October 24, 2014
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EB-5 Program Securities Offerings: Preparing Appropriate Disclosure Documents
Often in my practice, I am approached by clients who have misunderstandings about the EB-5 securities offering process. This article is meant to debunk a few of the common EB-5 myths related to the nature and scope of private placement memoranda (PPM) and related due diligence.
MYTH # 1: In EB-5 securities offerings, it is not necessary to undertake meaningful due diligence regarding the proposed project or the issuer of securities. Attorneys simply can rely on (and take at face value) the business plan and economic study prepared by third parties, including the economist, without reviewing any contracts or other readily available documentation to confirm that the information to be included in the PPM is accurate or complete.
MYTH # 2: EB-5 securities offerings are different than traditional securities offerings. Not only is the level of disclosure less, but reviewing the documents and performing the type of due diligence generally undertaken in non-EB-5 securities offerings is just not undertaken.
MYTH # 3: The type of disclosure generally included in PPMs for non-EB-5 offerings should not be used in connection with EB-5 securities offerings. Investors don’t want that level of disclosure and such disclosure will deter them from investing.
MYTH # 4: Use of unlicensed finders and other introducers of capital is not regulated in the EB-5 program. Everyone does it and the same rules don’t apply with securities offerings under the EB-5 program as in traditional non-EB-5 offerings.
Unfortunately, nothing can be farther from the truth. There are no EB-5 program specific exemptions to the U.S. securities laws. Whether you are selling limited liability company or limited partnership interests to raise money for a hotel, assisted living facility, manufacturer, restaurant or other endeavor, securities laws apply and the persons responsible for preparing the PPM should take reasonable steps to confirm that the information included in the PPM does not misstate or omit facts that would be considered material to an investor’s investment decision. You don’t get a “free pass” to avoid complying with applicable securities laws just because some or all of your investors are seeking a visa under the EB-5 program. PPMs are not template-based boilerplate documents and should be approached with care and diligence.
Federal and state securities laws require the issuer of securities to provide prospective investors with full, fair and complete disclosure of all “material” facts about the offering, the issuer of the securities and the issuer’s management personnel, business, operations and finances. Information is “material” if a reasonable investor would consider the information important in making an investment decision. Further, simply disclosing material facts is not enough. When disclosed, the facts articulated must be developed fully so there is fair, full and complete disclosure. At the obvious level, for example, it is not sufficient to simply state that you own a building without also disclosing that the building is uninsured, has been damaged by Hurricane Sandy or has been condemned by the health department. At a more subtle level, you also must disclose, if applicable, that the building is subject to a mortgage and the amount of that mortgage. Although your statement about ownership would be true, it is incomplete and would be considered materially misleading. The existence of a mortgage affects the economic value and other attributes of ownership.
To assist clients with ensuring that their PPMs contain full, fair and complete disclosure, legal counsel should provide his or her clients with a due-diligence questionnaire requesting key information and related documents to support the factual statements made in the PPM. Counsel also should provide management with a directors, officers and key personnel questionnaire to elicit information that should be included in the discussion of each named director, officer or other key person’s business experience. Without such questionnaires, clients would not be aware that certain information is material from a securities law disclosure perspective.
Entities raising capital from investors seeking a visa under the EB-5 Program should consult with legal counsel to ensure that they are complying with applicable securities laws. Depending on deal structure, the applicable securities laws may include any or all of the following: (i) the Securities Act of 1933, as amended, and state “blue sky” laws regarding the offer and sale of securities; (ii) the Investment Company Act of 1940, as amended; and (iii) the Investment Advisers Act of 1940, as amended, and state equivalents. These entities also must comply with applicable foreign securities laws and should evaluate whether introducers of capital (commonly referred to as finders or broker-dealers) must comply with the broker-dealer registration requirements of the Securities Exchange Act of 1934.