EB5 Investors Magazine Volume 5, Issue 2 - Page 108

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