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EB-5 Practice Under The JOBS Act

by Yi Song and Jennifer Mercier Moseley

Since the Jumpstart Our Business Startups Act (JOBS Act) was passed by Congress this past April, the EB-5 community has waited in anticipation for the Securities Exchange Commission (SEC) to revise its rules to remove the prohibition on general solicitation and general advertising under Regulation D[1] promulgated under the Securities Act of 1933 (the "Securities Act") for offerings where all purchasers of the securities are accredited investors. This article focuses on the status quo of EB-5 practice and compliance of securities law until the SEC guidelines are issued.

General Solicitation and General Advertising

Once adopted, the revised rules will give EB-5 regional centers and issuers of securities more leeway to promote their EB-5 projects. However, as was expected, the SEC announced in early July that it would not meet the July 4, 2012 deadline to adopt the new rules. During that announcement, the SEC also informed the public that it will have an open meeting on August 22, 2012 to consider amendments to Rule 506 of Regulation D, though it is unlikely the SEC will propose rules at the meeting or adopt interim rules. Though the timeline for the new rules is still uncertain, what is certain is that EB-5 regional centers and issuers who rely upon Regulation D for an exemption from registration under securities laws are still prohibited from engaging in general solicitation or general advisement activities in connection with the offer or sale of securities. Since the current rules in effect prior to the JOBS Act are still applicable, it is imperative that regional centers and issuers relying on Regulation D carefully conduct their marketing and promotion activities in compliance with the prohibition against general solicitation. In addition, they must continue to ensure that all parties acting on their behalf also comply with the prohibitions against general solicitation.

Accredited Investor Status

While the JOBS Act eliminates the ban on general solicitation, it does require the issuer to ensure that all investors who eventually purchase the securities are accredited investors. The JOBS Act does not change the accredited investor standard established by the Securities Act and the Dodd-Frank Act. According to Rule 501 under the Securities Act, the term "accredited investor" is defined as any person who comes within specific categories "or who the issuer reasonably believes comes within" any of those categories "at the time of the sale." On December 21, 2011, the SEC adopted amendments to the "accredited investor" standards in its rules under the Securities Act of 1933 to implement the requirements of Section 413(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). An accredited investor who is an individual has annual income greater than $200,000 (or $300,000 joint annual income with his or her spouse) for the previous two years (with a reasonable expectation that the income will continue in that amount) or a net worth over $1 million, not including his or her primary residence or debt secured by the primary residence.[2]

Regional Center Compliance

It is anticipated that the SEC will address in its new rules how issuers need to verify accredited investor status to ensure compliance with the requirement that all purchasers in an offering conducted using general solicitation are accredited. Until the SEC adopts the new rules implementing the changes required under the JOBS Act, it is unclear how much burden will be on the EB-5 regional center and issuer to verify that all purchasers are accredited investors. The current practice of regional centers and issuers is to verify the accredited investor status via a questionnaire completed by the potential investor, though few require supporting documentation to support that the investor, in fact, meets the accredited investor definition. Several public comments to the JOBS Act suggested that the new guidelines reflect the current practice and not impose undue burden on the issuers.

The comments[3] posted by the Business Law Section of the American Bar Association state that

"what might constitute reasonable steps may depend upon particular facts and circumstances and the applicable accredited investor category, we believe the Commission's rules should reflect current custom and practice which take these considerations into account. Especially because the purpose of the JOBS Act is to encourage and support capital formation, any requirement that imposes additional burdens on issuers or on purchasers would contravene the fundamental impetus for the JOBS Act. In this regard, we believe that the Commission should be sensitive to the legitimate privacy concerns of purchasers."
Without further guidance from the SEC, it is unclear whether the issuer will be subject to liability were it to be subsequently determined that a purchaser of the securities was not an accredited investor. Therefore, it is prudent for regional centers and issuers to review their current practice for verifying accredited investor status to determine what practical measures can be taken in advance to strengthen their verification process in anticipation of the new SEC rules.

This article is a general summary of complex securities law issues. No legal advice is provided in this article. Please consult the securities attorney for advice applicable to your particular circumstances.



117 C.F.R. 230.502(c)

2Definition of accredited investor

3Public Comments posted by American Bar Association the Business Law Section or JOBS Act Title II:

About The Author

Yi Song, Esq. is an associate attorney at Mona Shah & Associates in New York City. She is also licensed to practice law in People's Republic of China. She has practiced tax law in Beijing, China with a leading tax firm. She clerked in Beijing, the nation's capital at the Supreme Court of People's Republic of China. At Mona Shah & Associates, Yi practices EB-5 law and securities law and works on many successful EB-5 capital raising projects. She obtained her LL.B. degree from Beijing Foreign Studies University and she is a graduate from Georgetown University Law Center in Washington, DC. Yi is a native speaker of mandarin Chinese. She speaks fluent English and basic French.

Jennifer Mercier Moseley, Esq. is a partner at Burr & Forman, LLP in its Birmingham Office in Alabama. She represents companies in capital formation, private placements and merger and acquisition matters. She also represents public companies in connection with their Exchange Act reporting requirements and stock exchange matters. Jennifer is a member of the Alabama State Bar and the New York State Bar. She is admitted to practice before the United States District Court for the Southern and Eastern Districts of New York. In 2012, Jennifer was named an Alabama Super Lawyers "Rising Star" in the Business/Corporate practice area. Jennifer received her B.A., cum laude, from New York University, and her J.D. from Cornell Law School. Jennifer speaks Korean.

The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.