November 29, 2021

Volume XI, Number 333

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Unregistered Broker-Dealers: Risky Business for EB-5 Developers

Paying referral or finder’s fees to unregistered broker-dealers could create risks for developers in an EB-5 transaction. A few of my colleagues at Mintz Levin, Jeremy Glaser, Steve Ganis and Jake Romero, authored a relevant article last year on the risks associated with unregistered broker-dealers: “Using Finders to Assist in Financings: Understanding the Risks Associated with Unregistered Broker-Dealers.” http://www.mintz.com/newsletter/2011/Advisories/1088-0411-NAT-SEC/web.htm. This article is important reading for developers seeking capital through the EB-5 program. Every developer should know about the risks associated with unregistered broker-dealers before marketing an EB-5 project.

What risks could developers face for engaging unregistered broker-dealers in an EB-5 transaction? First, an unregistered broker-dealer in an EB-5 transaction could trigger rescission rights in favor of an EB-5 investor under state or federal law. Second, even if an EB-5 investor cannot bring a successful rescission claim against a developer, the use of an unregistered broker-dealer in an EB-5 transaction could have ramifications with respect to a developer’s future disclosure obligations and financings. These are all important factors to consider in developing any policy on EB-5 referral fees for a project, particularly in a climate of increased enforcement of securities laws by the Securities and Exchange Commission.

While the facts in every case must be carefully reviewed to assess whether a securities violation has occurred, EB-5 developers should be cautious when approached with referrals from unregistered broker-dealers. Commonly, immigration attorneys act as unregistered broker-dealers in an EB-5 transaction, with an expectation of a referral or finder’s fee. Paying referral or finder’s fees to immigration attorneys in this context is risky business. All parties should consult counsel before agreeing to such an arrangement. In addition, attorneys accepting referral fees from EB-5 projects or developers could face civil or even criminal penalties and allegations of professional misconduct by a state bar.

The explosion of new EB-5 projects in the past three to four years has resulted in a substantial increase in EB-5 advertising by attorneys. Developers relying on immigration attorneys or other unregistered agents to source investors for EB-5 projects should beware of the risks.

©1994-2021 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume II, Number 226
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About this Author

Douglas Hauer, Corporate Immigration Attorney, Mintz Levin, Immigration EB-5 Financing Securities & Capital Markets Israel
Member

Doug is a noted authority on the EB-5 investor visa program, which gives developers a path for securing capital for real estate, hospitality, and infrastructure projects. His fluency with the program makes Doug an essential resource for companies looking for financing from offshore sources. International entrepreneurs and companies also rely on him when launching a business within the borders of the US. He is ideally positioned to advise clients on immigration and corporate law issues that arise in doing business in the US. 

Doug is a Member in the firm's Corporate & Securities...

617-348-3044
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