Regulatory Considerations Through the Investor Life Cycle

03.02.16 | Archived


Greg WhiteRegulatory Considerations Through the Investor Life Cycle

By Gregory L. White, Partner Seyfarth Shaw LLP

A number of government and self-regulatory entities are either directly involved in administering the EB-5 program or laws applicable to the offering and sale of EB-5 investments to investors. The purpose of this brief summary to identify various regulatory organizations and the laws applicable to the process of offering and sale of EB-5 investments and the handling of funds and escrows. By “process” we mean the pre-investment, investment and post-investment stages of an EB-5 offering. This is not intended as a detailed discussion of all of these regulatory agencies or rules but rather to just set the stage for a broader discussion to follow. As the U.S. regulatory system is broad, this is not intended as an exhaustive list or summary


U.S. Citizenship and Immigration Services (“USCIS”), a component of the Department of Homeland Security (“DHS”), is the primary agency with authority for EB-5 program oversight. Other federal immigration entities also play a role, including the State Department, U.S. consular officers abroad, USCIS’s Fraud Detection and National Security Directorate, other DHS components (U.S. Customs & Border Protection and U.S. Immigration & Customs Enforcement), among others. Banks which become involved in the process of escrow, funds management or reporting are also subject to state and federal oversight. Also involved in program support or enforcement are the U.S. Department of Commerce, the U.S. Securities and Exchange Commission (“SEC”), and, in the case of licensed brokerage firms and individuals, the Financial Industry Regulatory Authority (“FINRA”), a self-regulating body that oversees the conduct and compensation of registered brokers and dealers. Under the dual securities regulatory system, state securities law regulators and state securities laws also apply to EB-5 transactions and participants in addition to federal laws and regulations.

Roles of Federal Entities in EB-5 Administration and Enforcement

Numerous federal departments and component agencies play a significant role in the EB-5 program. The principal government entities include:

U.S. Citizenship and Immigration Services (“USCIS”), a component of the U.S. Department of Homeland Security (“DHS”) — adjudicates EB-5 petitions as well as applications seeking immigration benefits such as an investor’s and family members’ applications for adjustment of status (“AOS”) to lawful permanent resident (green card status). USCIS also maintains a Directorate known as Fraud Detection and National Security (“FDNS”) which conducts site visits and investigates whether the facts represented in petitions and applications submitted are accurate and support the immigration benefit requested or granted. FDNS also conducts national security reviews. DHS, which stations personnel at U.S. consulates and embassies abroad to conduct similar investigations, has the authority to override the grant of an immigrant of nonimmigrant visa by a U.S. consular officer.

U.S. Department of State (“DOS” or “State”) through the Visa Office in the Bureau of Consular Affairs maintains the monthly calculation and allocation of the annual quota of immigrant visas, reporting the monthly usage data in its “Visa Bulletin.” The Immigration and Nationality Act (“INA”) requires that an immigrant visa be immediately available for use by U.S. consular officers at Embassies and Consulates around the world and by USCIS immigration officers before EB-5 investors and family members can be granted the benefit of U.S. lawful permanent residency. DOS issues Advisory Opinions on questions of law to consular officers. Under the doctrine of consular nonreviewability, however, consular-officer decisions made during the visa application process concerning questions of fact cannot be reviewed by the courts or the Executive Branch. Thus, an EB-5 visa applicant may be refused an immigrant visa if a consular officer adversely determines any question of material fact during a consular interview. State also maintains its Bureau of Diplomatic Security, another layer of law enforcement and investigative expertise that may address issues involving the EB-5 program.

U.S. Customs & Border Protection (“CBP”), a DHS component agency with immigration authority, inspects applicants for admission to the U.S., including EB-5 immigrant visa holders, at American ports of entry or pre-flight inspection posts to determine whether the individual is qualified under the visa category requested and is not inadmissible to the U.S. on a host of statutory grounds involving undesirable individuals. When a CBP officer admits an EB-5 investor or family member on an immigrant visa to the United States, that is the point when the individual first acquires the status of conditional lawful permanent resident (green card status) in the United States. The issuance of the EB-5 immigrant visa by the consular officer merely authorizes the holder to apply for admission as an immigrant to the United States. Correspondingly, when USCIS approves an EB-5 applicant’s adjustment of status application, that is the point when the individual becomes a lawful permanent resident (holding green card status).

