Avoiding the
Inadvertent Investment
Company
by Mark Katzoff, Angelo Paparelli,
Christopher Robertson, and Gregory White
While the Village People warbled that “it’s fun to stay at the
YMCA,”1 when it comes to the ICA, the Investment Com pany
Act of 1940 (the “ICA” or the “1940 Act”), the better advice may
be to “run, run away.”2 Most people who consider investment
companies, to the extent they think of them at all, probably
associate them with mutual funds. Conceivably, while keeping
company with Fidelity or T. Rowe Price might put an EB-5 fund
in the vanguard of the EB-5 industry, as this article will explain,
there are compelling reasons why an EB-5 fund would try to
avoid investment company status under the securities laws.
This article will explore what it takes to be dubbed an “investment company” under the 1940 Act, and provide an overview
of some of the common methods for avoiding inadvertent
status as an investment company. The article will also describe
the unpleasant potential consequences of inadvertently being
tagged as an investment company, including possible rescission,
ineligibility to satisfy the EB-5 “at risk” capital rules and a duty
to register as an investment advisor. While recent enforcement
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actions by the Securities Exchange Commission (the “SEC” or the
“Commission”) against EB-5 projects have not involved violations
of the 1940 Act, focusing instead on fraud, and in some instances
on the sale of unregistered securities or violations of the investment adviser and broker-dealer rules, the Commission – as this
article will show – retains full authority to enforce the ICA and
pursue non-compliant EB-5 industry participants as well. Hence,
attention to the requirements of the 1940 Act is essential.
What Is an Investment Company?
Section 3(a)(1) of the 1940 Act defines an investment
company in pertinent part as a company which: “is or holds
itself out as being engaged primarily, or proposes to engage
primarily, in the business of investing, reinvesting, or trading in
securities” or “is engaged or proposes to engage in the business of
investing, reinvesting, owning, holding, or trading in securities,
and owns or proposes to acquire investment securities having a
value exceeding 40 per centum of the value of such issuer’s total
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