The Sale of EB-5 Securities Offerings

The Securities Act of 1933 and its amendments require that all offers or sales of securities must be registered with the Securities and Exchange Commission (SEC); however, registering offerings often comes with extended wait times which are incompatible with the timelines of the EB-5 program. Therefore, most EB-5 investment offerings are not registered with the SEC and instead qualify for various exceptions to the registration requirement. 

The exemptions provide multiple transaction exemptions for businesses and entrepreneurs to wait to raise capital quickly from multiple different investors through private placements. These offerings are instead regulated by the Financial Industry Regulatory Authority (FINRA), a private compliance organization partnered with the SEC. These exemptions do NOT provide exemptions from anti-fraud, civil liability, and federal securities laws. Developers and project sponsors must take extreme care to provide sufficient detail in an offering to comply with the SEC’s antifraud provisions, even when registering under the exemptions.

EB-5 private placements typically qualify for two exemptions: Regulation D and Regulation S.

It is important to note the following summaries are only for high level, broad consideration and are not legal advice. Any project crafting an EB-5 offering must do so in close consultation with a licensed US securities lawyer. Similarly, if the offering will be sold abroad, it must be compliant with local securities laws of the country/jurisdiction targeted by marketing efforts. 

Regulation D

Regulation D allows for an entity to raise an unlimited amount of capital from sale inside U.S. territory. The project sponsor bears the burden of proof in demonstrating the securities offering is qualified and compliant with the terms of Regulation D exemption and securities law. The sponsor must also show their organization’s methods in disclosing information to future investors and the “requirement to comply with the manner in which the offering is conducted”.

Usually, U.S. states have additional requirements for private placement offers, securities sales, and sales to non-accredited investors within the state’s jurisdiction. Noncompliance with state laws can result in the sponsor paying a rescission remedy to the investor and paying all attorney fees for those pursuing legal recourse. Regulation D is only available to the issuer of securities – not to the project developer (if separate from the issuer), nor to the reseller.

Within Regulation D, EB-5 investments are typically structured as Reg D 506 (b) or Reg D 506 (c):

Rule 506(b) does not limit sale to accredited investors, but limits sale to only 35 non-accredited investors’. 506(b) also prevents any general advertising or solicitation of investments to the public. This includes any print or digital advertisement through public forums, such as newspapers, magazines, TV, and radio, as well as at public events which are marketed through these same channels. These projects can only be sold directly to investors who have a “pre-established” relationship with the investment issuer, directly or through a third party (like a broker dealer).

Rule 506(c) was added to Regulation D in 2013, and allows securities sales only to accredited investors. These investors’ accreditation and net worth must be verified by the investment issuer, a third party, or by the investor’s legal counsel, and submitted to the SEC for confirmation. Issuers Sponsors applying for 506(c) exemption may use general solicitation marketing for their project and have no limitations on what type of advertisements can be used (besides compliance with SEC rule 156 and anti-fraud provisions).

Below is a comparison between Reg D 506 (b) and (c)

Noncompliance with regulation D puts securities sales in violation of both federal and state securities laws. In this case, investors are able to rescind their investment/securities purchase. This means the project sponsor will be forced to insure the return of all investors’ capital no matter the circumstances. Additionally, the issuer will become subject of a state or SEC investigation.

Regulation S

“Regulation S” is another “safe harbor” exemption for securities offered and sold outside the U.S. The purpose of this exemption is to allow US companies and businesses to raise capital overseas, but also to protect foreign investors from investing in unregistered offerings. Essentially, Regulation S signals that the investment offering is a) unregistered, but still legal and compliant with SEC rules, and b) the investment is only open to offshore investors. 

There are two general conditions that “safe harbors” are subject to:

General condition 1 stipulates that the sale is an “offshore transaction”, meaning that the security is sold overseas to someone who has reasonably demonstrated they are not in the US at the time of sale, or that the offerings are sold through a foreign securities exchange or foreign securities market.

General condition 2 stipulates that no “direct selling efforts” are conducted on U.S. soil by any party employed by or working in conjunction with the project sponsor. Direct selling is considered advertising or promotion through publically circulated forums, such as newspapers, radio or TV. Sale over the internet is warranted, but only if reasonable safeguards are put in place to prevent against sale to a US person.

What is an accredited investor?

Almost all EB-5 investments are sold to investors who are considered “accredited”. Rule 501 of Regulation D defines an accredited investor as “a natural person who has individual net worth…that exceeds $1 million at the time of the purchase” OR “a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year”. 

Accreditation is required to ensure that all participating parties are “financially sophisticated” and “able to fend for themselves or sustain the risk of loss”. Accreditation varies depending on the type of offering being made (e.g. 506(b) or 506(c) offerings).

Non-accredited investors are required to be knowledgeable about all risks, merits, financial & business information, and other considerations needed to make an informed decision about their investment. The project sponsor must also reasonably believe the investor is qualified to proceed with the transaction. “Financial sophistication” may be substituted with a purchasing representative or legal counsel accompanying the investor during the sale of securities.

When should I use regulation D versus regulation S?

Regulation S was most commonly used amongst issuers when the EB-5 project was marketed in countries such as India, China, and Vietnam. Growing competition and long immigration delays in these countries have caused issuers to branch out to other SEC exemptions to maximize the investment raised and minimize time until petition approval.

If you are planning on targeting prospective immigrants currently residing in the US, you would more likely be using a Regulation D exemption, which allows for securities to be sold to investors on US soil. Regulation D exemption is also ideal for projects which are not being marketed publically, but rather as a private investment opportunity. If you plan to sell and market the offering to overseas investors, Regulation S would be used. Most EB-5 offerings are structured to allow for a sale under both exemptions given that EB-5 investors come from all over the world, including foreign nationals currently living in the United States on non-immigrant visas.