The jumpstart Our Business Startups (
IOBS) Act. signed by President Barack Obama on April 5, 2012, , aims to ease the regulatory burden on small companies that are in the process of raising capital. This article analyzes the new law's impact on the EB-S industry. It is a very general summary of many complex securities law issues. Please consult your own professional advisors for advice applicable to your particular circumstances.
EB-5 and Securities LBW Before the JOBS Act
One immediate mistuiderstanding is that the IOBS Act gives a regional center (or other EB-S practitioners) a green light to ignore a Securities and Exchange Commission (
SEC) lawyer's ranting, Do regional centers no longer need to comply with the securities laws? While the IOBS Act gives the regional center more leeway to market EB-S securities, it does not exclude regional centers and the principals of EB-5 projects from continuing to comply with securities law.
When you approach an investor to invest in your EB-5 project, you are engaged in the offer and sale of securities,
laws, including the Securities Act of 1933 (1933 Act), which focuses on the offering and sale of securities; and the Exchange Act of I934 (1934 Act), which addresses, among other things, the actions of issuers and broker-dealers in connection with selling securities.
A general misconception from companies seeking to raise money via the EB-S program is that securities law compliance should be a low priority. No doubt companies with this attitude are unaware that they are placing the funds they raise via EB-5 at risk of forfeiture to SEC andor recovery by their investors.
The 1933 Act requires that all offerings of securities be registered with SEC unless the offerings can be made pursuant to an exemption front registration. Registration is an expensive, time-consuming process that imposes costly ongoing reporting requirements on issuers of securities. Most EB-5 projects (and, in tact, most companies that raise funds by selling securities) rely on exemptions to avoid registration. The most common exemption from registration under the 1933 Act is set forth in Regulation D. Regulation Doutlines the rules for small private offerings. In addition to Regulation D, EB-5 issuers also are able to take advantage of Regulation S, which is an exemption exclusively for overseas offerings. It is possible to rely on more than one exemption, which is common practice in EB-5 issuances. Attempting to meet the criteria for two exemptions provides an EB-5 issuer with a back-up plan in case the requirements for one of the exemptions are inadvertently violated or unsatisfied.
Regulation D
Regulation D consists of several sub-exemptions based on the number of investors and the amount of the offering. An offering under Rule S06 of Regulation D is the most flexible, allowing an unlimited amount of “accredited investors" to participate in the offering (and 35 unaccredited investors, though it is generally not wise to sell to any unaccredited investors). with no limit on the amount of capital raised. Generally, an accredited investor has annual income greater than $200.000 (or $300,000 with his or her spouse) or a net worth of more than S1 million, not including his or her principal residence. Issuers relying on the Regulation D exemption could not engage in any general solicitations and advertising related to their issuance.
Regulation S
Under Regulation S, there is no prohibition on general solicitations. per se. However. there cannot be any
“directed selling efforts“ in the United States. Also, the securities cannot be sold to any “U.S. Persons." Regional centers typically use overseas brokers who can engage in solicitation activities abroad. To qualify for this exception, however. none of these activitiescan spill into the United States, and the actions of these broker/dealers are subject to the registration and anti-fraud provisions of the I934 Act. to be discussed later in this article.
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