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SEC NEWS ALERT!
SEC ORDERS SANCTIONS AGAINST UNREGISTERED BROKER-DEALERS
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SEC charges unregistered
brokers in EB-5
 

On Wednesday June 23, 2015, the Securities and Exchange Commission charged two firms and their principals that illegally brokered more than $79 million of investments by foreigners seeking U.S. residency.  These are the first public charges brought in the EB-5 industry against persons receiving placement fees for introducing investors to investment offerors.  The SEC charged two entities under the name Ireeco, and their individual operators Stephen Parnell and Andrew Bartlett in Florida, for directing investors to specific Regional Center investment projects and collecting approximately $35,000 from each investor as essentially investor broker fees.

This action and its basis are very similar to SEC enforcement actions on the identical issue currently ongoing in the EB-5 industry against immigration lawyers for receipt of unlawful broker fees, however those actions have not yet been concluded and thus not yet publicly reported.  Jurisdiction was undisputed, and guilt was essentially (though not expressly) confessed.
 
Sanctions announced against these defendants:  imposition of a cease and desist against current and future violations of Section 15(a) of the Exchange Act, formal censure, plus additional proceedings to determine whether disgorgement of unlawful fees received and/or the imposition of civil penalties pursuant to Sections 21B and 21C of the Exchange Act will be included; if payments are required they would be made bearing interest.
 
Important notes:
 
 

  •          In the order and the press release the Commission seems to have felt it was significant that some of the offerees were residing in the U.S. on temporary visas (“In at least 10 instances, potential investors already were residing in the U.S. on some other type of temporary visa when they were solicited by Ireeco, LLC or later by Ireeco Limited.”)  However there is no analysis to indicate whether or not U.S. residency of offerees was determinative in finding that any of the broker-dealer activities required registration.  The documents also state the fact that the defendants’ business was based in Florida, which likely would have been enough for the Commission to require registration.  (In fact, there is no analysis describing why the supplied facts support a finding of unregistered broker-dealer activity; however, conducting one’s own analysis leads to the same conclusion.)
  •          Jurisdiction is supported by the statement that the defendants 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.”
  •          The respondents tried to camouflage their activities by focusing on a host of “education” work they claimed to be performing (and may well have actually conducted) for the investors, about the EB-5 Program, about residency in the USA, about different RCs and their offerings, etc.  The SEC wasn’t fooled.
  •          The SEC mis-states the EB-5 rules, writing in the settlement “An applicant investor is only required to invest $500,000 if done through a regional center…By investing through a regional center, the foreign investor is relieved of the day-to-day operations of the business and is not responsible for the direct management of the center’s investment. As a result, the vast majority of issued EB-5 visas have been for applicants who invest through regional centers.” This confuses the reduced investment minimum for projects conducted within a targeted employment area, with the effect of including a regional center in an EB-5 project.  Regardless, getting the rules wrong didn’t prevent the respondents from settling. 

 
The SEC news release and action are posted on the Commission’s website at:
 
SEC news release - http://www.sec.gov/news/pressrelease/2015-127.html
 
SEC action - http://www.sec.gov/litigation/admin/2015/34-75268.pdf
 
Homeier & Law, P.C. will be following up by posting further analysis of this important SEC EB-5 enforcement action shortly.


If you have any questions please feel free to contact Homeier & Law, P.C. 

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