EB5 Investors Magazine Volume 5, Issue 2 - Page 116

A CLOSER LOOK AT THE LAW SEC Flexes Its Enforcement Muscle In EB-5 Enforcement Action Why Rule 206(4)-8 provides the SEC the power to prosecute ongoing activities of NCEs and not just statements and omissions made in connection with offerings and sales. By Mariza McKee and Robert Ahrenholz T he Securities and Exchange Commission (SEC) recently filed an action 1 against Serofim Muroff (Muroff) and related persons (collectively, the defendants) relating to two EB-5 financings in the State of Idaho, which raised more than $140.5 million from over 280 EB-5 investors. While some of the funds raised were used as described in the respective offering materials, the defendants allegedly misappropriated and misused a substantial amount of investor funds in both offerings while the offerings were ongoing and subsequent to the completion of the offerings. Not surprisingly in the Idaho complaint, as it has done in prior EB-5 enforcement cases, the SEC alleged anti-fraud violations under both Rule 10b-5 of the Securities Exchange Act of 1934, as amended in the Exchange Act, 2 and Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, as amended in the Securities Act. 3 However, what was novel and unique in the Idaho Complaint were the allegations brought against the defendants under Sections 206(a), 206(2) and 206(4) of the Investment Advisers Act of 1940, as amended in the Advisers Act 4 and Rule 206(4)-8 thereunder. 5 As a result of these Advisers Act allegations, stakeholders in EB-5 programs should be aware that the SEC is now also focusing on ongoing fraudulent investment adviser actions and activities relating to new commercial enterprises (NCEs) where  fraudulent activities are defined more broadly than under Section 17 of the Securities Act or Section 10 of the Exchange Act, and also 115 EB5 INVESTORS M AGAZINE