EB5 Investors Magazine Volume 5, Issue 2 - Page 105

A CLOSER LOOK AT THE LAW Shedding New Light on SEC Enforcement: EB-5 Investments as Securities, Unregistered Broker-Dealers and Related Disclosures Steps EB-5 participants can take for transactions to withstand regulatory scrutiny. By Rikard Lundberg and Tom Krysa C orporate and securities attorneys are often asked two common questions in EB-5 transactions: Is a limited liability company (LLC) interest in a new commercial enterprise (NCE) sold to EB-5 investors a “security” for purposes of U.S. state and federal securities law and is it possible to compensate individuals or entities that are not registered broker-dealers for soliciting investors in EB-5 transactions? A recent federal court case serves as an interesting illustration of the legal analysis that goes into answering these two questions. "...practitioners should assume that EB-5 investments will be treated as securities subject to state and federal securities laws." On June 29, 2017, the U.S. District Court for the Central District of California granted the U.S. Securities and Exchange Commission’s (SEC) motion for summary judgment in SEC v. Hui Feng and Law Offices of Feng & Associates. In this case, the court found that the LLC interests in question were “securities” for purposes of federal securities laws. It also found that an immigration attorney and his law firm had acted as unregistered brokers, and that, among other things, failure to disclose transaction-based compensation received by the immigration attorney and his firm constituted a material omission. EB-5 INVESTMENTS ARE LIKELY SECURITIES In Feng, the defendants argued on summary judgment that the LLC interests at issue were not securities, and accordingly, that the alleged securities laws violations did not apply. Whether an investment constitutes a security is an important threshold question in any securities-related matter. If not a security, an investment will be subject to significantly less regulatory requirements and investors will not have the protection of securities laws. The term “security” is defined broadly under the federal securities laws to include a wide variety of instruments that might be sold as an investment. EB-5 investments are typically structured as partnership or LLC interests. While these investments are not specifically enumerated as securities under the statute, partnerships and LLC interests may constitute “investment contracts,” a term that is included within the statutory definition. The U.S. Supreme Court defined an investment contract in the seminal case SEC v. W. J. Howey, 328 U.S. 293, 298- 99 (1946). In that case, the Supreme Court laid out a three- part test to determine whether an instrument constitutes EB5INVESTORS.COM 104