EB-5 Program Securities Offerings: Considerations for the Drafting Process
I am often asked what questions a client or prospective client should undertake to ensure that his or her attorney is approaching the private placement memorandum (PPM) drafting process with care and diligence. While not all circumstances are similar, I have outlined below some important considerations.
Step 1: Engagement Letter
Has the attorney prepared an engagement letter clearly describing the scope of anticipated services? Does the engagement letter clearly delineate or otherwise address the roles of securities and immigration counsel regarding the PPM and related offering documents (e.g., limited partnership agreement and subscription agreement)?
Step 2: Information Gathering/Due Diligence
To understand the anticipated structure, investment object and strategies of the issuer (i.e., the “new commercial enterprise” in EB-5 speak) or related project company (i.e., the “job creating enterprise”), has counsel requested and reviewed a copy of the project company’s business plan? Has counsel undertaken, or will the counsel undertake, teleconferences with the project company’s management personnel (and to the extent applicable, the issuer’s management personnel) to understand the project company’s business so appropriate disclosure can be made in the PPM?
Did counsel provide the issuer and the project company with one or more due diligence requests consisting of one or more extensive lists of material documentation, contracts, financial and other information relevant to the preparation of the PPM? Without such requests, it would be difficult for a client to completely understand what is material and not material from a securities law disclosure perspective.
Has key management personnel for both the issuer and the project company received directors and officers (aka management) questionnaires for review and completion? These questionnaires are designed to provide the securities attorney with material information regarding the business and educational backgrounds of the management personnel that will be included in the PPM’s “Management” section.
Step 3: Drafting the PPM
Following counsel’s review of your business plan, multiple conversations to understand your business and preferred structure, and review of documentation provided pursuant to counsel’s due diligence requests and questionnaires, counsel commences drafting the PPM. The PPM will incorporate relevant material information contained in the business plan, the responses provided pursuant to the due diligence requests and questionnaires, and material information provided by the management team.
In connection with drafting the “Risk Factors” section of the PPM, counsel should review with the management team risk factors applicable to companies engaged in similar businesses. Counsel should also ask the management team to identify any particular risks associated with the operation of the issuer, the project company or the industry in which the project company intends to conduct business.
Has legal counsel provided guidance regarding applicable laws, including relevant tax laws, project specific laws (e.g., land use, senior housing, alcohol beverage control, etc.), the Securities Act of 1933, the Investment Company Act of 1940, the Investment Advisers Act of 1940 and similar state laws?
Step 4: Cold Review
Once legal counsel has incorporated the management team’s final comments to the PPM, did counsel perform a “cold review?” A cold review occurs when the PPM is provided to a partner with no prior involvement with the PPM to review and comment. This review is intended to ensure that the PPM is clear, unambiguous and drafted in a manner that makes sense to an uninitiated or first time reader.