WHAT WE LEARN FROM SEC INVESTIGATION
RONALD R. FIELDSTONE
ATTORNEY AT LAW, ARNSTEIN & LEHR LLP., MEMBER OF IIUSA COMPLIANCE COMMITTEE
JAY M. ROSEN
PARTNER, ARNSTEIN & LEHR LLP
he Securities Exchange Commission (“SEC”) has clearly increased its degree of scrutiny in investigations with respect to the EB 5 Program since the end of 2012, especially after the Chicago Convention Center case that was filed by the SEC in February of 2013, where the SEC took a very active role in protecting the return of investor capital based upon the existence of obvious fraud and misrepresentation in the offering documents. Since that point in time, the credibility of the EB-5 industry (including industry best practices, heightened due diligence from regional centers and agents and heightened investigation by the SEC) has elevated the degree of scrutiny and protection for the EB-5 program. One must be mindful of the fact that the SEC will take an active role in stopping any projects involving fraud and misrepresentation and will bring actions for fines, sanctions and injunctions related thereto. This overall heightened role of the SEC, as well as the industry in general, has significantly improved the awareness of issues that were apparent in the Chicago Convention Center case and, in general, has avoided repeats of that type of situation.
GENERAL ROLE OF SEC TODAY IN POLICING EB 5 INDUSTRY Fraud in Offering Documents. Pursuant to the Securities Act of 1933 (the “1933 Act”), the SEC is actively enforcing any violation of Rule 10-b(5) under the 1933 Act. As noted above, any potential violation will result in an action for injunctive relief and civil sanctions, as well as possible criminal action. The SEC does not in and of itself bring criminal pro-
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cordance with the offering documents and the business plan utilized in connection with the EB 5 program. It is apparent that budgets always vary to some degree and that is acceptable. However, if funds are slated for one project and then utilized for another project or applied for other purposes that were not otherwise disclosed in the offering documents, that would constitute a breach of the disclosures set forth in the offering documents and again result in a potential action by the SEC. The SEC has no tolerance for these situations, especially if they are material in nature.
ceedings. It would need to refer any criminal action to the Justice Department. Escrow Violations. The SEC has also taken a very heightened interest in potential discrepancies and misrepresentations related to escrow arrangements. Investors believe in most cases that they have some form of protection by having funds placed in escrow and certain pre-conditions being satisfied. In some certain situations, the escrow is really a fiction or does not exist at all and funds are directly distributed to the project company for use in the project without having necessary pre-conditions, such as at least an I-526 filing for the applicable investor or a minimum number of subscribers having subscribed to purchase units in the project, thus ensuring that at least the minimum amount of EB-5 funding has been satisfied. Improper Use of Funds. Certain SEC investigations focus on the actual use of proceeds and whether they were applied in ac-
Broker-Dealer Issues. Probably the most active area of SEC scrutiny, investigation and action involves alleged broker-dealer violations. This is in part due to the complaints from the broker-dealer industry and FINRA related to parties that are apparently receiving inappropriate commissions in connection with transaction-based compensation in the EB 5 program. In connection therewith, the SEC will undertake very detailed investigations to determine if the instrumentality of United States commerce was utilized in any manner in effectuating the sale of the EB-5 security and whether commissions were improperly paid. As part of this process, the SEC will seek discovery of all emails, written correspondence, documents, telephone records, bank accounts and the like to determine exactly what happened in connection with investor solicitation, as well as the flow of funds and the payment of compensation to all parties involved in the transaction. This will not only involve business information, but personal information as well, such as personal telephone records, personal emails and personal bank accounts.
VOL. 3, ISSUE #4, JANUARY 2016