-5 financing?

• How long does it take before a developer receives the proceeds of an EB-5 financing?

• How much does EB-5 financing cost?

• What are the risks of using EB-5 financing and how does a developer protect against those risks?

Click here to read the full article.

Catherine DeBono Holmes is Chair of the Investment Capital Law Group at Jeffer Mangels Butler & Mitchell LLP, and the is the publisher of the Investment Law Blog. She has represented more than 50 real estate developers in obtaining EB-5 financing for their projects.

To review all of her articles on this topic, click on “EB-5 Financing” in the Topics menu to the right, and scroll down through all the articles we have posted.

In addition to forming EB-5 Regional Centers for investment in U.S. business through the EB-5 immigrant investor visa program, JMBM’s Investment Capital Law Group assists clients with forming U.S. and non-U.S. private investment funds for investment in real estate, mortgage loans, securities and other investments; sourcing and raising investment capital for hotel, multi-family and mixed use real estate developments throughout the U.S.; acting as securities counsel in connection with offerings of investment securities in compliance with exemptions from registration under the Securities Act of 1933 in the U.S. under SEC Regulation D and outside the U.S. under SEC Regulation S; and assisting securities issuers with crowdfunding.

Click here to see a full list of the services provided by JMBM’s Investment Capital Law Group.


Cathy HolmesCatherine DeBono Holmes is the chair of JMBM’s Investment Capital Law Group, and has practiced law at JMBM for over 30 years. She specializes in EB-5 immigrant investment offerings and hotel and real estate transactions made by Chinese investors in the U.S. Within the Investment Capital Law Group, Cathy focuses on business formations for entrepreneurs, private securities offerings, structuring and offering of private investment funds, and business and regulatory matters for investment bankers, investment advisers, securities broker-dealers and real estate/mortgage brokers. Contact Cathy at CHolmes@jmbm.com or 310.201.3553.


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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 →

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This article is the first 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. 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 1:  EB-5 Offerings Do Not Fit Standard SEC Registration Requirements

  • The SEC has not provided clear guidance on how to comply with U.S. securities laws requiring registration as a securities broker-dealer, investment company or investment adviser when conducting EB-5 offerings

The U.S. Securities and Exchange Commission (“SEC“) has stated in open meetings with the United States Citizenship and Immigration Services (“USCIS“) and the Association to Invest In the USA (“IIUSA“), the trade association for the EB-5 regional center program, over the past two years that EB-5 investment offerings are subject to U.S. securities laws, even though EB-5 investments are offered primarily outside the United States to persons who by definition are not currently U.S. residents but are seeking to become U.S. residents as a result of making their investment in an EB-5 offering.  However, the SEC has not provided any specific guidance to the EB-5 investment community on the ways in which they can comply with the registration requirements that apply to the registration requirements for securities broker-dealers, investment companies or investment advisers under U.S. securities laws, other than to suggest that they speak to an experienced securities lawyer.  This advice leads to conflicting opinions among lawyers, and makes it difficult for everyone involved in the EB-5 investment market to know exactly what they are required to do in order to comply with these registration requirements under U.S. securities laws. Continue reading →

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Competition for EB-5 Financing is Strong.

Demand for EB-5 financing among U.S. real estate developers is at record high levels, and demand for high quality EB-5 investments in China remains strong. Marketing agents in China and elsewhere are looking for the “best” EB-5 projects, meaning those that will be viewed by potential investors as the ones with the best chance for approval by USCIS and the best chance for the investors to receive a return of their investment after the investors receive their permanent green cards, in about five years from the date of their investment. At the same time, U.S. real estate developers are looking for the “best” marketing agents in China, meaning those who have a good track record of selling other EB-5 Projects, are direct and honest in communicating with the developer, and charge competitive fees for their services.

Most U.S. real estate developers have heard a great deal about EB-5 financing over the past five years. Those who are new to the market have a number of questions on how the EB-5 financing market works, how to structure a successful EB-5 offering, and how to find the right marketing agents to sell their EB-5 offering. Those developers who have some experience with EB-5 financing want to know what is selling in the EB-5 market now in China and how they can find good marketing agents in China to sell their EB-5 investment offerings. Here are some of the answers we provide to these questions:

What are the basic requirements for projects to obtain EB-5 Financing?

For those new to the EB-5 financing market, here is a thumbnail description: The EB-5 investor visa program allows non-U.S. persons to invest at least $500,000 or $1,000,000 in a business that is expected to create at least 10 new permanent jobs per investor, and to obtain a conditional visa upon review and approval by the United States Citizenship and Immigration Service (“USCIS”). EB-5 investments can be pooled to raise any amount of funds necessary to finance a project, provided that enough new jobs can be created to support the amount of financing being raised. Because the requirement is that new jobs be created, it is almost always the case that EB-5 financing is used for the development of new businesses, such as building new hotels or multi-family projects or major renovations of old buildings. EB-5 financing cannot generally be used to buy existing businesses, because the existing jobs cannot be counted toward the new job requirement. Due to USCIS policies, jobs of employees of tenants that lease space in a building cannot usually be counted toward the job creation requirement, which means that development of office and retail projects are generally not a good fit for EB-5 financing, other than in large projects seeking to raise a small percentage of EB-5 financing. Continue reading →