U.S. Immigration & Customs Enforcement (“ICE”), another DHS component agency, conducts worksite inspections to determine if employers have completed and maintained proper paperwork, Form I-9 (Employment Eligibility Verification), and if the employer employs only lawfully authorized workers. ICE may play a role in verifying that the entity seeking immigration benefits under the EB-5 program has in fact employed the requisite ten full time employees per investor. ICE also serves as government prosecutor in removal (deportation) proceedings brought before a Department of Justice agency, called the Executive Office for Immigration Review (“EOIR”), comprised of Immigration Judges (“IJs”) and the Board of Immigration Appeals (“BIA”). EB-5 investors who have been granted conditional lawful permanent resident status but whose petition (Form I-829) filed two years later seeking unconditional permanent resident status has been denied by USCIS may seek review of that denial before an IJ, and may appeal an adverse decision to the BIA, while remaining a conditional permanent resident during the IJ and BIA review process.

USCIS Ombudsman, a statutory body of equal rank with USCIS, has authority to investigate actions by USCIS, urge it to rectify errors, and make reports to Congress and the Executive Branch identifying systemic problems and proposing changes to the administration of the immigration laws, including the EB-5 visa category, by USCIS.

DHS Office of Inspector General (“OIG”) issues reports and recommendations on the operations of components within DHS, including a recent report on the USCIS’s administration of the EB-5 regional center program.

U.S. Department of Commerce provides technical support to USCIS on EB-5 issues, and promotes the program abroad through its SelectUSA program, whose mission is to promote and facilitate business investment in the United States. SelectUSA is represented by the department’s Commercial Service at U.S. Embassies and Consulates around the world.

Federal, State and Self-Regulatory Securities Regulators

U.S. Securities and Exchange Commission (the “SEC”) has broad authority under the U.S. securities laws to regulate the offer and sale of securities by companies located in the United States or to investors who reside in the United States. It is the SEC’s position that the limited partnership or limited liability company interests sold to EB-5 investors are securities that require compliance with these laws. While EB-5 program offerings are almost always structured as exempt offerings under Rule 506 of Regulation D and/or Regulation S, and therefore do not require registration with the SEC, a notification filing to the SEC is still required for offerings under Regulation D, as is providing investors with a private placement memorandum (“PPM”) that is necessary to comply with the federal antifraud rules discussed elsewhere. The SEC has taken increasing steps against EB-5 projects and sponsors by bringing civil enforcement lawsuits and administrative actions for violations of the antifraud rules, and by referring the earliest of such civil cases to the U.S. Department of Justice for criminal prosecution. The SEC and USCIS have also issued a joint alert with USCIS warning of potentially fraudulent EB-5 offerings.

Financial Industry Regulatory Authority (“FINRA”) is a self-regulatory organization that oversees the conduct and compensation of registered brokers and dealers participating in securities offerings. If a registered broker or dealer is engaged to solicit potential investors in an EB-5 project, then the broker or dealer will be required to submit copies of the PPM and all other marketing materials to FINRA for its review, and the amount and nature of compensation payable to the broker or dealer and its registered representatives and affiliated persons must be disclosed to FINRA. In addition, FINRA imposes various rules relating to the maintenance of escrows and handling of “client funds” by FINRA member organizations. If an EB-5 transaction involves a FINRA-licensed broker-dealer, these rules will likely apply to the escrow of EB-5 funds in the transaction.

