EB5 Investors Magazine Volume 5, Issue 2 - Page 118

A CLOSER LOOK AT THE LAW INVESTMENT ADVISERS Rule 206(4)-8 relates to actions by investment advisers with respect to pooled investment vehicles. The SEC takes the position that the manager of an NCE is such an adviser if it receives compensation in connection with investment advice given regarding the purchase or sale of securities. 9 Since the managing member of a limited liability company or the general partner of a limited partnership gives advice relating to the purchase by an NCE of a promissory note from the related job creating entity (which note is itself a security), and receives compensation in connection with such role, 10 then the managing member or general partner is considered by the SEC to be an investment adviser for purposes of the rule. EB-5 stakeholders should note that Rule 206(4)- 8 extends potential liability to be both registered and unregistered investment advisers if a pooled investment vehicle is involved. 11 ACTIVITIES PROHIBITED BY RULE 206(4)-8 Unlike the anti-fraud provisions contained in Section 10 of the Exchange Act and Section 17 of the Securities Act, the language in Rule 206(4)-8 prohibits investment advisers from engaging in any act, practice or course of business that is fraudulent, deceptive or manipulative with respect to any investor in a pooled investment vehicle. In this regard, the SEC stated in adopting the rule that “our intent is to prohibit all fraud on investors in pools managed by investment advisors,” 12 and that “the wording of [the Rule]...is designed to apply more broadly to deceptive conduct that may not involve statements.” 13 The use by the SEC of broad prescriptive language and the fact that scienter is not required to be plead also means that the SEC intends to use a negligence standard as a method reasonably designed to prevent fraud. 14 Thus, it is clear that Rule 206(4)-8 provides the SEC the power to prosecute the ongoing activities of NCEs rather than just statements and omissions made by NCEs in connection with the offering and sale of their securities. 15 In addition to the differences noted above relating to customary anti-fraud actions, the rule does not provide for a private right of action to enforce such rule. 16 As evidenced in the Idaho Complaint, the SEC has found a way to begin using the anti-fraud provisions of the securities laws relating to investment advisers in order to sue for the fraudulent, deceptive, and manipulative actions of the advisers in EB-5 investment transactions occurring both during and after EB-5 investor funds have been raised. As a result, EB-5 stakeholders should familiarize themselves with the additional enforcement powers now being utilized by the SEC in connection with structuring and operating their EB-5 financings. 117 EB5 INVESTORS M AGAZINE