The U.S. Securities and Exchange Commission has issued regulations implementing a portion of the Jumpstart Our Business Startups Act (JOBS Act) allowing an issuer enjoying exemption from registration under Rule 506 of Regulation D to engage in general solicitation and advertising even in the United States. This ruling, which will become effective 60 days from being published in the federal register, or around mid-September, will have several implications on the EB-5 industry.
The new exemption is separate from the existing and continuing Reg D exemption that prohibits general solicitation but does not dictate specific methods for verifying accreditation status. Furthermore, the rules do not require confirming that potential investors are accredited before soliciting them through general means, instead they require verification of purchasers before they actually subscribe. The issuer must also take reasonable steps to verify that purchasers of securities are accredited investors. Determining how to verify the accredited status of foreign investors, few of whom would have filed tax forms with the U.S. Internal Revenue Service or would be susceptible to a meaningful credit report from a U.S. credit reporting agency, will be one of the most significant challenges for EB-5 issuers.
In a separate final rule, the SEC now bans any person that is a “bad actor” or who is affiliated with a bad actor from relying on the Regulation exemption. The disqualification applies only for events that occur after the effective date of the rule, but events occurring before that date must be disclosed to investors. The SEC has also proposed a new rule that would change Form D filing requirements and certain disclosures made in offering memorandums – but we expect significant public and industry commentary and possible modifications before any change is finalized. Adoption of the proposed rule will affect the disclosures that are made as well as the timing on filing the Form D prior to the sale of securities. Failure to timely file a Form D would result in an issuer becoming ineligible to rely on Regulation D for a year.
Allowing general solicitation under Reg D does not exempt issuers from prohibitions on using unregistered brokers. Many EB-5 issuers who have become accustomed to using foreign sales agents under Reg S exemption for purely foreign offerings may be tempted to use those same or other unregistered agents for general solicitation for investors who will not qualify under Reg S, and this is prohibited.
**The above analysis does not represent or constitute legal advice. Seek professional guidance for advice on compliance.