Technical Violations of Securities Law with Edward Gartenberg – Episode 59

Technical Violations of Securities Law with Edward Gartenberg

Technical Violations of Securities Law with Edward Gartenberg – Episode 59

In the last five years, the SEC seems to have made EB-5 a major priority. Today, Mark and Mona are joined by leading SEC defense attorney Edward Gartenberg to explain how the EB-5 program falls under SEC jurisdiction. They cover proceeds and broker-dealer violations, the issuer exemption, and the potential consequences of breaking securities laws—regardless of your intentions.




The SEC’s initial interest in EB-5 involved uncovering cases of fraud. Since 2013, however, the agency has branched out to identify unintentional and even well-meaning violations of securities law. 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.


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


Today, Edward joins Mona and Mark to discuss the SEC’s governance over the EB-5 program as a securities offering. They talk documentation, explaining the importance of following the plan as outlined in the project’s PPM to avoid a use of proceeds violation. Edward offers insight around broker-dealer violations and the SEC’s narrow view of the issuer exemption. Listen in to understand when you should seek the counsel of an SEC lawyer and learn the very serious consequences of breaking securities laws in the US.



The SEC and EB-5

  • Since 2013, the SEC has made EB-5 a priority. The program falls under SEC jurisdiction because it is a securities offering.
  • The SEC is focused on enforcing securities laws 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 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.


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 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, Edward recommends that you contact an SEC lawyer. It pays to have someone with experience in SEC enforcement who can help guide you in using the right language 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 doesn’t 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%!