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BROKER-DEALER
PARTICIPATION IN
EB-5 FINANCING
by John D. Tishler
Many EB-5 offerings depend on the services of providers who locate and introduce eligible investors.
Persons who perform this service are potentially subject to regulation under the broker-dealer
laws of the United States and any state in which they conduct these activities. To date, most EB-5
capital has been raised without the assistance of registered broker-dealers. However, the threat of
enforcement action by regulators and the risks to project sponsors and regional centers from using
unlicensed “marketing agents” and “finders” are setting the stage for increasing involvement of
licensed broker-dealers in the EB-5 industry.
This article discusses the reasons for this trend and provides information on various alternatives for
conducting EB-5 financing activity within the broker-dealer registration scheme.
Background
The Securities Exchange Act of 1934, as amended (Exchange
Act), defines a “broker” as “any person engaged in the business
of effecting transactions in securities for the account of others.”
Brokers (and dealers, a separately defined term) are required to
register with the Securities and Exchange Commission (SEC)
and the states in which they conduct business. Once registered,
they are required to become members of the Financial Industry
Regulatory Authority (FINRA). As registered broker-dealers
and FINRA members, broker-dealers are subject to extensive
regulatory requirements and oversight.
Some regional centers and project sponsors raise money for
projects they themselves manage. In that case, they may not
fall under the definition of a “broker” because the transactions are not for the account of others. However, individual
employees or contractors for these entities may still fall under
the definition of broker due to their individual activities to
recruit investors on behalf of their employer. Rule 3a4-1 under
the Exchange Act provides a non-exclusive “safe-harbor” from
registration for associated persons of an issuer of securities
engaged in capital-raising activities. Many employees and
consultants for EB-5 issuers cannot rely on Rule 3a4-1 because
it requires, among other things, that:
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• such persons perform substantial duties
for the issuer otherwise than in connection
with transactions in securities, and
• such persons not participate in selling
an offering of securities for any issuer
more than once every 12 months.
If Rule 3a4-1 is not available, these persons must determine
either that their activities are otherwise excluded from the definition of broker, or that their activities are not subject to U.S. law.
The SEC has indicated that the following factors should be
considered in determining whether activities require registration
as a broker-dealer: involvement in negotiations, discussing
details regarding the transaction or making a recommendation,
receiving transaction-based compensation and previous involvement in the sale of securities. In the joint stakeholder phone call
with USCIS held on April 3, 2013, a representative from the
SEC’s Division of Trading and Markets indicated that transaction-based compensation (what he called a “salesman’s stake”)
“in all likelihood . . . would trigger broker-dealer registration.”
In the same phone call, the SEC representatives stated a
sweeping view of the applicability of U.S. securities laws,
including broker-dealer laws, to raising funds from foreign
investors. Under the articulated view, any activity in furtherance
• such persons not be compensated by the payment of
of capital-raising conducted from the United States, or using the
commissions or other remuneration based directly
“means of commerce” (that is, the mail, telephones, etc.) subjects
or indirectly on a transaction in securities,
a person to U.S. regulatory jurisdiction even if the majority of the
activity is conducted offshore.
E B 5 I n v estors M ag a z i n e