State Securities Regulators. The securities regulatory scheme in the United States is bifurcated between federal and state laws and regulators, and each state has its own laws which apply both to securities transactions and market participants such as broker dealers. For purposes of brevity, we will simply note that the perils and pitfalls applicable to non-compliance with the various federal securities laws generally have analogs in each of the U.S. states and territories. Additionally, each state has its own securities commission which performs functions similar to certain key functions performed by the SEC. In most cases, securities transactions which are exempt under the most common provisions of Regulation D will also be automatically exempt from registration requirements at the state level (however, notification filings and the payment of fees are usually required by certain states, with the failure to timely comply leading to offers and sales within those states being potentially deemed unlawful and investors who have made purchases in those states potentially being entitled to rescission rights). While in some cases EB-5 financings are styled as Regulation S financings which from a federal law perspective are deemed to take place overseas, Regulation S (which essentially delineates the extraterritorial reach of the registration provisions of the Securities Act of 1933) does not have any direct analog in the states securities laws, and so it is possible that EB-5 transactions which rely solely on Regulation S may in some rare cases still conceivably draw scrutiny at the state level. However, as the jurisdiction of the state securities authorities is limited to offers and sales directed in those states (or, sometimes, to issuers located in the state, with California being a notable example), if offers and sales are limited to foreign nationals living abroad, it is unlikely that such transactions would fall under the scope of the state securities laws. To the extent that an EB-5 project will require additional funding from investors within the United States, failure to comply with the applicable state securities laws could result in the project lacking sufficient funds to accomplish its goals. Each state securities commission also has concurrent jurisdiction over broker dealers and investment advisers. These state securities commissions also have powers and remedies available to them which are similar and in addition to those available to the SEC.

Government Background Checks

As part of every request for immigration benefits, USCIS conducts extensive background checks to identify potential fraud, criminal conduct or national-security threats. Until recently, EB-5 screenings were treated no differently than other immigration cases. However, in December, 2013, the DHS OIG released a report, noted above, criticizing USCIS for inadequate screening of EB-5 program participants. USCIS responded to the OIG report, noting in part that, among other measures, USCIS has expanded security checks to include regional centers and some of their executives as well as requiring regional centers to report annually on their activities.

IIUSA has developed suggested guidelines for regional centers with respect to “know your customer” and for knowing and overseeing “recruiters” who might provide potential investors. The guidelines are directed at regional centers, as opposed to issuers in direct EB-5 programs. However, the practices offer benefits for direct programs as well, and it may be advisable for participants in EB-5 transactions (including professional service providers and banks and other escrow agents) to request certifications from either regional centers or direct programs as to their compliance with these or similar guidelines. While it may be difficult for regional centers or direct projects to effectively control the activities of migration agents or other recruiters of investors to ensure those agents’ or recruiters’ compliance with various laws, this is an area that deserves close scrutiny through securities industry-type due diligence, as failure to comply can have significant consequences for EB-5 projects.


As the focus of the securities laws is on the offering and sale of securities, most of the concerns relating to the securities laws will come during the “regional center controlled” portion of the investor timeline. During the pre-marketing phase, careful consideration should be given as to the form of the investment offering (for example, single entity versus two entity structures) to avoid registration for the issuer or affiliates as an investment company or investment adviser. During the marketing and receipt of investor funds phases, care should be taken both in the selection of persons involved in the marketing effort and in monitoring how the marketing effort is conducted.

Broker-Dealer Issues (Section 15 of the Securities Exchange Act)

Section 15 of the Securities Exchange Act of 1934 (the “1934 Act”) generally requires a person effecting securities transactions for others to register with the SEC as a broker-dealer. Section 3(a)(4) of the Exchange Act defines a broker as meaning any person engaged in the business of effecting securities transactions for others’ accounts. In a 2010 no-action letter, the SEC took the position that receiving a percentage of the proceeds of an offering could require a person to register as a broker, even if their activities were limited to arranging introductions between potential investors and companies seeking financing, in contrast to past no-action letters where the SEC had also considered the nature of the activities in which a person was engaged. Engaging unregistered broker-dealers in EB-5 transactions can have significant consequences for an EB-5 project, all negative. In many EB 5 financings, the EB 5 issuers will employ foreign “finders” to assist in sourcing investments from foreign nationals. As a rule, these finders are not registered with the SEC. A finder’s failure to register as a broker-dealer, if required to do so, may subject not only the finder but potentially also the EB-5 issuer and its controlling persons (directors, officers, managers, and any controlling shareholders) to various enforcement actions and other risks.

These risks include:

• Regulatory sanctions for employing an unregistered broker or for aiding and abetting the violation of federal and/or state law by the unregistered broker, including administrative fines, inability to rely on certain securities registration exemptions, and criminal penalties.

