A CLOSER LOOK AT THE LAW
INVESTMENT ADVISERS
Rule 206(4)-8 relates to actions by investment advisers
with respect to pooled investment vehicles. The SEC
takes the position that the manager of an NCE is such
an adviser if it receives compensation in connection
with investment advice given regarding the purchase
or sale of securities. 9 Since the managing member of a
limited liability company or the general partner of a limited
partnership gives advice relating to the purchase by an
NCE of a promissory note from the related job creating
entity (which note is itself a security), and receives
compensation in connection with such role, 10 then the
managing member or general partner is considered by
the SEC to be an investment adviser for purposes of the
rule. EB-5 stakeholders should note that Rule 206(4)-
8 extends potential liability to be both registered and
unregistered investment advisers if a pooled investment
vehicle is involved. 11
ACTIVITIES PROHIBITED
BY RULE 206(4)-8
Unlike the anti-fraud provisions contained in Section 10
of the Exchange Act and Section 17 of the Securities
Act, the language in Rule 206(4)-8 prohibits investment
advisers from engaging in any act, practice or course of
business that is fraudulent, deceptive or manipulative
with respect to any investor in a pooled investment
vehicle. In this regard, the SEC stated in adopting the
rule that “our intent is to prohibit all fraud on investors in
pools managed by investment advisors,” 12 and that “the
wording of [the Rule]...is designed to apply more broadly
to deceptive conduct that may not involve statements.” 13
The use by the SEC of broad prescriptive language
and the fact that scienter is not required to be plead
also means that the SEC intends to use a negligence
standard as a method reasonably designed to prevent
fraud. 14 Thus, it is clear that Rule 206(4)-8 provides the
SEC the power to prosecute the ongoing activities of
NCEs rather than just statements and omissions made
by NCEs in connection with the offering and sale of their
securities. 15 In addition to the differences noted above
relating to customary anti-fraud actions, the rule does
not provide for a private right of action to enforce such
rule. 16 As evidenced in the Idaho Complaint, the SEC has
found a way to begin using the anti-fraud provisions of
the securities laws relating to investment advisers in order
to sue for the fraudulent, deceptive, and manipulative
actions of the advisers in EB-5 investment transactions
occurring both during and after EB-5 investor funds have
been raised. As a result, EB-5 stakeholders should
familiarize themselves with the additional enforcement
powers now being utilized by the SEC in connection
with structuring and operating their EB-5 financings.
117 EB5 INVESTORS M AGAZINE