Thursday, February 26, 2015

Long Anticipated SEC Enforcement Action In EB-5 Targeting Unlawful Broker Fees Arriving Shortly


(Source: Homeier & Law) NEWS ALERT FOR THE EB-5 INDUSTRY

The SEC's formal announcement of its enforcement action in the EB-5 industry concerning receipt of unlawful broker fees looks to be coming very soon.  We and fellow securities counsel practicing in the EB-5 space have warned for some time that the SEC has been conducting a wide-ranging investigation into the payment of fees by EB-5 regional centers to immigration attorneys and other persons not registered as securities brokers, in return for sourcing investors for the regional centers’ projects.  This practice appeared widespread prior to 2010; however with our arrival and that of other securities lawyers into the industry around that time, our group advice that receipt of such fees by unlicensed persons could likely run afoul of the broker registration rules seemed generally to be heeded, and the practice substantially diminished.  Nevertheless, in a classic case of it being impossible to “un-ring the bell,” the SEC is now bringing enforcement actions against a number of those attorneys, including many who had already abandoned the practice on the advice of securities counsel prior to the SEC’s arrival in EB-5.  It appears that the targeted lawyers are being required to disgorge the payments they unlawfully received dating back for the five years of the standard statute of limitations, or to January 1, 2010, plus interest (and, in “appropriate” cases, with penalties being assessed, as well), in some cases amounting to $1 Million or more, for each lawyer.  As yet, it is unknown whether this spate of enforcement actions will mark the conclusion, or only the beginning, of the SEC’s enforcement actions on this issue. We understand the SEC is investigating EB-5 issuers and regional centers for “aiding and abetting” unregistered brokering activity by engaging and paying unregistered intermediaries, as the SEC has done in recent enforcement actions outside the EB-5 sphere.  The agency has publicly and prominently announced that enforcement is a top priority, and the impending formal announcement of its action in EB-5 clearly demonstrates its resolve.  Further enforcement action should be expected, in particular as to legacy practices by industry participants.  EB-5 securities issuers (just like those outside EB-5) are well advised of their ongoing need—and duty—to strictly comply with all applicable securities laws and regulations, including but not limited to the immediate broker fee issue.  The assistance of experienced securities counsel in helping accomplish this compliance should be secured as early in the investment process as possible to avoid outcomes like this.

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