Technical Violations Of Securities Law with Edward Gartenberg

Technical Violations Of Securities Law with Edward Gartenberg

EB-5 Investment Voice

Mona Shah & Associates Global Podcast Series

By Hermione Krumm, Esq.

 EB-5 Investment Voice is the only Podcast series that focuses on the United States immigrant investor visa, EB-5 and foreign direct investment. Mona Shah, Esq. welcomes guests from the industry, including: Developers, Regional Center Operatives, Attorneys, Legislators and Politicians.


When thinking about EB-5, the media tend to ultimately jump to the conclusion that it is a “Green-Card-for-Cash” program, without realizing that it is a securities offering, which falls under the SEC’s strict scrutiny. Although many dwell on the thought of corporate discussions, in the last five years, the SEC seems to have made EB-5 a priority, which makes the topic pertinent and crucial. In this episode, Mona is joined by leading SEC defense attorney Edward Gartenberg to discuss the SEC’s governance over the EB-5 program. They explain the importance of following the plan as outlined in the project’s PPM to avoid a use of proceeds violation. They also offer insight around broker-dealer violations, the SEC’s narrow view of the issuer exemption, and the potential consequences of breaking securities laws—regardless of your intentions.

A leading SEC defense attorney out of Los Angeles, Edward Gartenberg served as a Special Counsel for the Division of Enforcement of the SEC and a Special Assistant in the United States Attorney Office (Washington, D.C.). He has represented numerous attorneys, Regional Centers, brokers, and project sponsors in EB-5 investigations and litigation brought by the SEC.


The SEC and EB-5

  • The SEC’s initial interest in EB-5 involved uncovering cases of fraud. Since 2013, the SEC has made EB-5 a major priority. The agency has branched out to identify unintentional and even well-meaning violations of securities law – innocent pitfalls. Even in cases where the issuer’s actions had a positive impact on investors, the SEC has been known to prosecute for breaking the rules and regulations.
  • Since the SEC took a keen interest in EB-5 in the recent years, a group of lawyers within the SEC have truly understood the program. However, the SEC is, to some extent, solely focused on enforcing securities laws exactly the way they were written, regardless of whether the issuers’ actions are good or bad for investors.


Proper Documentation

  • Everything an investor needs to know to make an informed decision is documented via the Private Placement Memorandum (PPM). To comply with SEC regulations, issuers must follow the plan as outlined in the document.
  • In one case, the SEC froze the investment and took over a project because the issuer had committed a use of proceeds violation. It did not matter that the issuer made the investors more money by using the money differently; it only mattered that the issuer did not follow the PPM and did not disclose the same to the investors.


Broker-Dealer Violations

  • Anyone who is paid for bringing investors into a project must be registered as a broker-dealer, and this rule applies even to well-meaning immigration lawyers. Simply disclosing your receipt of a referral fee is not enough.
  • The consequences for broker-dealer violations are steep. Several big Regional Centers have been fined for paying lawyers, and anyone who is less than forthcoming about their receipt of a referral fee may be charged with fraud.


The Issuer Exemption

The “Issuer Exemption,” as it’s commonly known, typically applies to individual employees or agents of the issuer rather than the issuer itself. The rule has customarily been interpreted to not require the issuer itself to register as a broker because the issuer is not effecting transactions for the account of others, however, persons acting on behalf of the issuer engaged in distributing its securities, including the issuer’s own directors, officers or employees, may be deemed ‘brokers’ under Section 3(a) of the Act.

  • The SEC takes a very narrow view of the issuer exemption. Ed recommends checking with a securities lawyer to ensure compliance if you plan to rely on the exemption.
  • Smaller projects that secure investors on their own can use the administration fee to cover costs associated with the offering, including referral fees paid to agents. But if the money is used to reimburse someone in the US on a per-transaction basis, they must be a registered broker-dealer to avoid liability.


When You Need an SEC Lawyer

  • If you are contacted by the SEC, it is highly advisable that you contact an SEC lawyer, not just a securities lawyer who does not handle SEC work. It pays to have someone with experience in SEC enforcement who can help guide you in using the right language (not just business jargons) to answer questions.
  • Once an investigation begins, someone will be named as an enforcement target. Edward suggests seeking professional advice early on in the process.


Serious Consequences

  • If you are prosecuted for fraud, your reputation will be ruined. Furthermore, the SEC has the authority to freeze an investment and an individual’s personal funds—without notice.
  • If litigation is involved, SEC penalties are much more serious than simply paying a minor fine. This could mean being barred from the EB-5 program completely.


The Whistleblower Provision

  • The SEC does not disclose information around how individual investigations begin, though a complaint by an investor, partner or USCIS typically initiates the process.
  • Whistleblowers who provide the SEC with original information about EB-5 fraud that leads to enforcement sanctions of at least $1M are entitled to a reward of between 10 and 30%!


Please see the link below for access to the podcast episode:


About the Author:

Hermione Krumm, Esq. is an associate attorney with Mona Shah and Associates Global. Hermione works with EB-5, corporate, merger and acquisition (M&A), intellectual property and foreign direct investment (FDI) matters involving China, the UK and the US. Hermione writes and comments frequently on current business and immigration issues. Her articles have been published by LexisNexis, ILW, EB-5info, EB-5 Supermarket, etc. Hermione received her LL.B. (Hons) from the University of Manchester School of Law (UK), and obtained her LL.M. from Cornell Law School. Hermione speaks fluent English, Mandarin and Cantonese.