Latest EB-5 News
Important SEC Rules on Regional Center Advertising
The SEC, pursuant to the JOBS Act, recently issued final rules that will have an important impact on regional centers – advertising of EB-5 projects and enhanced “accredited investor” asset verification.
The new rule allows a regional center project to engage in general solicitation of the public for investment. This is a new exemption of the ban on general solicitation. If a regional center project relies on this exemption, it can advertise EB-5 projects. Soon there will be advertisements for EB-5 investment projects on television, in foreign-language newspapers and possibly Facebook and other social media. Before launching any ad, one should be sure to check with an experienced securities attorney and review it with him or her.
Requirements: verification of “accredited investor” status and Form D
There are a couple of requirements that must be met for a regional center project to engage in general solicitation. First, the project must “verify” that each prospective investor is “accredited” in that each has an individual or joint net worth with a spouse of $1 million (excluding his or her primary residence) or annual income of $200,000 (or $300,000 with a spouse) in the past two years with a reasonable possibility of the same amount of income in the current year. This rule applies to all investors.
Regional center projects that engage in general solicitation will no longer be able to merely rely on a questionnaire completed by the prospective investor. The regional center will need to review documentation such as tax returns and bank accounts provided by the investor that proves his or her net worth or annual income.
Alternatively, a regional center can rely on confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that it has taken reasonable steps within the prior three months to verify the purchaser’s accredited status. The verification process must be completed before allowing the investor to subscribe to the project.
It will particularly have an effect on petitioners who receive $500,000 for an EB-5 investment as a loan or gift from another person. If such petitioners do not have a high enough income, then the person lending or giving the money may have to give more so that the petitioner can meet the net worth requirement. There are other strategies that we can advise investors on to meet these requirements.
The SEC also revised “Form D,” which securities issuers who are exempt from general solicitation mustcomplete and file for the new general accredited investor solicitation exemption. The new Form D will have a check box to indicate that the project will take advantage of the exemption allowing general solicitation.
This final rule exempting issuers from the ban on general solicitation (“Rule 506(c)”) will become effective 60 days after publication in the Federal Register, which should occur this or next week.
My staff and I will be pleased to help with the process of verifying “accredited investor” status. Confirming that an investor is “accredited” is distinct from addressing the EB-5 requirement establishing an investor’s lawful source and path of funds. Often it will not require the same documents as those pertinent to the source and path of an investor’s funds (but some of the same documents may be involved). To satisfy the accredited investor rules, one need only prove assets and liabilities or income, not that such assets come from a legal source as is required by USCIS for the $500,000 investment and the subscription fee. Typically the complex cases will involve an investor who receives a gift of the funds that will be invested. Most other investors have more than sufficient funds to satisfy the rules. We have trained staff to provide assistance.
PROPOSED rule: Form D filing requirements and disqualification
At the same time, the SEC has proposed new rules that apply both to issuers engaged in general solicitation and those that rely on the “accredited investor” exemption but do not engage in general solicitation. Issuers that engage in general solicitation would have to file Form D fifteen days before a securities sale and at its conclusion.
Under another proposed new rule, issuers that do not engage in general solicitation but which take advantage of the Rule 506 “accredited investor” exemption to SEC registration will be disqualified from relying on Rule 506 for one year if they fail to comply with Form D filing requirements. The rule also expands Form D to require substantially more information from the securities issuer (the regional center project), including identification of the issuer’s website, the offered securities, the use of proceeds, the types of investors, and the methods used to verify the accredited investor status of investors.
More information regarding the proposed new rules can be found here:http://www.sec.gov/news/press/2013/2013-124-item3.htm.
Again, please confer with your securities lawyer on these matters. The above is a general news alert and is not intended to be specific legal advice.