EB5 Investors Magazine Volume 1 Issue 2 | Page 31

“ Reasonable Steps to Verify ”
For Rule 506 ( c ) offerings , issuers can no longer rely on the investor questionnaires , purchaser representations , and limited personal identification information that may suffice for Rule 506 ( b ) offerings . Whether or not the steps taken to verify that an investor is accredited are reasonable is an objective determination depending on the specific facts and circumstances of each purchaser and transaction . Factors that issuers should consider include , ( i ) the nature of the purchaser and type of accredited investor the purchaser claims to be , ( ii ) the amount and type of information the issuer has about the purchaser , and ( iii ) the nature of the offering , such as the manner in which the purchaser was solicited and the terms of the offering ( e . g ., minimum investment amount ).
Rule 506 ( c ) enumerates certain non-exclusive methods of verifying accredited investor status for natural persons . For the income test , such methods include reviewing copies of any IRS form that reports income for the two past years and obtaining a written representation that the purchaser expects to reach the necessary income in the current year . However , such IRS forms will likely be unavailable for EB-5 investors , which means that issuers must take the principles-based method of verification discussed above when investors qualify as accredited investors by reason of annual income .
For the net worth test , issuers must review one or more written documents , dated within the last three months , demonstrating that the purchaser has disclosed all liabilities necessary to make the determination of net worth . For assets documents include : bank statements , brokerage statements and other statements of securities holdings , certificates of deposit , tax assessments and appraisable reports issued by independent third parties . For liabilities documents include : a consumer report from at least one nationwide consumer reporting agency . However , such consumer reports may not be available for EB-5 investors , necessitating that issuers take the principles-based method of verification . Issuers should be prepared to encounter many obstacles to verifying that an EB-5 investor is accredited by reason of income or net worth ( e . g ., an investor ’ s aversion to providing information additional to the information provided to immigration counsel ).
As an alternative to the non-exclusive methods described above , an issuer may satisfy the verification requirement by obtaining written confirmation from a registered broker-dealer , an SEC-registered investment adviser , a licensed attorney , or a certified public accountant that it has taken reasonable steps to verify that the person is an accredited investor within the prior three months , including a specification as to what “ reasonable steps ” were actually used by the verifier . EB-5 issuers should discuss alternative methods for verifying accredited investor status with counsel . In all cases , records of accredited investor verification ( including backup ) need to be maintained by the issuer to
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Additional Actions Required in Reliance on the Rule 506 ( c ) Exemption
Rule 506 ( c ) issuers must file a Form D , now amended to add a separate box to check for claiming the new exemption . Currently , an issuer is required to file Form D within 15 days of the first sale of securities . However , the SEC ’ s proposed rules may require an earlier filing depending on the form of the final rules to be adopted .
Impact on Regulation S Offshore Offerings
Most EB-5 program issuers rely on the dual protections provided by Securities Act Regulation D and Regulation S . Regulation S provides a safe harbor for any offer or sale of securities made outside the United States , provided that no directed selling efforts are made in the United States . The SEC has confirmed that any general solicitation in compliance with a Rule 506 ( c ) should not make Regulation S unavailable for a concurrent offshore offering . EB-5 issuers should consult with counsel to ensure concurrent offerings each comply with their respective safe harbors .
Securities Act Section 4 ( a )( 2 ) Alternative Unavailable
Unlike for offerings under Rule 506 ( b ), there is no safety outside the safe harbor for Rule 506 ( c ) offerings . An issuer disqualified from relying on Rule 506 ( c ) for a failure of accredited investor verification , that has engaged in general solicitation , may not alternatively rely on Section 4 ( a )( 2 ) or Rule 506 ( b ) because general solicitation is irreconcilable with a claim of exemption for transactions not involving any public offering .
Impact on Foreign and State “ Blue Sky ” Exemptions
Securities issued in Rule 506 ( c ) offerings are “ covered securities ” under state Blue Sky regulations and , therefore , states are preempted by federal law from requiring registration of such offerings . However , as with Rule 506 ( b ) offerings , Rule 506 ( c ) offerings are still subject to state notice filing requirements . Although some states exempt issuers from such notice filings , the exemptions are often available only for securities offered without general solicitation and , therefore , will not be available for 506 ( c ) offerings . Further , a number of countries accessed in the search for EB-5 investors may not permit general solicitation of their citizens by foreign investment opportunities . Counsel should be engaged to confirm whether general solicitation poses any problems with relying on foreign and state exemptions .
Special Concerns for EB-5 Fund Structures
To avoid being regulated like a mutual fund under the Investment Company Act of 1940 , as amended (“ Investment Company Act ”), EB-5 programs using a “ pooled ” private investment fund structure often rely on Investment Company Act Section 3 ( c )( 1 ) or 3 ( c )( 7 )’ s exclusion from the definition of “ investment company ,” each of which require that the securities being offered not be part of a “ public offering .” The JOBS Act specifically provides that issuers relying on these
Genna Garver exclusions may engage in general solicitation without losing either exclusion .
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