"... EB-5 offerings are not subject to the heightened disclosure requirements..." sales process. Most courts and securities practitioners likely would agree that the payment of commissions to middlemen involved in the offering and sales process in unregistered EB-5 offerings is material and should be disclosed to EB-5 investors even though there is no SEC rule that mandates such disclosure. However, reasonable minds may disagree on the level of disclosure necessary. The spectrum of potential disclosure is broad and could range from a minimum disclosure that an issuer has retained the services of one or more middlemen to solicit or steer investors to an EB-5 offering, to a very detailed disclosure identifying all middlemen and providing specific details about their compensation, similar to the disclosure required in a registered offering.
A CLOSER LOOK AT THE LAW
"... EB-5 offerings are not subject to the heightened disclosure requirements..." sales process. Most courts and securities practitioners likely would agree that the payment of commissions to middlemen involved in the offering and sales process in unregistered EB-5 offerings is material and should be disclosed to EB-5 investors even though there is no SEC rule that mandates such disclosure. However, reasonable minds may disagree on the level of disclosure necessary. The spectrum of potential disclosure is broad and could range from a minimum disclosure that an issuer has retained the services of one or more middlemen to solicit or steer investors to an EB-5 offering, to a very detailed disclosure identifying all middlemen and providing specific details about their compensation, similar to the disclosure required in a registered offering.
One common business objection to providing detailed disclosure is that such disclosure would put the issuer at a competitive disadvantage in negotiating pricing with foreign agents involved in EB-5 offerings. Agents could use the information to negotiate higher compensation. In the end, materiality should be the guiding principle.
If the compensation to be paid to foreign agents is within a range a reasonable investor could expect, the argument for generic disclosure is stronger. In contrast, if the compensation paid is materially higher or structured differently than what could be commonly expected, a general disclosure is likely insufficient. That said, any flexibility that issuers may currently have will likely be eliminated by future legislative amendment to the EB-5 program. Recent legislative proposals mandate disclosure about fees, ongoing interests, and other compensation paid or to be paid to middlemen involved in EB-5 offerings. Most industry participants expect future amendment legislation to pass with some form of mandatory disclosure requirement.
PENALTIES AND CONSEQUENCES
As demonstrated in Feng, courts can impose significant sanctions for securities law violations. In Feng, the defendants were permanently enjoined from future securities law violations. The court also ordered them to disgorge their commissions, $ 1,268,000 plus $ 468,012 in prejudgment interest and assessed significant civil money penalties against them, including $ 160,000 against the attorney and $ 800,000 against his law firm.
In addition to these sanctions, participants in EB-5 offerings could also be subject to bars or suspensions from participating in the securities industry if they committed misconduct while acting as an investment adviser or broker dealer, whether they were registered or
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