EB-5 ALERT: SEC ORDER AGAINST IREECO FOR ACTING AS AN UNREGISTERED BROKER FOR EB-5 INVESTMENT TRANSACTIONS PROVIDES GUIDANCE FOR EB-5 MARKETING ARRANGEMENTS
By Catherine DeBono Holmes, Esq.
On June 23, 2015, the Securities and Exchange Commission (“SEC”) announced that it had entered into an Offer of Settlement with Ireeco, LLC and Ireeco Limited, finding that their activities constituted a violation of Section 15(a)(1) of the Securities Exchange Act of 1934 (the “Exchange Act”) because they acted without registration as a broker-dealer with the SEC. By entering into an Offer of Settlement, the Ireeco entities waived their rights to an administrative hearing, and without admitting or denying the findings, they consented to the entry of the Order. The Order requires that the Ireeco entities cease and desist from committing or causing any further violations of Section 15(a), censures the Ireeco entities, and orders further proceedings to determine whether to require disgorgement of ill-gotten gains and/or civil penalties, and if so, the amount of such disgorgement or penalties.
The Order provides several important insights into the SEC’s views of what constitutes marketing activities that require broker-dealer registration in the EB-5 investment market. We offer our analysis of these issues here.
According to the Order, the SEC found that the following activities violated the Securities Exchange Act:
- Ireeco LLC was formed in 2006 as a U.S. entity with an office in the U.S., where a small staff of 4 to 5 people worked, including the two principal owners, Stephen Parnell and Andrew Bartlett. They operated primarily through a website, whicheb5.com, which offered to help foreign individuals determine if the EB-5 Visa Program would work for them and to help them find EB-5 regional centers and projects.
- Ireeco Limited was formed in 2012 as a Hong Kong entity, and replaced Ireeco, LLC as the company that solicited foreign investors for EB-5 investments. It listed a “U.S. Admin Office” address for the company in Greenville, South Carolina, and continued to rely on the same small staff of 4 to 5 people located in the U.S., including Parnell and Bartlett, that operated Ireeco, LLC.
- In at least 10 instances, potential investors were already residing in the U.S. on some other type of temporary visa when they were solicited by Ireeco, LLC or Ireeco Limited.
- Ireeco would give each investor one or more EB-5 regional center projects as possible choices, and claimed to perform “due diligence” on each of the regional centers it selected for its customers.
- Ireeco would give each investor one or more EB-5 regional center projects as possible choices, and claimed to perform “due diligence” on each of the regional centers it selected for its customers.
- After each investor identified which regional center they wanted to work with, Ireeco would “register” the investors with the regional center. The investors then dealt mostly with the regional center, received offering documents from them, and only occasionally dealt with Ireeco after that.
- Ireeco LLC and Ireeco Limited had “referral partner agreements” with regional centers, who compensated them for each registered investor who invested funds in an EB-5 offering, which was generally $35,000 per investor paid through the Administrative Fee.