• Securities fraud liability to investors and regulators for failure to disclose use of an unregistered broker. (Note that state securities regulators can also bring claims under state securities or “blue-sky” laws, although with foreign investors and a foreign finder, it would seem likely that the only state that may have jurisdiction could be the state in which the EB-5 business is located or from which the EB-5 offering is conducted; this is not necessarily the case with offerings claiming the Regulation D exemption.)

• Rescission claims by investors demanding return of invested funds plus statutory interest and attorneys’ fees.

• Loss of the securities registration exemption (Reg D or Reg S, or both), which then also gives rise to investor rescission rights. (See elsewhere herein relative to the relationship of these rights to the EB-5 “at-risk” requirement.)

• Issues with financial statements (disclosure to investors and regulators of contingent liabilities, asset valuations or any accounting restatements).

Unregistered Broker-Dealers – Certain Exemptions for Foreign Persons or Transactions. As many EB-5 projects engage the aid of foreign persons to help market their offerings, there are potential exemptions available for using such persons:

• Rule 15a-6 under the 1934 Act exempts certain foreign brokers and dealers from registration.

• NASD Rule 1100, among other things, permits U.S. registered broker-dealers to engage foreign persons as “foreign associates” acting as registered representatives of the broker-dealer to engage in finder or broker transactions outside the U.S. without being required to take the examinations necessary for registered representatives in the U.S., subject to specified limitations.

• New FINRA Rule 2040, among other things, permits U.S. registered broker-dealers to engage nonregistered foreign persons to engage in finder transactions (but not brokering) outside the U.S. in exchange for transaction-based compensation without being required to take the examinations necessary for registered representatives in the U.S., subject to specified limitations or otherwise registering with FINRA.

• Section 30(b) of the 1934 Act provides that the 1934 Act does not apply to persons transacting “a business in securities without the jurisdiction of the United States” but has been ruled by courts to be unavailable “if the United States is used as a base for securities fraud perpetrated on foreigners.”

Even under a multi-factor test, the analysis of whether a person’s activities constituted “effecting transactions in securities” will likely focus on the actual services provided by the person, and not the label the person or the person’s issuer applied to the activity. For example, a $45,000 “administrative fee” charged when the investor’s money clears the offering escrow runs the risk of being characterized as a brokerage fee unless the foreign person provides services unrelated to the investment which have a value commensurate with the fee which is charged, such as providing advice with respect to the immigration process. By contrast, if the agent merely receives a flat administrative fee from the potential investor which is not tied to the release of the escrow, that would seem less likely to be deemed a brokerage fee tied to the success of the offering. The fewer the contacts that both the foreign finder and the investors have with the U.S., the better the possibility for arguing that their relationship should not be subject to U.S. securities laws. However, given that the issuer will be based in the U.S. and the dollars will ultimately be paid into the U.S., that may be sufficient for the SEC or a private plaintiff to asset jurisdiction even in the absence of fraud.

Associated Persons Exemption. Generally, Rule 3a4-1 under the 1934 Act exempts from the definition of “broker” all “associated persons” of the issuer who are not subject to a statutory disqualification (i.e., have not committed one of a number of “bad acts”, many relating to the sale of securities), who do not receive compensation based on the sale of securities, and who either limit the nature of their sales activities with respect to the EB-5 offering or have not been a broker or associated with a broker for the 12 months prior to an offering, and are not involved in more than 1 offering per year. “Associated persons” include any natural person who is a partner, officer, director, or employee of the issuer or a related company.

Use of U.S.-Registered Broker-Dealers. If an issuer of an EB-5 offering engages U.S.-registered broker-dealers to help market the offering, such broker-dealers would still be subject to applicable securities laws governing their conduct in the offering notwithstanding the fact that the securities were marketed solely to foreign nationals. In a 2013 interpretive letter, FINRA expressly affirmed that its rules requiring broker-dealers to assess the suitability of securities offerings to their clients apply to EB-5 offerings marketed to foreign nationals, which assessment had to include an assessment of whether the investment was likely to satisfy the EB-5 requirements.

