Check out what’s new in the EB-5 world, where a team of securities lawyers are at work offering to help lawmakers understand complex legal provisions of proposed EB-5 integrity legislation. The group is called the EB-5 Securities Roundtable (the “Roundtable”) and is made up of securities attorneys (the author of this blog posting included) who represent a broad range of stakeholders in EB-5 deals such as regional centers, recipients of EB-5 funds and lenders.

Anticipating more action from lawmakers on the EB-5 integrity front, the Roundtable has proposed technical language solutions to securities law provisions that may come into any final version of an EB-5 integrity bill. The group is aiming not to lobby but to serve as a resource to help lawmakers line EB-5 reform efforts up with existing securities laws, regulations and policies. Securities law is a very complicated area with its own universe of terminology. We think the Roundtable’s resource will be welcome by lawmakers, industry groups and others who have a stake in EB-5 reform. 

One of the goals of the Roundtable, which Mintz Levin co-founded with several firms across the country, is to regularize EB-5 securities law practice. This is an important goal. EB-5 needs to be a more normative form of financing in the toolkit of lawyers. This starts with the securities lawyers in the field — gatekeepers of EB-5 in every sense of the word — giving sound advice to clients and promoting best practices.

Right now the EB-5 Program is still on the margins of the securities industry despite the fact that EB-5 financing benefits emerging businesses seeking capital across sectors, particularly in industries where construction and hard development costs are high. The Roundtable can have an impact as the EB-5 Program develops and becomes more institutionalized.

What is the future of EB-5?

We hope the EB-5 Program becomes established, permanent and normative. But Congress needs to act soon. We are about a month away from the Program lapsing.

Lawmakers are right on to insist on integrity reforms with any extension of the Program. The EB-5 Program has been plagued by bad actors, fraud and loose practices since it became more popularized in 2008. But lawmakers don’t need to reinvent a whole new legal structure to fix this.

Added integrity provisions are a sensible move by Congress. This is in step with current law. But changes to the law should be aligned with our existing securities laws, which are effective. Specifically, the United States has a very strong anti-fraud legal infrastructure in place when it comes to the purchase and sale of securities, including Section 10(b) of the Securities and Exchange Act of 1934, and Rule 10b-5, codified at 17 C.F.R. 240.10b-5, which is one of the most important rules targeting securities fraud promulgated by the U.S. Securities and Exchange Commission. These laws work. Congress does not need to re-write our securities laws in an effort to make EB-5 more sound and secure. The core integrity provisions for EB-5 are for the most part already in place. The technical guidance from the Roundtable can help lawmakers ensure that integrity provisions do not inadvertently create confusion, or conflict with existing obligations of issuers of EB-5 securities.

The Securities Law Roundtable has offered lawmakers a technical resource in the EB-5 reform process

Hopefully lawmakers will consider comments of the Roundtable when finalizing a draft of any legislation.

We’d like to continue to have EB-5 financing as an option in our toolkit to help clients. Many of our firm’s clients have been the recipients of EB-5 financing for projects ranging from the creation of a small media business to large-scale hotels, resorts and mixed-use real estate development. Congress making strategic moves to bring an increased level of integrity to the Program will benefit all. The Roundtable’s contribution to this broader effort is an important step forward, and will ensure that securities provisions in any new law are informed and workable. 

The Securities and Exchange Commission (SEC) has just published three new decisions in connection with administrative proceedings against two well known immigration lawyers, as well as against a third lawyer. One party has allegedly earned $450,000 in commissions from one EB-5 Offeror alone. This enforcement is not surprising. Last year, we saw several immigration lawyers subject to the same proceedings and sanctions. The allegations are resoundingly familiar: Violation of Section 15(a)(1) of the Securities Exchange Act of 1934 (the “Exchange Act”). We expect even more SEC enforcement activity in this space. Why is the SEC targeting immigration lawyers? What implications are there for all parties in an EB-5 transaction and to the industry as a whole when an EB-5 Offeror pays finder’s fees to lawyers?

Immigration lawyers are EB-5 gatekeepers

The SEC has a strong interest in prosecuting civil violations of securities laws by gatekeepers of securities markets.

Immigration lawyers are viewed as gatekeepers to the EB-5 Program. What is a gatekeeper? In the securities law context, a gatekeeper is a professional that holds a position of trust who should be looking out for the interests of a specific securities market. The idea is that the integrity of markets is kept in check by professionals charged with executing their responsibilities. Accountants, lawyers and auditors are often gatekeepers of the securities marketplace.

