Insider’s Look at the Advice EB-5 Developer’s Receive – Episode 116
As EB-5 developers confront the current economic reality, what advice are they receiving from EB-5 experts and securities attorneys? On this episode, Mona and Mark are joined by Michael Homeier from Law Office of Michael G. Homeier, PC to discuss the common questions developers ask in regards to EB-5 funded projects and the concerns that have arisen during the pandemic. Listen in to understand the changes developers may be making to EB-5 projects and whether they have the authority to make these changes.
Michael G. Homeier is a leader in EB-5, investment crowdfunding, and blockchain/token-related corporate and securities transactions, and with his prior firm has represented a number of EB-5 regional centers as well as private EB-5 clients on over 400 regional center and EB-5 securities offering projects to date. His firm is devoted exclusively to corporate and business transactional law, including securities (EB-5, crowdfunding and blockchain/token). Michael G. Homeier routinely presents at EB-5 industry events, including AILA/IIUSA combined conferences.
Today, he joins Mona and Mark to discuss how project developers and issuers have a substantial amount of control over EB-5 projects but are limited by securities laws. He emphasizes the importance of engaging experienced attorneys in the field of EB-5 immigration and securities law to both prepare the project’s offering documents as well as to provide sound advice on what changes can be made to a project during a crisis.
QUESTION: What if a project developer needs to change the management of the project and sell off company assets that were originally used as collateral for the EB-5 loan from the NCE to the JCE?
- The cliché lawyer answer applies here: It depends. Is this a brand-new investment, or one in which investors are still being solicited? Have some investors only partially invested? Is it an investment that has been closed?
- For a project that is still being offered and investors still being solicited, it is possible to make changes by proposing them to new investors as new investment circumstances.
- However, it’s most likely required under securities laws that the issuer go back to the existing investors and divulge that the terms of the deal have changed. These investors will technically have “recission rights”, which means they will have the opportunity to either remain invested in the project despite the changes or exit the project and withdrawal their capital.
- Any changes not divulged to existing investors in a securities offering can result in litigation against the issuer of the offering for misinformation, whether it was negligent or intentional.
QUESTION: How much power does the project developer have over the project, and can the Regional Center help protect the interests of the investors?
- The regional center should work with experienced immigration counsel and securities counsel in preparing its agreement with the developer, making certain that the deal they make with the developer gives the regional center the power and flexibility to regulate any material changes to the deal.
- In the event that the developer doesn’t inform the Regional Center of changes that he or she is making, the securities attorney would look to the agreement between the two parties.
- If the developer is the issuer (of the offering), the regional center has to decide whether to allow the changed circumstances or whether it has the power to either halt these changes from taking place or else require that these changes be disclosed.
- More often the regional center is the issuer of the EB-5 offering, and this inherently gives the entity more control and limits the power of the developers to make unilateral changes.
QUESTION: So how does a developer find the right regional center for their project?
- Developers have the option of either starting their own regional center or renting an existing one.
- For existing regional centers, developers should look at the following: how many projects the regional center has been involved in? Did the regional center complete a successful raise and if not, why? How successful were the projects from start to finish?
QUESTION: If it is time to pay back investors and the project has sufficient capital but is unwilling to repay during the pandemic due to the state of the economy, must they still do so?
- As always, it depends. Once the offering is closed, the offering documents are essentially “cast in concrete” and they cannot usually be changed unless the developer and the attorneys were smart enough to build in some flexibility that gives discretion to the developer to make these changes. Usually, there is a practical limit to the discretionary changes a developer can make to the project.
- Otherwise, the developer must act in conformity with the original terms of the offering documents unless the investors unanimously consent to new terms due to the unanticipated and drastic change in circumstances. This is true whether the offering is structured as debt or equity.
- Most business transactional lawyers and securities lawyers will include clauses in the offering documents dealing with unexpected circumstances that are beyond the ability or responsibility of the developer. These clauses, referred to as force majeure, attempt to include what rights the developers have in the event of unanticipated circumstances beyond their control. The COVID-19 pandemic is now being viewed as a force majeure event.
- Remember that all the offering documents, with the exception of the PPM (which is a disclosure document), are considered contracts between the investor and the developer or issuer. Thus, contract law will govern the rights and duties of the parties involved.
QUESTION: Can an investor who wants to withdraw from the project request a return of their capital prior to the agreed-upon term?
- Carefully written documents will warn investors that they will not be repaid early, no matter the reason. It is important that the documents are correct from the beginning.
- It is not a violation of fiduciary duties for the developer to rely on language stating that they have no obligation to repay investors until the time the investment has expired.