To the extent that a U.S.-registered broker-dealer is involved in the EB-5 offering and makes payments to a foreign finder, it would be subject to new FINRA Rule 2040 which limits the payment of transaction-based compensation to non-FINRA members (i.e., persons not registered as broker-dealers). The FINRA rules require, among other things, that the registered broker-dealer be comfortable that the foreign finder, either as a result of its actions or payment of the fee, would not be required to register as a broker-dealer, that both the finder and the finder’s customers are either foreign nationals or foreign entities domiciled outside of the United States, that the customers receive both a descriptive statement disclosing payment of the fee and a statement on each confirmation that a finder’s fee is being paid, and that the customer provide written acknowledgement that he or she is aware of the fees. FINRA has indicated that Rule 2040 applies only if the activities of a foreign finder are limited to the initial referral of non-U.S. customers to the registered broker-dealer.

Registration and Exemptions from Registration for Securities Offerings (Sections 4 and 5 of the 1933 Act)

Section 5 of the Securities Act of 1933 (the “1933 Act”) generally requires that offerings of securities sold through interstate means be registered with the SEC. Section 4 of the 1933 Act sets out certain exemptions from registration. EB-5 projects are generally sold under an exemption from the registration requirements.

Notable exemptions from the registration requirements frequently used with respect to EB-5 projects include:

• Regulation D under the 1933 Act, which exempts sales to “accredited investors.”

• Regulation S under the 1933 Act, which exempts sales directed outside of the United States.

An offering to investors may claim to be exempt under one or more exemptions from registration under the 1933 Act, but need only qualify under one exemption. For example, an offering purportedly limited to foreign investors who are also “accredited investors” can claim to be exempt under both Regulation D and Regulation S but to the extent that a portion of the offering is sold to foreign investors who turn out not to be accredited investors sales to such investors can still be exempt under Regulation S alone. In addition, different exemptions can be claimed for different investors in the same offering. For example, an issuer could make an offering both to U.S. persons who are “accredited investors” using the Regulation D exemption (with Regulation S not applying to those sales) and to foreign persons who are not “accredited investors” in the same offering using the Regulation S (with Regulation D not applying to those sales).

Failure to Perfect an Exemption. Under certain circumstances, if an unregistered EB-5 securities offering fails to comply with the applicable exemption from registration, the investor may have a right of rescission under federal and/or state law, which would entitle the investor to force the issuer to return the investor’s investment. Exercise of such right by the investor would require the investor to return its investment in the issuer.

• Circumstances permitting rescission include failure to comply with all of the terms of an applicable exemption from securities registration, making payments based on the size or success of an EB-5 offering to persons not registered as a broker-dealer (but who should have been), and, in some instances, making material misstatements or omissions in offering documents.

• Under federal law, rescission rights survive for the later of five years from the date of issuance of the security, or two years from the date from the discovery of the violation giving rise to the rescission rights. State statutes of limitation may differ.

• Note that because investors in EB-5 transactions must have their investments considered to be “at risk” without a right of redemption, it is an open question whether the mere existence of rescission rights could disqualify an EB-5 investment even if an investor elects not to exercise them.

Anti-fraud Provisions (Rule 10b-5 under the 1934 Act)

Claims by EB-5 Investors under Rule 10b-5. Rule 10b-5 under the 1934 Act generally prohibits the use of fraudulent devices in connection with the sale of securities; state securities laws have similar provisions. These all apply even if the offering of the securities was exempt from registration. Rule 10b-5 applies both to affirmative misstatements, and to omissions of information that would be necessary to make what was actually disclosed not misleading.

Rule 10b-5 applies to sales to foreign nationals. Section 27(b) of the 1934 Act gives U.S. courts jurisdiction over claims made by the U.S. or the SEC with respect to breaches of the anti-fraud laws involving “(1) conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States.”

In the event that an EB-5 project fails or the investor(s) fail(s) to obtain a Green Card, it is possible that investors will claim that they were not provided with adequate disclosure concerning the material facts and risks involved in the offering, or that the issuer or project did not act in accordance with the disclosures.

