Holmes Shum EB and US Securities Laws Revised 2-27-2015
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Are regional centers really required to register as broker-dealers under U.S. securities laws?

Recent articles have suggested that every United States Citizenship and Immigration Services (“USCIS”)-approved regional center which pools foreign investor funds for EB-5 investment offerings sold to foreign investors may be required to register as securities broker-dealers under U.S. securities laws. In addition, it has been suggested that the principals or employees of regional centers must be registered as licensed “associated persons” of a securities broker-dealer under U.S. securities laws. We agree that it is extremely important to conduct EB-5 investment offerings in compliance with all applicable securities laws, but we believe there are better ways of complying without registration as a broker-dealer. In this article, we will answer some of the most frequently asked questions we receive from our clients using EB-5 financing for their projects, and offer some practical guidelines for regional centers and project developers to conduct EB-5 investment offerings in compliance with the regulations and policies of the Securities and Exchange Commission (“SEC”).

Do broker-dealer registration requirements apply to EB-5 offerings that are exempt from U.S. securities laws?

Yes. Many people do not realize that even if the offering of EB-5 investment securities is exempt from registration under U.S. securities laws, every person who sells EB-5 investments is still subject to the requirements for broker-dealer registration or exemption. In this article, we are focused on the SEC registration requirements and exemptions that apply to people engaged in the sale of EB-5 investments, whether they are selling here in the U.S. or outside the U.S. There are also state laws that apply to registration of broker-dealers, but for securities offerings that take place in more than one state, federal laws and regulations are primary, and we therefore focus on federal requirements in this article. Continue reading →

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Four years after the collapse of the traditional financing markets for new hotel developments, most hotel developers are still struggling to find the necessary financing to fill the capital stack required to build new hotels. Even for developers with access to construction loans, loan to cost ratios are hovering at 50%, and equity providers expect returns in the mid-teens to the mid-twenties. As a result, the “feasibility gap” between a typical project’s cost and its value is still too high, and hotel developments around the country are stalled.

Meanwhile, most cities and states are no longer providing public dollars to support private development. In California, for example, all community redevelopment agencies were abolished by the California legislature in 2011, and $1.7 billion that had been earmarked for redevelopment projects by approximately 400 redevelopment agencies state was instead required to be returned to state and local governments to fill operating budget deficits.

In other states as well, many governmental entities have no public dollars available, or are unwilling to use public dollars to support hotel development. Even in those areas where government financing is available, the time required to obtain approval is usually much longer than anticipated – often taking two to five years or more. There is also the risk that during that time mayors and city council members will change, and they may not support the projects approved by the prior administrations. In this economic climate, some hotel developers around the country are assembling multiple alternative financing sources for their hotel projects, such as EB-5 immigrant investor financing, new markets tax credits, historic tax credits (for renovation of historic buildings), and other forms of public incentives. Continue reading →

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USCIS has challenged EB-5 financing for hotel projects that rely on stabilized revenues as the basis for determining job creation. Since 2012, the U.S. Citizenship and Immigration Services (USCIS) has issued multiple Requests for Evidence (RFE) challenging the validity and reasonableness of economic job creation models for hotel projects that rely on the revenues anticipated to be generated after the second or third year of hotel operation, instead of the revenues generated in the first or second years of hotel operation. In the hotel industry, a new hotel’s future value is based on its anticipated “stabilized revenues”, meaning revenues anticipated after the first two or three years of hotel operation. The USCIS has instead used revenues from the first one to three years of a new hotel’s operation, which are referred to as the “ramp-up phase” of a hotel’s operation. However, using revenue predictions from the ramp-up phase of hotel operations does not reflect the full economic value or job creation potential of a hotel development. In this article, we explain why we believe the USCIS should use stabilized revenues in evaluating the job creation from hotel projects, for the reasons we discuss below. Readers should note that the USCIS has not accepted the use of stabilized revenues as of the date of this article, and this article is intended to suggest that it should do so in the future. Continue reading →

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USCIS has challenged EB-5 financing for hotel projects that rely on guest expenditures. Since 2012, the U.S. Citizenship and Immigration Services (USCIS) has issued multiple Requests for Evidence (RFE) challenging the validity and reasonableness of economic job creation models for hotel projects that include jobs created from increased visitor arrivals or guest expenditures (also referred to as visitor spending), meaning expenditures of hotel guests for goods and services outside the hotel, such as restaurants, retail and entertainment. This has resulted in high levels of uncertainty for regional centers and developers seeking to build hotel projects that include jobs from increased guest expenditures.

