The Federal Bar Association Hosts a Leadership Luncheon Panel with the SEC
By Omar Hakim, Esq.
On June 14, 2017, the Federal Bar Association hosted the Leadership Luncheon Panel in Washington D.C with George Bagnall, Sarah Hall, and Marc Johnson from the SEC. There, the Panel discussed a variety of issues related to fraud, immigration, and other functions of key regulators in the EB-5 space, such as the SEC and USCIS.
The Panel touched upon several high-profile fraud cases and also common red flags for EB-5 projects that might trigger further scrutiny by the SEC. The Panel noted that some of these practices that might warrant further scrutiny are the definitive promise of a green card, guaranteed returns on investment and layers of companies in the corporate structure of a project run by the same people. In our opinion, any guarantee or definite promise should be a clear red flag to walk-away. However, while multiple layers of companies owned by the same people does create the potential for abuse, it also may be legitimately needed to meet the requirements of the EB-5 program. In these situations, it is paramount that the investor perform proper due diligence with respect to the project and its principals and to ensure that proper safeguards have been put in place.
Furthermore, the panel sought to dispel the myth that EB-5 investments are not securities and thus do not fall under the jurisdiction of the SEC. The landmark case of SEC v. W.J. Howey Co. 328 U.S. 293 (1946) helped set the foundation of what exactly is the definition of a “security.” The general rule is that a “security” is an investment of money from an expectation of profits coming from a common enterprise based solely on the efforts of a third party. This definition and how EB-5 investments fall within the scope of this definition was reinforced and clarified by the Panel through discussions about later cases.
Lastly, the panel provided an important clarification that a financially successful project can still be fraudulent and a poorly performing project is not necessarily fraudulent. In other words, fraudulent activity is not always correlated to financial performance. While a failed project will certainly result in very unhappy investors, a key requirement of the EB-5 program is that the funds must be at risk and risk means that there is the potential for things to go poorly even when there is no wrongdoing. However, it is important for a project developer to emphasize this risk on the front-end before the investment is made. The developer cannot have it both ways by pitching the securities as having little to no risk in order to entice an investor and then telling the investor they should have known about the risk when things go wrong.
Overall, the panel was very enjoyable and informative. We would like to thank the Federal Bar Association for hosting and to thank George Bagnall, Sarah Hall, and Marc Johnson for taking the time to provide their insights.
Omar Hakim, Esq. is an attorney at Mona Shah & Associates 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. Additionally, he is able to draw on his experiences at major federal regulatory agencies and bodies, which includes work at the SEC, the United States House of Representatives Committee on Financial Services, and the CFTC. He earned his J.D. at the University of Virginia; his Master of Laws in Securities and Financial Regulation at the Georgetown University Law Center; and his B.A. in Economics at Georgetown University.