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
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