There have been an increasing number of civil enforcement actions brought against regional centers on grounds of fraud, and one criminal indictment (so far), and most of these have had a very high profile in the EB-5 industry and beyond.

Other U.S. Securities laws which may apply to EB-5 transactions and participants

Below is a brief summary of the laws pertaining to investment companies and investment advisers.
Investment Company Matters. Section 3(a)(1) of the Investment Company Act of 1940 (the “Company Act”) defines an “investment company” in pertinent part as a company which: “is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities” or “is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40 per centum of the value of such issuer’s total assets (exclusive of Government securities and cash items) on an unconsolidated basis”.

Typically, an investor utilizing a regional center does not make a direct investment in an EB-5 project. The investor invests in a collective investment vehicle or SPE which in turn itself invests in the EB-5 project, generally in the form of a secured loan. As the secured loan would generally be deemed to be a type of security under the U.S. securities laws, the collective investment vehicle could potentially be deemed an investment company. Investment companies are required to register with the SEC, file a registration statement describing the vehicle and its activities, and make periodic reports, and are subject to other operational restrictions, all of which make acquiring investment company status highly undesirable for most private companies.

The main exemption from investment company status is not making a public offering of securities and limiting the number of investors in the project to 100 or fewer, which would allow the project to raise between $50,000,000 and $100,000,000 depending on the applicable current minimum qualifying EB-5 investment for the project. Other exceptions, which may be more difficult to comply with, include primarily investing in mortgages equal in value to the aggregate EB-5 financing received, and limiting investment in the project to “qualified purchasers” (generally meaning that they have at least $5,000,000 in total investments, not net worth or net income).

Investment Adviser Matters. Section 202(a)(11) of the Investment Advisers Act of 1940 (the “Advisers Act”) defines an investment adviser as “any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.”

As noted above, funds formed to invest in EB-5 projects through regional centers are generally investing in securities, usually debt, of a separate operating business. General partners or managers of EB-5 funds receiving a carried interest or other compensation can thus be deemed to be compensated for providing advice with respect to the investment in the securities of the operating companies. Accordingly, absent an exemption from registration, such persons could be required to register as investment advisers.

The Advisers Act generally requires that persons deemed to be investment advisers either register with the SEC or the individual states where they are deemed to have clients as an investment adviser depending on the amount of assets under management, i.e., the size of the fund. State laws must also be considered for their applicability.

There are potential exemptions from registration as an investment adviser. Under federal law, Section 203(b)(3) of the Advisers Act exempts “foreign private advisers.” Foreign private advisors cannot have a place of business in the United States or hold themselves out to the public in the U.S. as an investment adviser. Assuming that the foreign private adviser is just advising investment funds, fewer than 15 investors in the funds can be U.S. persons and these U.S. persons must invest an aggregate of less than $25,000,000. Otherwise the adviser may be required to register. Once again, state laws must also be considered to determine whether state exemptions are available.


Because EB-5 projects by their nature involve investment by foreign nationals depending on the nature of the business of the project, it may be necessary to comply with certain non-securities laws relating to foreign investment in key U.S. businesses. In addition, the involvement of foreign investors raises potential issues regarding money laundering and matters relating to identification of investors. This section summarizes some of the potential concerns in these areas.


The Exon–Florio Amendment was enacted by the United States Congress in 1988 and provides for the review of all foreign investments that might affect national security. The amendment empowers the President to block an investment when “there is credible evidence that leads the President to believe that the foreign interest exercising control might take action that threatens to impair the national security.” Following passage of the amendment, President Reagan delegated the review process to the Committee on Foreign Investment in the United States (“CFIUS,” commonly pronounced “sifius”).
CFIUS is an inter-agency committee of the United States Government that reviews the national security implications of foreign investments in U.S. companies or operations. Chaired by the United States Secretary of the Treasury, CFIUS includes representatives from 16 U.S. departments and agencies, including the Defense, State and Commerce Departments, as well as (most recently) the Department of Homeland Security. Companies proposing to be involved in an acquisition by a foreign firm are supposed to voluntarily notify CFIUS, but CFIUS can review transactions that are not voluntarily submitted. Among the examples of investments blocked under Exon-Florio authority is Ralls Corporation, owned by the Chinese Sany Group, which in 2012 was ordered by President Barack Obama to divest itself of four small wind farm projects located too close to a U.S. Navy weapons systems training facility in Boardman, Oregon.

