by Michael Fitzpatrick. Principal, Baker Tilly Capital, LLC and Clem Turner, Partner, Barst Mukamal & Kleiner LLP
What is a broker-dealer?
Broker-dealers serve an important role in U.S. financial markets to ensure integrity and transparency. Broker-dealers are registered with the Securities and Exchange Commission (SEC) and are members of the Financial Industry Regulatory Authority (FINRA), each of which provides regulatory oversight. In addition to conducting independent due diligence on companies seeking capital, the broker-dealer has a duty to only offer “suitable” investments to potential investors. In other words, each investment offered by a broker-dealer must be suitable for that investor in light of their: (1) stated investment objectives, (2) risk tolerance, (3) liquidity needs, (4) investment experience and (5) investment time horizon.
For an EB-5 investor, “suitability” carries additional immigration burdens. EB-5 investors seek to obtain immigration status within the U.S., which adds a component to their investment goals not present with traditional investors. The feasibility of the immigration goals must be evaluated as part of the diligence process just as closely as the financial soundness of a project. Accordingly, EB-5 broker-dealers must obtain additional FINRA approvals before they can raise money from investors for EB-5 projects.
Recent SEC Actions
The September 2016 Government Accountability Office (GAO) report identified that the most frequent incidents of fraud in the EB-5 program are associated with securities fraud, whereby immigrant investors were defrauded by unscrupulous regional center principals, developers and/or their associates. Recent enforcement actions brought by the SEC underscores this trend.
According to the SEC, between February of 2013 and December of 2015, the Commission filed 19 cases involving EB-5 offerings, of which almost half (7 cases) involved fraud allegations. Additionally, 11 of the 19 cases involved unregistered persons acting as broker-dealers.
The SEC brought forth the first stand-alone unregistered broker-dealer case in the EB-5 industry in June of 2015. The case involved two firms claiming to help investors choose the right regional center, but in fact the firms directed most of the EB-5 investors to regional centers paying the firms commissions of roughly $35,000 per investor. The firms handled EB-5 investments for more than 150 investors.