We frequently speak with our clients about whether their
participation in an EB-5 program requires registration as a
broker-dealer. Joseph Furey, Assistant Chief Counsel at
the SEC Division of Trading and Markets, addressed this topic on
the joint
USCIS/SEC stakeholder call held on April 3, 2013. The SEC staff
takes a broad view of the broker-dealer registration requirements
— broad both as to activities that require registration and
as to applicability to extraterritorial activities. (Readers should
note that an SEC staff view does not necessarily mean that the SEC
would be successful in an administrative or litigation enforcement
action brought against an unlicensed participant. However,
the SEC may bring such an action, and any company not registering
would face the possibility of the cost of defending itself in any
such action.)
Registration as a broker-dealer is a time-consuming process and once registered, a broker-dealer has robust ongoing compliance requirements, including being subject to regulation by FINRA. For many EB-5 participants, registering as a broker-dealer would require a significant increase in their costs of doing business.
An alternative for EB-5 participants is to affiliate with a registered broker-dealer. The simplest way to understand this arrangement is to think about a traditional company which wishes to raise money in an initial public offering. In an IPO, the issuer engages a broker-dealer (more often, a syndicate of broker-dealers) to offer and sell the securities. The IPO remains the issuer's offering. The issuer continues to be an active participant in the offering, including drafting the disclosure document and putting on "road show" presentations to potential investors coordinated by the broker-dealers.
Similarly, a full service regional center offering securities (an issuer) can conduct the offering through a third-party registered broker-dealer, still playing an active role itself, and compensate such broker-dealer based on success of the offering.
Until recently, there were few, if any, registered broker-dealers active in the EB-5 space. Several firms have now entered this marketplace. We are compiling a list of these firms.
For those EB-5 participants coming to the reluctant conclusion that their activities fall within the purview of the SEC's position on broker-dealer activities, affiliation represents an attractive alternative to full registration.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.