Patriot Act/”Know Your Customer”

Know your customer (“KYC”) is the process used by a business to verify the identity of their clients. The term is also used to refer to the bank regulation which governs these activities, Section 326 of the Patriot Act which required banks to establish certain customer identification programs, and subsequent requirements by bank regulators that expand those requirements. KYC processes are also employed by companies of all sizes for the purpose of ensuring the anti-bribery compliance of their proposed agents, consultants, or distributors. Banks, insurers, and export credit agencies are increasingly demanding that customers provide detailed anti-corruption due diligence information, to verify their probity and integrity. EB-5 has some unique parallel requirements, such as verifying the source of investors’ funds.


The Hart–Scott–Rodino Antitrust Improvements Act of 1976 (Public Law 94-435, known commonly as the “HSR Act”) is a set of amendments to the antitrust laws of the United States, principally the Clayton Antitrust Act. The HSR Act provides that parties must not complete certain mergers, acquisitions or transfers of securities or assets, including grants of executive compensation, until they have made a detailed filing with the U.S. Federal Trade Commission and Department of Justice and waited for those agencies to determine that the transaction will not adversely affect U.S. commerce under the antitrust laws. While parties can carry out due diligence and plan for post-merger integration, they may not take any steps to actually integrate operations, such as an acquiring party obtaining operational control of the acquiree. HSR would likely only be implicated if an EB-5 project involved the acquisition of an existing business.


The Office of Foreign Assets Control (“OFAC”) is a financial intelligence and enforcement organization of the U.S. government charged with planning and execution of economic and trade sanctions in support of U.S. national security and foreign policy objectives. Acting under Presidential national emergency powers, OFAC carries out its activities against problematic foreign states, organizations and individuals alike. A component of the U.S. Treasury Department, OFAC operates under the auspices of the Office of Terrorism and Financial Intelligence and is primarily composed of intelligence experts and lawyers. While many of OFAC’s targets are broadly set by the White House, most individual cases are developed as a result of lengthy investigations by OFAC’s Office of Global Targeting (“OGT”).

OFAC is responsible for administering the Specially Designated Nationals (“SDN”) List. The list is a publication of OFAC which lists individuals and organizations with whom United States citizens and permanent residents are prohibited from doing business. This list differs from the one maintained pursuant to Section 314(a) of the USA PATRIOT Act, which is based on information sharing between law enforcement and the financial industry. When an entity or individual is placed on the SDN List, it may petition OFAC to reconsider, but OFAC is not required to remove an individual or entity from the SDN List. While two federal court cases have found the current Treasury/OFAC process establishing and administering the SDN list to be constitutionally deficient and allowed entities placed on the list to challenge seizure of their assets, it would still be advisable for companies not to do business with persons named on the SDN List.

As EB-5 involves raising funds from foreign investors, it is advisable for sponsors of EB-5 projects to check their prospective investors against the SDN List.


The vast majority of the regulatory concerns discussed above relate to the structuring and marketing of the EB-5 project and/or obtaining information regarding potential investors, and thus would generally relate to the period commencing with the pre-marketing of an EB-5 project through the deposit of funds in escrow. As noted above, to the extent that ultimate adjudication does not lead to “green cards” for investors, that may give rise to claims that fraud was involved in the offering of the project in an attempt by investors to recoup their investment. Many of the rules relating to the handling of funds and the KYC rules apply to all stages of the project, because the funds must be accounted for in connection with the I-526 application as well as at the time of the I-829.


The scope of the securities and other relevant laws and regulations that may apply to EB-5 investments and the applicability of such laws to varying stages of an EB-5 project require those involved in the offering and sale of EB-5 projects to maintain constant vigilance to ensure compliance with such laws and regulations. Failure to maintain compliance can have substantial consequences both for the issuer and the investors, including, but not limited to, fines for the issuers and the obligation to refund investments and the potential loss of the opportunity to obtain a green card for the investors.


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