The SEC has routinely held that the Immigrant Investor
Program, better known as the EB-5 program, falls within the
purview of the SEC. As recent actions emphasize, the SEC takes
fraud and any complaints of fraud or misrepresentation within
the program seriously and will not shy away from government
enforcement actions. As the SEC continues its pursuit of
fraudulent activities in connection with the EB-5 program, it
is important for anyone involved in this program to be aware
that SEC enforcement is on the rise and even careless errors
in failing to comply with SEC regulations can have disastrous
consequences for those who may be viewed as selling securities.
However, SEC regulations and enforcement provide the invaluable service of protecting investors and companies alike.
Warning signs for SEC investigators
The typical SEC investigation can start in one of two ways.
First, an investigation can start from a lead generated by an
investor in the EB-5 program. If an investor feels he or she is
being misled by the principal, promoter, or anyone else associated
with the investment, the investor may voice his or her complaint
with the SEC. Typically, in this scenario, the investor feels that
the nature of the investment has been misrepresented. Often this
can occur because of language barriers between the investor and
the person selling the securities. Typical representations that are
certain to draw the attention of the SEC include “guarantees,”
“promises” or obscenely high returns on investments. These representations are indications of fraud that the SEC commonly sees in
many cases. To protect themselves from SEC inquiry, developers
and marketing teams should make sure that they are offering no
promises to investors that contradict EB-5 or SEC regulations.
Along these lines, the SEC will view
material omissions made to investors
as a warning sign of possible fraud.
In this regard, the SEC will closely
scrutinize the Private Placement
Memorandum (“PPM”) to determine
if it clearly and truthfully lays out the
objectives, risks and terms of the investment. The purpose behind a PPM
is to provide buyers with information
regarding the offering and to protect
the seller from liability by fully disclosing the investments and
risks associated thereof. The failure to disclose all material risks,
or the absence of a PPM, is an event that could pique the interest of the SEC and cause the agency to investigate an offering
further. Specifically, a common pitfall a company may face is
the failure to openly disclose commissions paid to brokers as a
finder’s fee for bringing in new investors into an EB-5 program.
Oftentimes, the commission actually paid is excessive compared
to industry standards. Instead of the typical 10-15 percent
commission, undisclosed commissions often range anywhere
from 30-40 percent or sometimes even higher. The SEC views
this kind of omission as material because disclosure of this fact
could impact whether the average investor would invest in that
particular security.
Another area of concern for the SEC is the possibility that
investor funds are not being used for their stated purpose and
are being used for either (1) personal use; (2) to pay back other
investors; and/or (3) other non-disclosed uses. It is extremely
important that the funds are used in a manner consistent with
what investors are told. Even the slightest deviation in the use
of funds from the manner described, no matter how innocent,
may be construed as material deviation.
The second way an investigation can start is with an internal
exam or tip from another governmental agency. USCIS is
responsible for regulating the EB-5 and other visa programs.
Another similar agency, the Department of Labor (DOL),
administers and regulates labor laws and wages in both public
and private employment. If USCIS or the DOL suspects or
becomes alerted to possible fraud, it may approach the SEC. At
this point, the SEC will use the information provided to it from
USCIS or the DOL to commence its own investigation.
Launching an investigation
Under either approach, the first step the SEC will take will be
to talk to investors within the EB-5 program. The SEC will ask
investors questions about what they were told, what documents
they were given, what money they have been paid and other
pointed questions designed to help inform the SEC whether
there is an ongoing fraud. If, after talking to investors, the SEC
determines further inquiry is warranted, it may attempt to call
the brokers and/or principals of the EB-5 project and solicit
information from them as well. The SEC may also decide to use
its subpoena power and subpoena individuals to provide documents, including but not limited to, emails with investors, documents identifying investors within the
EB-5 program, corporate formation
documents, executed documents between the company and the investors
and financials of the company.
Generally, the subpoena represents
the first time the company becomes
aware of any investigation by the
SEC. At this juncture, it is imperative
for anyone receiving a subpoena to
contact an experienced SEC defense attorney. Interfacing with
the SEC without the assistance of