Related SEC Regulations on EB-5 Regional Center Investment
An EB-5 program belongs to a private placement investment so any EB-5 regional center promoter or developer needs to not only comply with the regulation from USCIS under the immigration law, but be aware of information disclosure, maximum investment amount, maximum number of non-accredited investors allowed, or related investment requirements under the SEC (Securities Exchange Commission) regulations as well. US Attorney Joe Zhenghong Zhou and Curt Schmidt from Law Offices of Joe Zhenghong Zhou and Associates PLLC, a legal counsel for EB-5 New York Metro Regional Center, point out that there are some scenarios in Security Law EB-5 Regional Center developers need to be aware of.
To qualify as a private placement, an offering by an issuer must meet either the requirement of Sections 3(b) or 4(2) of the 1933 Act as developed through SEC interpretation and court decisions or must follow the conditions set out under Regulation D of the 1933 Act. Persons claiming the exemption from the 1933 Act carry the burden of proving that its activities came within that exemption.
Non-accredited Investors Regulation
Up to 35 non-accredited investors are allowed under sections 505 and 506 of Regulation D of the Securities Act; no limits are put on any number of investors
According to the Security Law, an investor who meets the net worth requirements for an accredited investor under the Securities & Exchange Commission's Regulation D is accredited investor. A non-accredited individual investor is one who has a net worth of less than $1 million (including spouse) and who earned less than $200,000 annually ($300,000 with spouse) in the last two years.
When a company raises private equity for an investment, such as a new company or a hedge fund, it is able to receive unlimited investments from accredited investors. On the other hand, Regulation D stipulates only 35 non-accredited investors are allowed to invest money into a private placement.
However, under the exemptions allowed by current federal statutes and SEC regulations, the maximum number of non-accredited investors allowed in a private placement is unlimited if exempt under Rule 504, up to 35 if exempt under rule 505, or up to 35 sophisticated investors if exempt under Rule 506.
Security Law has different information disclosure requirements for accredited investors and non- accredited investors. A RC developer or projector manager need to have full knowledge about your investors and related regulations.
Maximum Investment Amount
Under the exemptions allowed by SEC Regulation D, the maximum investment amount for an EB-5 visa is $1 million, $5 million, or unlimited – depending on which exemption is claimed.
Under the exemptions allowed by current federal statutes and SEC regulations, the maximum investment amount allowed in a private placement is $1 million if exempt under Rule 504, $5 million if exempt under rule 505, or unlimited if exempt under Rule 506. Please note that there are further requirements for each of these exemptions that must be complied with, some of which are detailed below.
Section 4(2) of the Federal Securities Act exempts from registration "transactions by an issuer not involving any public offering." It was under this mandate from Congress that the SEC promulgated rules to specify what private placements qualify as not involving any public offering.
Rule 504 provides an exemption for the offer and sale of up to $1,000,000 of securities in a 12-month period. No public solicitation or advertising to market the securities is allowed. Purchasers receive "restricted" securities, meaning that they may not sell the securities without registration or an applicable exemption. Note that there is no maximum number of accredited or non-accredited investors for this exemption to apply.
Rule 505 provides an exemption for offers and sales of securities totaling up to $5 million in any 12-month period. Under this exemption, you may sell to an unlimited number of "accredited investors" and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions.
Rule 506 is a "safe harbor" for the private offering exemption.
You can raise an unlimited amount of capital; there is no maximum amount for this exemption. Accordingly, the exemption available in this section is the only one available for any investment projects where the capital raised exceeds $5 million.
You can sell securities to an unlimited number of accredited investors and up to 35 other purchasers. These purchasers must be sophisticated, or they must rely upon sophisticated purchaser representatives.
Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated - that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.
Financial statement requirements are the same as for Rule 505; and purchasers receive "restricted" securities. Consequently, purchasers may not freely trade the securities in the secondary market after the offering.
Purchaser Representative Requirements
An EB-5 Regional Center possibly needs a Purchaser Representative. If it is determined that a particular purchaser is not sufficiently sophisticated in business matters to effectively evaluate the investment opportunity, then he or she must be assisted by a "purchaser representative," i.e., a person possessing the requisite sophistication (chosen by the purchaser) who is able to and does assist in evaluating the investment opportunity and who is not an affiliate of the issuer, not the brokerage firm.
In order to qualify for the exemption under Rule 506, the Purchaser Representative must have knowledge and experience in financial and business matters (or the issuer must reasonably believe this to be the case); must disclose in writing any prior relationship between the Purchaser Representative and the Issuer; and is acknowledged by the purchaser in writing to be his or her Purchaser Representative.
Rule 501 of Regulation D of the Securities Act of 1993 reads as follows:
Purchaser representative shall mean any person who satisfies all of the following conditions or who the issuer reasonably believes satisfies all of the following conditions:
1. Is not an affiliate, director, officer or other employee of the issuer, or beneficial owner of 10 percent or more of any class of the equity securities or 10 percent or more of the equity interest in the issuer, except where the purchaser is:
- A relative of the purchaser representative by blood, marriage or adoption and not more remote than a first cousin;
- A trust or estate in which the purchaser representative and any persons related to him as specified in paragraph (h)(1)(i) or (h)1(iii) of this section collectively have more than 50 percent of the beneficial interest (excluding contingent interest) or of which the purchaser representative serves as trustee, executor, or in any similar capacity; or
- A corporation or other organization of which the purchaser representative and any persons related to him as specified in paragraph (h)(1)(i) or (h)(1)(ii) of this section collectively are the beneficial owners of more than 50 percent of the equity securities (excluding directors' qualifying shares) or equity interests;
2. Has such knowledge and experience in financial and business matters that he is capable of evaluating, alone, or together with other purchaser representatives of the purchaser, or together with the purchaser, the merits and risks of the prospective investment;
3. Is acknowledged by the purchaser in writing, during the course of the transaction, to be his purchaser representative in connection with evaluating the merits and risks of the prospective investment; and
4. Discloses to the purchaser in writing a reasonable time prior to the sale of securities to that purchaser any material relationship between himself or his affiliates and the issuer or its affiliates that then exists, that is mutually understood to be contemplated, or that has existed at any time during the previous two years, and any compensation received or to be received as a result of such relationship.
In order to protect investors, SEC has tight scrutiny on either public or private placement. As a private placement, EB-5 Regional Centers need do a good compliance work under SEC regulations for alien investors.