A CLOSER LOOK AT THE LAW
securities for the account of others.” Federal courts
often analyze the factors developed in SEC v. Hansen,
1984 WL 2414, at *10 (S.D.N.Y. Apr. 6, 1984) when
determining whether someone is acting as a broker. No
one factor alone is determinative, although the SEC and
courts typically view the receipt of transaction-based
compensation as the most important factor. The table
below presents the Hansen factors and the facts of the
case the Feng court identified.
Hansen Factors
Feng Factors
thumb given the fact-intensive nature of the analysis.
Further, because it appears that the SEC takes the
position that anyone receiving transaction-based
compensation is most likely acting as a broker, those
involved in securities transactions should assume
that the SEC will treat them accordingly if they receive
transaction-based compensation.
RELATED DISCLOSURE
CONSIDERATIONS
• Employee of the issuer • No • Received transaction -
based compensation
such as a commission
rather than a salary • Yes, in the form of
commissions or referral
fees for referring clients
to regional centers • Sells or sold securities
from other issuers • Yes, defendants had
provided EB-5 services
since 2010 and Feng
himself had conducted
securities transactions
outside of the EB-5
program from
2003 - 2014 As unregistered offerings, EB-5 offerings are not subject
to the heightened disclosure requirements of registered
offerings. However, unregistered offerings are still subject
to general anti-fraud rules requiring the disclosure to
investors of all material facts. Materiality determinations
are fact-intensive and complex and, when litigated, courts
have the benefit of examining the facts in hindsight.
• Yes, interfaced directly
with regional centers
and negotiated on
clients' behalf Generally speaking, a fact is material if a reasonable
investor would consider it important in making an
investment decision. Specifically, an omission is material if
there is a substantial likelihood that a reasonable investor
would consider its disclosure significant or would view its
disclosure as having significantly altered the total mix of
information available in the market.
• Was involved in
negotiations between
issuers and investors
• Advertised for clients
• Gave advice or made
valuations regarding
the investment
• Was an active finder
of investors
• Regularly participates in
securities transactions
• Yes, conducted research
and performed due
diligence on EB-5 projects
and recommended EB-5
Regional Centers
to clients
• Yes
• Yes
Finding that seven out of eight Hansen factors were
met, the Feng court concluded that the defendants
acted as brokers and that there was no available
exemption from the broker registration requirement.
As illustrated in Feng, the test for determining whether
someone is acting as a broker is fact intensive. While the
facts in Feng were unfavorable to the defendants, it is clear
that there can be situations where someone can receive
compensation in connection with a securities transaction
without acting as a broker.
See for example S.E.C. v. Kramer, 778 F.Supp.2d 1320
(M.D.Fla. 2011). However, there is no bright-line rule of
107 EB5 INVESTORS M AGAZINE
Under U.S. state and federal securities laws, a securities
offering must be registered with the SEC and state
securities commissions or qualify from an exemption
from registration. EB-5 offerings are generally conducted
under such registration exemptions.
In Feng, the court found that the defendants had
committed securities fraud violations by failing to disclose
to investors the defendants’ receipt of commissions
from regional centers for referring clients to invest in the
offerings, and for misrepresenting to regional centers that
foreign-based persons or entities were responsible for
finding investors, when in reality the U.S.-based defendants
were finding investors and receiving commissions directly
or indirectly.
The court found these omissions material because
there was evidence that investors would have chosen
a cheaper investment or asked to share in defendants’
commissions if they had known of the omitted facts, and
that Feng intentionally failed to disclose the information to
avoid sharing commissions with investors. The court also
emphasized that referral fees create potential conflicts of
interest that should be disclosed as material facts.
In registered offerings, the SEC’s rules require issuers
to disclose in great detail the compensation to be paid
to underwriters and agents involved in the offering and