cific project company (referred to as the “job creating entity” or “JCE”). Notwithstanding this potential defense, it is always advisable to comply with a verbal position of the SEC in order to avoid becoming a test case in the future. Based upon our several calls with staff attorneys at the SEC, who have acknowledged their doubt whether the IC Act applies, the SEC’s Division of Investment Management will enforce the provisions of the IC Act as if they apply.
Investment Company Act of 1940 (the “IC Act”). A lesser known concern is the SEC’s overview of the IC Act and potential violations for not registering under such Act or obtaining an exemption. I am not aware of any formal action undertaken by the SEC with respect to the EB 5 program related to the IC Act, although the SEC has, on several occasions, taken the verbal position that the creation of an new commercial enterprise (“NCE”) to receive investor funds and make a loan to a project is deemed to be trading in securities under the IC Act. Many practitioners believe that this position is not properly supported under the facts and circumstances of the EB-5 program, since arguably there is no trading in securities, only the sale of a security in order to make a loan to a spe-
In connection with the 1940 Act, the following should be noted: 1. There is a so-called C(1) exemption for offerings involving no more than 100 sub scribers. 2. If the offering involves more than 100 subscribers, then the so called C(5) exemption could apply, which involves the investment in mortgage-backed collateral. However, even though many transactions do involve mortgage-backed collateral, some transactions have so-called mezzanine pledges, since the senior lender will not otherwise permit a second mortgage on the project. The SEC has taken the position that one can otherwise comply with the C(5) exemption by otherwise meeting the require-
ments of the 2007 Capital Trust No Action Letter (“Capital Trust”). The six criteria set forth in Capital Trust are as follows: “(1) a Tier 1 mezzanine loan is a subordinated loan made specifically and exclusively for the financing of real estate; (2) both second mortgages and Tier 1 mezzanine loans are underwritten based on the same considerations and after the lender performs a handson analysis of the property being financed; (3) the Company as Tier 1 mezzanine lender exercises ongoing control rights over the management of the underlying property; (4) the Company as Tier 1 mezzanine lender has the right to readily cure defaults or purchase the mortgage loan in the event of a default on the mortgage loan; (5) the true measure of the collateral securing the Tier 1 mezzanine loan is the property being financed and any incidental assets related to the ownership of the property; and (6) the Company as Tier 1 mezzanine lender has the right to foreclose on the collateral and through its ownership of the propertyowning entity become the owner of the underlying property.” Based upon the above, the SEC has taken the position that only a first lien pledge of an interest in the borrower entity or its parent
CONTINUED ON NEXT PAGE >>
VOL. 3, ISSUE #4, JANUARY 2016
IIUSA.ORG | 21
Education/research
Investment Advisor Issues. Pursuant to the Investment Advisors’ Act of 1940, the SEC will investigate whether unlicensed parties are providing investment advice in connection with the sale of securities. This would apply to parties that recommend various EB-5 offerings to investors, since by providing multiple choices of projects to invest in, this could be deemed the rendering of investment advice as opposed to just acting as a broker-dealer for a specific transaction.