The SEC has the objective of keeping gatekeepers accountable. The SEC expects gatekeepers — be they accountants, lawyers or auditors to name a few — to raise red flags when there are visible issues and problems in an offering of securities. This maintains the integrity of markets and protects investors. When gatekeepers violate securities laws or engage in conduct that turns the concept of protecting investors on its head, the SEC becomes very interested in holding those individuals accountable. The idea here is that gatekeepers are front-line protectors of a marketplace. Immigration lawyers in the EB-5 industry have often taken on this role. They are often the first to be able to spot an irregularity in an EB-5 transaction. And immigration lawyers often comment on or assist with drafting documents prepared in connection with an EB-5 offering.

The SEC likes to hold out gatekeeper-violators of securities laws as examples for an industry. This is no consolation for the attorneys facing sanctions and disgorgement, but it does explain to some degree how the SEC prioritizes investigations and why immigration lawyers are of interest. Attorneys with high profiles in the EB-5 industry who are involved in producing investors for regional centers or who engage in marketing should be concerned. And so should the attorney who takes a finder’s fee from a regional center one single time. The SEC also pursues “minor violations” particularly by gatekeepers to set an example for an industry. One of the attorneys in today’s proceedings had received $37,500 in finder’s fees. This was sufficient for the SEC to pursue administrative proceedings and sanctions.

Transaction-based compensation is often not difficult for the SEC to trace and later prove

The DNA of these three recent cases is virtually identical, with the SEC finding that each of the attorneys earned transaction-based compensation for steering clients to specific EB-5 regional center projects. The SEC ordered disgorgement of unlawfully earned commissions along with interest in all three cases. One of the three attorneys also incurred a civil monetary penalty of $30,000. He is alleged to have had commissions transferred to a foreign bank account despite the fact that his business is U.S. based. In the case of one of the other attorneys, he had a “Referral Services Agreement” in place with the EB-5 regional center that paid him compensation. This means that these attorneys left their fingerprints in very identifiable places, which SEC investigators love. Continue Reading Three Immigration Lawyers Sanctioned by the SEC for Brokering EB-5 Investments

Here is a summary of the claims by the SEC in the Commission’s recent action against Luca Funds, authored by Joel Rothman, an Attorney with Mintz Levin’s Litigation Department and Institutional Investor Class Action Recovery Practice. 

The Securities and Exchange Commission (“SEC”) appears to be stepping up enforcement in the EB-5 area. On July 6, 2015, the SEC filed a complaint and a separate cease and desist order against the perpetrators of a Ponzi scheme targeting EB-5 investors. These enforcement actions highlight the perils that EB-5 investors face when dealing with unregistered brokers and investing in unregistered private placements. EB-5 investors should be sure to conduct thorough due diligence before investing.

The SEC complaint alleges that an oil and gas company and its CEO ran a Ponzi scheme that targeted Asian investors, including some solicited as part of the EB-5 program. According to the SEC, the CEO set up a number of investment funds (the “Luca Funds”) and engaged in a fraudulent scheme targeting the Chinese American community and Asian EB-5 investors.  Specific to the EB-5 program, the CEO and the CEO’s “chief fundraiser” recruited investors through seminars in China where, the SEC claims, they distributed brochures that “were unfounded and inconsistent with the actual performance” of the Luca Funds. Further the SEC alleges that the CEO raised approximately $8 million by representing in a private placement memorandum given to EB-5 investors that their money would be used to make fully secure loans that would finance the development costs for eight oil and gas drilling projects.  In fact, according to the SEC, the entity receiving the money, which the CEO controlled, had no realistic possibility of ever repaying the loans, and the CEO diverted the funds for personal gain. Continue Reading Recent SEC action against Luca Funds highlights perils of EB-5 deals for investors

In a recent action, SEC v. Luca International Group, LLC et al. (“SEC v. Luca“), the Securities and Exchange Commission (SEC) has charged a California-based oil and gas company and its CEO with violations of securities laws in connection with a $68 million Ponzi scheme and affinity fraud. The target of the fraud was the Chinese American community. Additionally, a portion of the funds raised by the defendants came from EB-5 investors seeking green cards through the EB-5 Program. The SEC issued both a press release and cease and desist order this week in connection with this most recent action. We think that this case highlights two important and relevant points for our readership, and that the SEC exposing the defendant schemers/fraudsters in SEC v. Luca is good for the EB-5 industry and integrity of the EB-5 Program. Continue Reading Sunlight is the best disinfectant: SEC charges oil company for fraud on EB-5 investors