July 24, 2014

Financial Industry Regulatory Authority (FINRA) Provides Guidance on Immigration Due Diligence to Broker-Dealers in EB-5 Offerings

There is some interesting but overlooked news on the EB-5 front.

In a letter to a broker-dealer dated August 26, 2013, FINRA (Financial Industry Regulatory Authority) confirmed that the suitability rule (Rule 2111) applies to FINRA members making investment recommendations to foreign nationals in connection with the EB-5 Investor Visa Program. This guidance has sweeping implications for broker-dealers that market securities in connection with EB-5 projects. Broker-dealers interested in marketing securities for EB-5 projects now have interpretive guidance on their obligations regarding the applicability of the suitability rule when advising foreign investors. This is the first substantive guidance that FINRA has issued in connection with the EB-5 program.  If you are a broker-dealer and interested in marketing EB-5 securities to foreign investors, you need to understand this guidance and how it applies to your obligations in an EB-5 private offering.

What is FINRA?

FINRA is the largest independent regulator for all securities firms doing business in the United States. FINRA’s chief role is to protect investors by maintaining the fairness in the recommendation of securities. FINRA members include broker-dealers and investment professionals who market securities. In the broader context of the marketing of securities, including private placements under Regulation D or S of the Securities Act of 1933, FINRA has rules that protect the transparency of the investment process. Federal law gives FINRA the authority to discipline securities firms and individuals in the securities industry who violate the organization’s rules.

Why is this guidance from FINRA important?

FINRA member broker-dealers now have some guidance on their obligations in EB-5 offerings. Read our alert about the implications of this guidance from FINRA at:

This guidance is important for two reasons.

First, the Securities and Exchange Commission (SEC) is increasing enforcement efforts to ensure that EB-5 investors are protected from predatory, unlawful practices of unregistered broker-dealers. Right now, securities violations and problematic practices exist in the EB-5 world, with “finder’s fees” being paid to entities and people who are wholly unqualified to recommend an investment to a potential foreign investor. We are going to see a spike in interest in securities compliance among EB-5 Regional Centers and issuers, but FINRA has not issued guidance in the past that applies to the EB-5 investment context. The guidance now is timely. One FINRA source told me three weeks ago by phone that “the EB-5 program is all the rage at FINRA right now.” FINRA needs to respond to a growing interest of its members in marketing EB-5 related securities while upholding high standards to protect investors.

Second, many EB-5 private offerings are deals that are “off-market,” meaning that terms offered to the investors, the projected performance of the investments and the risk levels are not in step with the market. Yet these EB-5 projects may create thousands of jobs and meet the EB-5 program requirements as intended by Congress. FINRA’s guidance allows broker-dealers to consider the job creation aspect of an EB-5 investment alongside other issues such as the investment’s projected performance. Before this guidance was issued, FINRA member broker-dealer firms had the concern that recommending EB-5 investments to clients would be impossible because so many EB-5 investment vehicles are risk-laden and problematic from a financial performance standpoint.


If you are a broker-dealer seeking to market securities in connection with an EB-5 project, you will need to perform heightened due diligence with respect to immigration matters. We anticipate further changes on the horizon with FINRA. From a practical standpoint, FINRA’s guidance means that broker-dealers recommending EB-5 investments will need to understand and advise investors on the viability of job creation projections and on a project’s compliance with related EB-5 regulatory requirements. This is a substantial additional burden for FINRA members undertaking the marketing of EB-5 offerings. But these additional steps may make investors more confident about there being an independent analysis behind the investment products they are purchasing. FINRA’s guidance is positive because the organization is encouraging the involvement of broker-dealers in EB-5 transactions. If we want the EB-5 Regional Center Pilot Program to become permanent, we need to have more checks and balances in the system. FINRA stepping into the picture to guide broker-dealers should have a positive impact on the EB-5 landscape.

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About the Author

Douglas Hauer, Immigration Attorney, Mintz Levin Law Firm

Douglas is a Member in the firm's Immigration Practice and also practices in the Israel Business Group. His practice focuses on business immigration law, related government investigations, family-based green card sponsorship processes, EB-5 investor visa filings, and corporate immigration policy development.

He has represented multinational corporations in the financial services, technology, management consulting, hedge fund, specialty chemicals, insurance, defense, and engineering sectors. He has in-depth experience counseling corporate clients on the immigration...


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