EB-5 investors are becoming increasingly aware of the Securities and Exchange Commission (SEC), the top U.S. securities regulator, and its involvement in the EB-5 Visa Program. As a result, investors are anxious to learn the connection between the nation’s financial watchdog and the immigration program. Created by the Securities Act of 1934, the SEC was designed to protect investors from fraud by enforcing securities laws requiring complete disclosure of information and regulating the people involved in the securities transactions. Attorneys handling EB-5 Visa clients should be prepared to provide a competent explanation on both immigration and securities issues involved in the EB-5 process. In the past, securities law was considered a specialty area of law reserved for large firms in cities such as New York. However, at present, to practice as an EB-5 attorney, it is important to have at least a minimum understanding of the U.S. securities law.
The SEC defines a security as any stock, bond, debenture, note, transferable share, investment contract or certificate of interest in a profit-sharing agreement. In general, all securities offered in the United States must be registered with the SEC and comply with the regulations, or be eligible to claim an exemption from registration. A typical EB-5 Regional Center Project is structured in the form of a Limited Partnership and according to SEC, interest in the partnership is an investment contract and therefore, a security . To further elaborate on the term “investment contract”, the Supreme Court of the United States determined the definition in the landmark case of SEC v. Howey.
According to the Supreme Court, an investment contract is any transaction in which (1) a person invests money (2) in a common enterprise (3) is led to expect profits and (4) solely from the efforts of others. The four elements combined are commonly referred to as the Howey Test and are used to determine whether an instrument qualifies an investment contract.
The first element is interpreted as the investor not purchasing a consumable commodity or service, rather, making an actual bona fide at risk investment. The second element of commonality is determined by multiple investors having interrelated interest in a common scheme (it is sufficient if a single investor has a common interest). The third element of expectation of profits is interpreted as expected returns must come from the earnings of the enterprise. Lastly, earnings must come from the efforts of others, this is broadly construed to mean that the efforts of managers must predominate over the passive investor.
EB-5 Regional Center Projects structured as a Limited Partnership meet all 4 elements of the Howey Test and are therefore defined as an “investment contract”. Foreign investors (1) invest at minimum $500,000 (2) into a common enterprise, Limited Partnership, (3) with an expectation of returns on the investment and (4) through the efforts of the managing partner.
Simply meeting the definition of a security is just the beginning of the complex regulations of U.S. securites. In our next blog, we will elaborate on the scope of the regulatory authority of the EB-5 Visa Program by SEC.
For more information on the EB-5 Visa and SEC compliance, please contact our office today.
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The Information contained in this blog is for information purposes only, and should not be considered legal advice for any individual case or situation. The information provided is not a substitute for consultation with an attorney. No attorney/client relationship is created by the information contained herein.
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