The SEC has finally issued regulations implementing the portion of the JOBS Act (Jumpstart Our Business Startups Act), enacted more than a year ago, allowing an issuer enjoying exemption from registration under Rule 506 of Regulation D under the Securities Act of 1933 to engage in general solicitation and advertising. What does this mean for EB-5?
First, some background: Let’s say that you have decided to open a business – say, some kind of iPhone app company – and invite friends and family to invest in your start up in return for a share of the future riches you will make when your company becomes the next Facebook. This is a securities offering in the eyes of the law. By default, anyone who issues securities must register the securities unless you fall under one of the exemptions provided in the law. To “register” securities means to file a very detailed report including audited financials with the SEC on a form called a S-1. This means hiring lawyers and accountants and a whole lot more. And once a company is registered, it is subject to a host of reporting requirements such as 10-Qs (quarterly reports) and 10-Ks (annual reports) and 8-Ks (basically anything that you think the public should know about). This is what people mean when they say a company “went public”.
But really? It would cost you more to register the $50,000 worth of shares you are issuing than the actual investment itself! That is why there is a category of securities offerings that do not have to be registered with the SEC as long as they fit under an exemption rule. These offerings are called “private offerings”.
EB-5 offerings are structured as private offerings designed to fit under two different kinds of exemptions from registration: those that fall under Regulation S (called Reg S exemptions) and those that fall under Rule 506 of Regulation D (which are called Reg D exemptions). Reg S exemptions are for offerings that are wholly conducted overseas. Basically, as long as absolutely nothing happens in United States territory, an offering would fit under Reg S. Private offerings in the United States can qualify under Reg D exemptions (and therefore avoid the registration requirement) as long as the investors are “accredited investors”. Accredited Investors are people who fit a minimum income or net worth requirement (net worth of $1 million, not including the house you live in OR annual income of $200,000 (or $300,000 if with spouse) during the last 2 years). (There are also institutions who qualify as accredited investors which I won’t discuss since institutions aren’t interested in getting greencards.) And, there is room for 35 non-accredited investors in each private offering.
So, in your iPhone app scenario above, while the default rule is that you have to register the 10 shares that you issued to your friends and family, you can avoid that because your offering was private and you only had 5 investors, so even if none of your investors are accredited, you are OK, which means the SEC will not come after you.
BUT! An overarching very important rule in the world of private offerings has been the ban on general solicitation. In other words, you can go around talking to people about your new idea and offer to sell them a share in your company as long as you fit under the exemption BUT you cannot be advertising in the local newspaper, and more relevant today, is you can’t have a website or a Facebook page extolling the potential of your new start up and urging people to invest in you. UNTIL NOW.
The JOBS Act has eliminated the general solicitation ban on private offerings as long as the people who ultimately invest in the private offering are accredited investors. I personally think this is huge for EB-5. Have you wondered why when you go into a Regional Center’s website they pretty much tell you nothing other than the EB-5 process and how great their location is? That’s because it is pretty hard to convince the SEC that you are not engaging in general solicitation when you have all your project terms online. (Of course some people still do it, attempting to protect themselves with a “This is Not a Securities Offering!!!” disclaimer.)
So once the JOBS Act regulation is implemented in mid-September, I expect to see a whole lot more information regarding Regional Center EB-5 projects available to the general public online. And I think this will be a game changer as investors will gravitate towards projects with more transparency. That said, my friend (a securities lawyer) disagrees. He thinks that regardless of the change of rules, issuers will be reluctant to put too much information out there in the spirit of “the more you say, the more that can potentially come back to bite you”. Time will tell.
I must note that nothing in this post (or in this blog for that matter) is legal advice. And just to drive that point home, I will say, if Regional Centers want to engage in general solicitation once the new rules are implemented, there are a couple of very important procedural details to be taken care of, which you should be discussing with your own lawyers.
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