The current stated position of the USCIS is to accept job credit based on guest expenditures so long as the applicant demonstrates by a preponderance of the evidence with a data-based analysis that the new hotel project will result in an increase in new visitor arrivals and new guest expenditures. In this article, we explain what standards we believe the USCIS should use to determine that a new hotel will create new jobs as a result of filling demand for additional hotel rooms in a local market. Readers should note that the USCIS has been hostile to the use of guest expenditure jobs since approximately 2012, and this article is intended to suggest that it should more readily credit jobs from guest expenditures in the future where appropriate based on market data. Continue reading →

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通过使用尽职调查最佳实践保护EB-5投资市场

EB-5 stakeholders must act to protect the integrity of the EB-5 investment market in the wake of the SEC fraud complaint against the International Regional Center Trust of Chicago, LLC. The EB-5 immigrant investor program provides an important source of capital for investment in job-creating businesses in the United States, but in order to protect the market for these investments, the EB-5 community must demonstrate its commitment to the protection of EB-5 investors from fraudulent operators. The recent action by the Securities and Exchange Commission against the Intercontinental Regional Center Trust of Chicago, LLC, and its operator, Anshoo Sethi, have caused investors to question how many other EB-5 investments are being offered by unscrupulous operators making fraudulent statements in their offering documents and presentations. The best EB-5 regional centers already have established practices that are based on the same standards as are used in U.S. securities offerings and are designed to prevent fraud by project developers using EB-5 financing. Those regional centers who have not already adopted these practices should make this a priority in order to assure EB-5 investors that the EB-5 investment market is based on the same principles of good faith and fair dealing as are the foundation of the U.S. securities markets. We would recommend that every regional center review its due diligence practices with counsel to verify their compliance with best practices. Continue reading →

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What is due diligence?

Particularly in the context of a hotel acquisition, “due diligence” generally refers to the investigation conducted by a potential buyer of the hotel that is the target of the acquisition. The investigation covers both the physical asset (i.e. the hotel structures, parking, systems, equipment, inventories) as well as the operating business conducted at the hotel facility, and the relevant markets and environment.

The purpose of the investor’s due diligence is to understand and evaluate the potential investment in the hotel. It is the analytic review of the real and personal property, the business operations and potential of the specific hotel. This effort all seeks to validate the investor’s reasons for buying the hotel and to avoid surprises after the purchase has closed. Continue reading →

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EB-5 Program Regional Centers Have Been Re-authorized until 2015. EB-5 Regional Centers play an important role in raising EB-5 financing for new business development, and there has been some concern among investors and project developers that the federal regulations authorizing EB-5 regional centers were set to expire on September 30, 2012. We have been expecting that this portion of the EB-5 program would be reauthorized for some time, but we are now able to announce that an important step in the reauthorization has now been accomplished. Yesterday, the U.S. House of Representatives passed S. 3245 (412-3) – which includes a three year re-authorization of the EB-5 Regional Center Program through September 2015. The U.S. Senate previously approved the reauthorization on August 2, and the bill will now be submitted to President Obama for signature. Continue reading →

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On August 27, 2012, the California Department of Corporations adopted a new Rule 206.204.9, which was intended to encourage capital investment in private investment funds by providing an exemption from investment adviser registration requirements for the managers of these funds. However, the new Rule imposes so many new requirements that it may be a shock to managers of many private investment funds, particularly real estate related investment funds. This article describes what types of private investment funds are subject to the new Rule, what requirements apply under the new Rule, and some of the special issues that affect funds that invest in real estate assets as a result of this new Rule.

