07 Apr Role of Disclosure in Securities Laws and How It Applies to EB-5
by Omar Hakim, Esq.
The United States has developed a plethora of regulations that establishes confidence in the intangible securities markets through the Securities and Exchange Commission. These regulations attempt to effectively mitigate the market failures associated with the sale of securities, most notably asymmetric information. This is especially important to consider when investors, such as those in the EB-5 immigrant investor program, are purchasing these securities from outside the U.S. and therefore are at a greater disadvantage. The SEC, in conjunction with other regulatory agencies, has ensured that these investors also can pursue a legal remedy in the event of fraudulent transactions.
What is the SEC?
The U.S Securities and Exchange Commission (“SEC”) protects investors, maintains fair, orderly, and efficient markets, and facilitates capital formation. It was created by the Securities Exchange Act of 1934 to restore investor confidence in U.S capital markets after the stock market crashed in October of 1929. The laws and regulations that govern the securities industry in the United States derive from the principle that all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it. This is why the SEC requires companies to disclose all relevant information about a company to potential investors. The SEC continually works with all major market participants, such as investors, to learn about their concerns. As the EB-5 industry as it has grown, the SEC has taken a significant interest in the EB-5 market and begun interacting with market participants regularly. In addition, they have begun coordinating with international regulators from the home countries of EB-5 investors.
The SEC works with other institutions such as state regulators and self-regulatory organizations, like the Financial Industry Regulatory Authority (“FINRA”). It requires companies conducting securities offerings to inform potential investors all material information about the company, its principals, and the investment opportunity. Furthermore, these agencies mandate that the companies disclose risks that a reasonable person would want to know before making an informed investment decision. The sale of many goods in the United States is governed by the market principle of “caveat emptor” or “buyer beware;” however, the sale of securities is different in that securities are not tangible assets such as a car, which can be taken for a test drive by a potential buyer. Investors do not generally examine all of the company’s assets, contracts, and records, nor do they conduct interviews with management and key employees. Thus, to address this institutional information asymmetry, securities laws require companies tell potential investors all material information about the company so that investors can be informed on issues pertaining to the value of the security and the risks associated with the investment.
The SEC and EB-5
The SEC has significant enforcement tools at its disposal to punish issuers that deceive investors, including EB-5 investors overseas. The Securities Act of 1933 provides for criminal and civil penalties for failing to disclose material facts or making false statements in the disclosure. Moreover, the act also imposes civil liability on companies and their principals if they issue securities while failing to disclose all material information or making false statements in their offering documents or marketing materials. These civil liability provisions entitle EB-5 investors to sue companies that deceive them for the return of their entire investment amount (typically $500,000 in the context of EB-5) plus interest. Additionally, a person who willfully violates the Securities Act may face criminal prosecution with a potential maximum punishment of a fine of $5,000 or imprisonment for not more than ten years, or both.
What Does the SEC require of Disclosures to Investors?
Companies raising funds from EB-5 investors prepare a document called a private placement memorandum, or “PPM,” to inform the potential investor of all material information and to also aid in resolving any future disputes that may arise between the company and dissatisfied investors. Preparing a disclosure document is perhaps the most important component of conducting a proper securities offering. The information must be thorough, yet also must be understood by an ordinary individual.
The disclosure document will aid the company in telling its story to potential investors, describing all important aspects of the company and its business.
A good rule of thumb when preparing a disclosure document is to include anything that you would want to know about a company before making an investment in a similar enterprise. For most businesses, the key elements of this disclosure include the risks of the investment; the company’s organizational structure; background on the business’s target market; primary competitors; the management team; use of proceeds; terms of the offering; financial information; and any outstanding litigation. Even after the sale of securities, a company may still be obligated to provide certain information to investors to keep them apprised of the company’s ongoing activities and financial health.
The SEC, despite its American origins, has legal tools to protect both domestic and international investors from deceptive activity in the securities market. It provides a framework for investors to feel confident in the ability to receive remedies for misrepresentation or other fraudulent acts by companies seeking to raise capital. As the securities market is an important source of liquidity, the need for high levels of confidence in the institutions behind it is paramount to meeting the needs of the parties involved in the investment. This confidence, in turn, allows significant liquidity to exist in the securities market, to the benefit of both issuers and investors, despite the presence of asymmetric information. In the world of securities, the EB-5 investment program benefits from the oversight and protections by the SEC afforded to other investment opportunities. This has allowed its popularity to grow in recent years to make it an increasingly important source of capital for U.S. projects.
About the Author
Omar Hakim, Esq. is an attorney at Mona Shah & Associates, a top 25 EB-5 law firm, in New York City. The firm is an established source for EB-5, assisting numerous Regional Centers/EB-5 Projects and Investors in navigating this complex, nuanced and constantly changing area of immigration law. Omar offers clients years of experience in corporate finance, the financial regulatory system, securities matters and in general corporate governance matters. He has successfully filed numerous entrepreneur, direct-pooled, and regional center projects and offering documents. Omar is experienced in EB-5 compliance and advising on policy and integrity measures, as well as handling the firm’s client regional centers I-924 annual filings.
With a wealth of knowledge in EB-5 and securities, Omar has spoken and presented at numerous conferences, and has published several articles. He is also a member of the President’s Advisory Council for Invest In the USA (IIUSA) and a member of the American Immigration Lawyers Association (AILA).
Omar earned his J.D. at the University of Virginia where he was a member of the Tax Review, and his Master of Laws in Securities and Financial Regulation at the Georgetown University Law Center. He earned his B.A. in Economics at Georgetown University with minors in Computer Science and Arabic, and has passed the Chartered Financial Analyst Level I exam.