A CLOSER LOOK AT THE LAW
"As unregistered
offerings, EB-5 offerings
are not subject to the
heightened disclosure
requirements of
registered offerings. "
an investment contract. The test requires an investment
of money in a common enterprise with an expectation of
profits produced by the efforts of others. The test is an
objective inquiry into the nature of the investment based
on what investors were led to expect.
In Feng, the defendants focused their arguments on the
third prong of the test, arguing that the EB-5 investors had
no expectation of profits. Specifically, they argued that the
EB-5 investors were motivated by the prospect of securing
permanent resident status in the United States under the
EB-5 program and not making profits. They argued that
no profit motive existed since the administrative fee each
EB-5 investor paid to invest was higher than the actual
return on the investment.
In rejecting these arguments, the Feng court focused on
the rationale behind the EB-5 program, rather than the
105 EB5 INVESTORS M AGAZINE
economic reality of the transactions at issue. The court
cited EB-5 program regulations that allude to a profit
motive and state that an investor must place “the required
amount of capital at risk for the purpose of generating
a return on the capital placed at risk.” The court found
it significant that the regional centers’ offerings were
intended to meet the requirements of the EB-5 program,
including the “at risk” component.
The court also noted that the offering materials mentioned
the potential for profit and identified the investments
as “securities.” Importantly, the Feng court drew a
stark distinction between the administrative fees and
the potential return on the investment contracts. The
court essentially viewed the expectation of a return on
investment in isolation, and refused to reduce the return by
the amount of the administrative fees.