The new Rule applies to “private fund advisers”. The new Rule provides that “private fund advisers” are exempt from registration as investment advisers under California law if they comply with the restrictions and requirements of the Rule. Private fund advisers are persons who provide advice solely to one or more “qualifying private funds,” which are defined as funds that qualify for the exclusion from the definition of an investment company under one or more of sections 3(c)(1), 3(c)(5) and 3(c)(7) of the Investment Company Act of 1940. In order to determine if a manager of an investment fund is required to comply with the new Rule, the manager first has to determine if the manager is an adviser to a “qualifying private fund.” Continue reading →

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Buying or selling a hotel operating under a brand name requires special attention – the existing franchise agreement will be assumed, terminated or modified in some way, which will have a significant and lasting impact on the value of the hotel. The JMBM Global Hospitality Group® has represented buyers and sellers of all of the major, and many minor, branded hotels and have developed practical solutions for our clients to achieve a smooth transition of the franchise from the seller to the buyer, or to change the franchise if that suits the buyer’s goals. Knowing when and how to work with the franchisor as part of the transaction can save both parties tens of thousands of dollars, avoid major disruption of hotel operations upon the ownership transfer and increase the ongoing value of the property itself.

In this article, we some of our experience in dealing with the key hotel franchise issues that need to be addressed during the negotiation and transition process.

The first thing you need to know: the franchise does not follow the property – it terminates when the hotel is sold.

Some buyers and sellers of a hotel believe that the hotel brand can be sold along with the hotel; that is not true. The existing franchise agreement terminates when a hotel is sold and the buyer has to enter into a new franchise agreement if the buyer wants to retain the brand. Franchises are personal agreements between the franchisor and the franchisee, and virtually all franchise agreements include restrictions on the ability of a franchisee to transfer the franchise. This leads to two key concerns. First, unless a franchisee has negotiated otherwise with the franchisor, the sale of the hotel may cause the termination of the franchise agreement, making the seller obligated to pay a significant termination fee. While most franchisors will waive the termination fee on an approved sale, this fact has to be addressed. Second, a franchisee must make independent arrangements with the franchisor to continue to operate the hotel under the same brand (if it chooses to do so), starting on the day the transfer takes place. Continue reading →

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Thank you to my partner, Marta Fernandez, a Labor & Employment lawyer at JMBM, who is my co-author for this article. In the article, we will share some of our hotel-specific insights concerning the key labor and employment issues that the seller and buyer should address as part of their negotiation of the hotel purchase and sale agreement. We will also discuss some of the important decisions that the hotel buyer must make with regard to hotel employees. In addition, we will highlight some of the special issues that will apply to any sale of a hotel that has a unionized workforce in place at the time of the transaction.

The first thing you need to know: Who Is the “employer”?

Is the hotel owner or hotel operator the “employer” of the workers at the hotel. Where the hotel is managed by anyone other than the owner, the answer will usually be in the hotel management agreement. If the seller is the employer, then the employment issues can be worked out between the seller and the purchaser in the purchase agreement. If the hotel operator is the employer, the buyer will also need to work with the operator on employment termination and transfer matters.

Because of the WARN Act notification requirements (discussed further below), the seller and buyer will want to make sure that these issues are decided more than 60 days prior to the intended effective date of the transaction.

A key decision for the buyer: Who should be the employer after the closing?

Outside the U.S., the hotel owner is usually the employer of all hotel workers. However, in the U.S., the hotel operator is probably most frequently designated as the employer. Some hotel owners believe that it is always better to have the hotel operator be the employer of the hotel employees, because the operator has labor experts necessary to handle employment matters and the owner does not. Some owners also believe that if the hotel operator is the employer, then the owner will not be liable for wage and hour claims, harassment, discrimination and other labor law violations at the hotel. Continue reading →