The next part of review will be a search of public records. Most
companies will engage an outside investigator for this purpose.
Some of these searches should be tailored – for example a check
for good standing with FINRA may be sufficient for a broker
dealer. But in general the search should include:
•
Confirmation of identity and all names
used by the covered person
•
Search engines (e.g. Google), social
networking sites and news databases
•
Federal criminal databases
•
Disciplinary records of the SEC, CFTC, federal
banking authorities and the U.S. Postal Service
•
The issuer should also consider whether conducting more
targeted searches in the area or industry of the red flag activity
is warranted. It would also be advisable to broaden the search
of state criminal records and regulatory agencies to include
additional states where the covered person may have lived
or worked, and criminal records and disciplinary records of
securities, banking and insurance regulators in states where the
covered person lived or worked during the past ten years.
Criminal records and disciplinary records of
securities, banking and insurance regulators
in states where the covered person lived
or worked during the past ten years
The searches should include not just the individual’s name,
but the individual’s employers. The investigator should give
careful thought as to what other names and aliases the covered
person may have used to provide confidence that the searches
conducted would have reasonably disclosed any of the bad acts
in the U.S. and states where the individual reasonably may
have lived.
Any positive findings should be discussed with securities
counsel to determine if it is a bad act that disqualifies the covered person or requires disclosure.
Phase Two: Review: The issuer should initiate a Phase Two
investigation into the details of any bad act detected during
Phase One. In addition, further investigation is warranted if any
other “red flags” appeared during Phase One. Red flags will vary
by business or industry, and officers of the issuer should discuss
with investigators specific issues to watch for. Some of the more
common red flags would be:
•
Unexplained loss or lapse of a professional
license in the securities or financial industry
•
★
A “near miss” – finding an act by the covered person
that would have been a bad act under Rule 506(d) if it
had occurred more recently or in a different industry
•
Conclusion
No investigation is perfect – even the most exhaustive investigation may fail to discover a covered person’s bad acts, even as
it depletes the issuer’s resources. Fortunately, the due diligence
defense under Rule 506(b), and the regulators enforcing it, do
not require perfection; rather a reasonable inquiry is all that
is required. Advance planning and careful formulation of the
investigation process can assure that reasonably detectible bad
acts are, in fact, detected and that the proceeds of the offering
benefit the issuer and not its investigators and lawyers.
Civil suits or criminal proceedings
alleging fraud or deception in industries
not involving finance or securities
•
Jor Law
Serving as an officer, director or employee
of an entity charged or sued for fraudulent
acts, especially a pattern of such acts.
If Phase One identified any red flags, and the failure to disclose
the red flag on the questionnaire was a false response, the issuer
should follow up with the individual to understand the reason
for the omission, to make further inquiries and (apart from
offering concerns) consider whether grounds exist to terminate
the individual’s employment or engagement by the issuer.
Charles Kaufman
1
Jor Law practices corporate
and business transactional
law in Los Angeles and is
a founding shareholder
of Homeier & Law, P.C.
In addition to his regular
practice of representing companies of all sizes and individuals in the areas of
finance, secured and unsecured lending, mergers
and acquisitions, licensing, securities, venture
capital, internet and new media, technology,
e-commerce, and other corporate transactions,
Jor routinely advises on corporate and securities
aspects of EB-5 related transactions.
Charles Kaufman, Counsel
at Homeier & Law P.C., is a
member of Homeier & Law’s
prominent EB-5 practice.
Charles has advised numerous
companies in raising capital
under the program. As EB-5
transactions have become part of the financial
mainstream, but also come under unprecedented
scrutiny, clients have sought out his combined expertise in U.S. securities laws and regulations and
in the specialized demands of EB 5 financing.
17 CFR § 230.506, Instruction to paragraph (d)(2)(iv).
WWW.EB5INVESTORS.COM
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