On June 23, 2015, the SEC ordered an EB5 investor-sourcing company to cease and desist from acting as an unregistered securities broker.  This case is a shot across the bow of the cottage industry of unlicensed finders and agents of EB5 regional centers whose un-policed activities are running afoul of long-standing securities industry regulations. The EB5 industry should take note that the use of unregistered finders in investment transactions can have serious legal implications.

The facts of In the Matter of Ireeco, LLC and Ireeco Limited, SEC Admin. Proc. File No. 3-16647 (Order dated June 23, 2015), appear to be common to the otherwise legitimate business practices of many EB5 agents who troll for foreign investors in hopes of introducing them to a regional center and facilitating the investor’s immigration application for a sizeable fee. For this reason, the Ireeco, LLC, case should be of interest to the EB5 industry, which appears to have operated for a number of years under the mistaken belief that its activities are legal and unregulated by USCIS and that the primary activity it is involved in is the facilitation of visa services to wealthy foreigners.  The EB5 industry may have been only half-correct. Although USCIS has not attempted to regulate the activities of regional center agents, Ireeco, LLC, should serve as a warning to the EB5 industry that the SEC views immigration agents as securities brokers because they are materially involved in the process of introducing investors to U.S. companies seeking funding.

Ireeco, LLC, is instructive also because it did not involve any allegation of fraud by Ireeco, LLC or its employees. Thus, Ireeco, LLC, stands for the proposition that otherwise legitimate agency activities of regional centers and of facilitators of investor-immigrants are the activities of securities brokers, and such activities have been nationally regulated by the Securities Exchange Act of 1934 since the EB5 program came into existence in 1990.  Stateel securities laws also require securities brokers to be registered if they are doing business in a particular state. Unlicensed securities broker activity is punishable as a felony at both the state and federal levels. Further, the presence of an unlicensed salesperson in a securities transaction can be grounds for the investor to void the transaction as a matter of both federal and state law. Thus, Ireeco, LLC, serves as a timely reminder for the EB-5 industry that using unregistered finders fees in investment transactions can have serious legal implications.  Thus, the EB5 industry should take note that the use of unregistered finders in investment transactions can have serious legal implications.

The SEC’s cease-and-desist order found that the corporate Ireeco respondents (hereafter collectively referred to as  “IREECO”) were unregistered securities brokers. IREECO acted as a broker because:

• IREECO was in the business of introducing investors to companies seeking investment funding;
• IREECO offered through a website to assist foreign investors in choosing EB5 projects;
• Website viewers would make requests for information through the website;
• IREECO would attempt to call the foreigners to qualify them for interest in the EB5 program and their level of knowledge;
• IREECO would attempt a second substantive call or email to discuss the initial steps in the EB5 process with the prospective immigrant-investor;
• IREECO would email to the immigrant-investor industry publications and other information, including IREECO’s management’s background information describing its EB5 expertise;
• IREECO then attempted to qualify the investor for the EB5 program and determine the investor’s investment preferences;
• IREECO provided information on a selection of EB5 regional centers;
• IREECO then provided contact information to the regional center of interest to the prospect;
• Thereafter, the regional center would distribute its private offering documents to the prospective immigrant-investor directly;
• The immigrant-investors typically invested $500,000 in a regional center and paid an “administrative fee” to the regional center;
• The regional center split a percentage of the “administrative fee” with IREECO as its referral fee for investments made but would only pay the referral fee when USCIS granted the investor’s I-526 (green card) application.

The cease-and-desist order cited no legal precedent for its conclusion that IREECO was in violation of the federal securities laws. The order merely concluded that the IREECO violated the securities broker dealer registration requirements because they used “the mails or any means or instrumentality of interstate commerce to engage in the business of effecting transactions in, or inducing or attempting to induce the purchase or sale of, securities for the accounts of others without registering as a broker-dealer with the Commission or without associating with a broker-dealer registered with the Commission.”

Nevertheless, IREECO’s activities clearly violated well-settled securities laws. For example, the Securities Exchange Act of 1934’s definition of a “broker” is “any person engaged in the business of effecting transactions in securities for the account of others.”  15 U.S.C. § 3(a)(4)(A). Further, the following two quotations from SEC No-Action letters well-summarize the classic nature of IREECO’s broker activities, which violated most of the attributes of broker activity summarized in the No-Action letters. The SEC’s staff has indicated its view that:

“Factors indicating that a person is ‘engaged in the business’ include, among others: receiving transaction-related compensation; holding one’s self out as a broker, as executing trades, or as assisting others in completing securities transactions; and participating in the securities business with some degree of regularity. In addition to indicating that a person is ‘effecting transactions,’ soliciting securities transactions is also evidence of being ‘engaged in the business.’”

BD Advantage, Inc., SEC No-Action Letter, 2000 WL 1742088 (Oct. 11, 2000).  The SEC’s staff has also stated that:

“A person effects transactions in securities if he or she participates in such transactions ‘at key points in the chain of distribution.’ Such participation includes, among other activities, assisting an issuer to structure prospective securities transactions, helping an issuer to identify potential purchasers of securities, soliciting securities transactions, and participating in the order-taking or order-routing process (for example, by taking transaction orders from customers).”

BondGlobe, Inc., SEC No-Action Letter, 2001 WL 103418 (Feb. 6, 2000).

Notably, the management of Ireeco, LLC, was not charged with any violation of the federal securities laws. (It is possible that management could be charged in a separate proceeding, but to date no public announcements to this effect have been made.) However, the SEC typically does charge senior management along with corporate entities with violations of the federal securities laws because these laws impose personal liability for violations, and the SEC believes that it is important for individuals to be charged so that they have a public record of wrongdoing and can less easily repeat the same conduct using a different corporate entity in the future.

IREECO agreed in part to settle the SEC’s charges. The administrative order requires IREECO to cease and desist from acting as an unregistered securities broker dealer and censures it. On October 8, 2015, the parties’ briefing schedule concludes on the issue of whether IREECO will be ordered to disgorge the so-called commissions it received and/or to pay civil money penalties. A final decision could be expected by year-end.

Conclusion

The IREECO cease-and-desist proceeding should serve as a warning to regional centers to review the licensing status of all persons soliciting prospective investors on their behalf or on behalf of their sponsored projects. Unintentionally or otherwise, the use of an unlicensed sales agent to communicate with prospective investors can void an entire private offering and can result in substantial monetary and reputational damage for all involved. Such consequences can be avoided with proper planning.