Nearly all U.S. broker-dealers are members of the Financial Industry Regulatory Authority (FINRA).  FINRA regulates, and provides oversight and guidance for its member firms.  When a broker-dealer becomes a FINRA member, they enter into a membership agreement which, among other things, specifies which financial products and services the broker-dealer is permitted to offer to its clients.  Engaging in securities transactions that are not authorized by broker-dealer’s membership agreement can subject that broker-dealer to penalties and enforcement actions.

Many broker-dealers whose membership agreements grant them authority to sell private placements assume that this gives them the ability to sell EB-5 securities.  However, if a firm has authority to sell private placements, that does not necessarily mean that they are qualified to sell EB-5 securities.  While sold as a private placement within the U.S., EB-5 securities are a specialized product which require additional controls, policies and procedures.  EB-5 issuers who seek to engage a broker-dealer to sell their offerings, should learn about that broker-dealer’s experience with EB-5 securities.

An existing broker dealer can seek permission from FINRA to sell new products by filing a continuing membership application (CMA).  Under FINRA Rule 1017, a member firm is required to submit a CMA when there has been (or will be) a “material change in business operations.”  In interpretative guidance, FINRA has stated that whether or not an event is a “material change in business” ultimately depends on “an assessment of all relevant facts and circumstances.”  See NASD NTM 00-73.  The factors to be considered are: the nature of the proposed expansion; the relationship, if any, between the proposed new business line and the firm’s existing business; the effect the proposed expansion is likely to have on the firm’s capital; the qualifications of the firm’s personnel; and the degree to which the firm’s existing financial, operational, supervisory, and compliance systems can accommodate the new business line.  Depending on the broker-dealer’s current business and membership agreement, selling EB-5 products for the first time may require the broker-dealer to file a CMA.  Broker-dealers that are uncertain whether or not they have the authority to distribute EB-5 securities (or any other product), should consult with counsel, and if in doubt, can solicit an opinion from FINRA by filing a materiality consultation request.