EB5 Investors Magazine - Page 43

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