Conducting An EB-5 Offering Under Rule 506 of Regulation D
The EB-5 offering program was created by the U.S. Congress as part of the Immigration Act of 1990 to stimulate the U.S. economy through job creation and capital investment by foreign investors. Using an EB-5 offering foreign investors can obtain EB-5 visas designated by the U.S. Citizenship and Immigration Services (USCIS) to gain lawful residency in the U.S. for themselves and their immediate family in exchange for a capital investment. The capital investment must be at least $500,000 in a qualified U.S. business enterprise. When securities are offered to foreign investors pursuant to the EB-5 program, Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended (the “Securities Act”) is typically the securities exemption relied upon by the U.S. business enterprise.
Securities sold under an EB-5 offering pursuant to Rule 506 are a cost effective and relatively quick way for foreign issuers to raise capital prior to their going public transactions. In the past, the 506 exemption prohibited any form of general solicitation or advertising in connection with the offering. Since September 23, 2013, issuers conducing EB-5 offerings in reliance upon on the Rule 506 are no longer banned from general solicitation and advertising. Issuers may use advertising in their EB-5 offerings to accredited investors, making it easier for issuers to raise capital. This new rule allows EB-5 issuers to engage in general solicitation, including public websites, social media, newspapers and television, if specific requirements are met. The SEC has confirmed that the Rule 506(c) exemption will not be forgiving for issuers who engage in general solicitation but fail to comply with its requirements. EB-5 issuers still need to ensure proper compliance, particularly when choosing a credible EB-5 entity to invest in and verifying that foreign investors are accredited.
EB-5 Immigrant Investor Visa Requirements and Advertising of EB-5 Projects
To qualify under the EB-5 program, a foreign investor has two different options for the required investment amount.
1. The EB-5 investor must make an individual investment of at least $1 million in a qualified, for-profit U.S. business enterprise; or
2. The EB-5 investor need only invest a minimum of $500,000 as long as he/she chooses to create a business in a Targeted Employment Area (TEA) or in a rural area which has experienced high umemployment.
Additionally, the option chosen must result in the creation of full-time employment for at least 10 U.S. workers for a minimum of two years. In addition to the strict proof and proper documentation compliance with these rules, EB-5 issuers must be mindful of potential pitfalls. The most significant compliance concern is that issuers make sales only to accredited investors.
Under the regulations, the EB-5 program is capped at 10,000 visas annually. This number has yet to be reached. In 2011, however, there was a significant increase in the number of EB-5 program participants and the EB-5 investment program has grown in popularity due to the efficiency in the application process and the creation of more EB-5 Regional Centers throughout the U.S. EB-5 Regional centers are designated by the USCIS to administer EB-5 investment projects based on proposals for promotiong economic growth. By investing through a Regional Center, the investor is relieved of the day-to-day troubles of running the business, and they are not responsible for the direct management of their investment. As a result, the vast majority of EB-5 visas issued have been for applicants who invest through the EB-5 Regional Center.
EB-5 investment projects may only use general solicitation and advertising in their Rule 506(c) offerings if sales are made to accredited investors. Even one sale to a non-accredited EB-5 investor will prevent the issuer from relying upon the exemption, making it a time bomb for issuers who fail to adopt proper compliance methods for their offerings. In the adopting release implementing Rule 506(c), the SEC made proposals and provided some guidance about the steps issuers should take to confirm accredited investor status. These proposals include imposing disclosure and filing requirements for offerings made under Rule 506(c), and changing Form D. Rule 506(c) will go into effect on September 23, with or without final action on the SEC’s proposals.
Accredited Investor Requirements
Under the Securities Act, an accredited investor must have either (i) a net worth of at least $1 million, not including the value of his or her primary residence, or (ii) income of at least $200,000 in each year of the last two years or $300,000 together with his or her spouse if married and have the expectation to earn the same amount in the current year.
The SEC has indicated that accredited investor status will be an objective determination by the issuer based upon the particular facts and circumstances. The SEC suggested the methods below:
1.Confirming Accredited Investor Status – The issuer should review tax forms, including W-2s, 1099s, K-1s, and 1040s, that report the purchaser’s income for the two most recent years. The issuer should also obtain written representations from the investor that he or she has a reasonable expectation of reaching the income level necessary to qualify as an accredited investor during the current year.
2. Net Worth Requirement Assets – The issuer should review bank, brokerage and other statements of securities holdings, certificates of deposit, tax assessments and appraisal reports that are no more than 3 months old.
3. Liabilities – The issuer should obtain reports from credit agencies. The reports would need to be dated within the prior three months. The issuer should obtain written representations from the investor that all liabilities necessary to make a determination of net worth have been disclosed.
4. Third Party Confirmations – The issuer should request written confirmations from third parties such as broker-dealers, investment advisers, attorneys and certified public accountants, that such third party has taken reasonable steps within the prior three months toverify that the purchaser is an accredited investor.
5. Existing Investors – The issuer should ensure that accredited Investors who purchased prior to September 23 should certify that he or she remains an accredited investor.
Using the EB-5 Program in conjunction with the Rule 506(c) exemption provides the issuer with a roadmap for a successful capital raising offering. EB-5 issuers should ensure that prior securities offerings made to non-accredited investors are not integrated with a Rule 506(c) offering or the exemption will could be lost. Issuers should ensure compliance with the securities laws and regulations in the countries where EB-5 investors are located.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
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Brenda Hamilton, Securities Attorney
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Boca Raton, Florida 33432
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