Are You an Investment Adviser?

By Genna Garver

If you advise EB-5 investors, or sponsor an EB-5 investment program, the answer may be “yes!” Persons who fall within the definition of investment adviser generally must register with the U.S. Securities and Exchange Commission (“SEC”) (or applicable state securities authorities) on Form ADV and comply with the provisions of the Advisers Act, unless an exemption from registration is available. Even if an exclusion from the definition or exemption from registration is available, the anti-fraud provisions of the Advisers Act, state securities laws and common law fiduciary obligations still apply. For some exempt advisers, certain provisions of the Advisers Act, as well as certain filing obligations, also apply.

What is an Investment Adviser?

Generally, we can expect that stock or interests in an entity operating in an EB-5 program will be securities. Therefore, persons who give advice regarding these securities can expect to be treated as investment advisers. As with all of the U.S. securities laws, the Advisers Act regulates activities involving “securities”—a term which is defined and interpreted very broadly by the U.S. Securities and Exchange Commission (“SEC”) and includes shares of stock in a corporation, certain debt instruments, as well as interests in private investment limited liability companies and limited partnerships.

Are You an Investment Adviser?

Recently, the SEC staff presented its views on the application of the U.S. federal securities laws, including the Advisers Act, to the EB-5 program to USCIS, noting the Advisers Act may apply in EB-5 transactions depending on how they are structured. Generally, there are two types of situations in which investment advice may be involved in the EB-5 context.

Generally speaking, if a person is receiving special compensation for providing investment advice, the person likely is an investment adviser and must register with the SEC (or applicable state securities authority) unless an exemption is available.

First, a potential investor may engage an adviser to locate and select an appropriate EB-5 investment opportunity. The Advisers Act does provide certain limited exceptions from the definition of investment adviser in this context. For example, there is an exception for brokers who give investment advice incidental to their brokerage activity so long as they are not receiving special compensation for such incidental advice. If a person is being compensated for finding EB-5 opportunities for investors, and such person is not a securities broker, that exemption will not be available. There is also a similar exception for attorneys, accountants and professors—so long as the investment advice provided is incidental to their profession.

If a fund sponsor discusses the advantages and disadvantages of investing in the fund for a particular investor in light of their individual investment objectives, and is compensated for their services, the fund sponsor could be deemed to be acting as an investment adviser to that investor.

The second type of situation that may involve investment advice in the EB-5 context is when EB-5 investors invest through a pooled investment vehicle—commonly referred to as a fund—which then makes and holds investments in the underlying EB-5 project company. The operator of the fund—typically a manager of a limited liability company or a general partner of a limited partnership—may be deemed to be providing investment advice to the fund regarding its investments in the underlying project company. Note, although the fund is technically the advisory client under the Advisers Act, the antifraud provisions of the Advisers Act extend to the fund’s investors. Also, if a fund sponsor discusses the advantages and disadvantages of investing in the fund for a particular investor in light of their individual investment objectives, the fund sponsor could be deemed to be acting as an investment adviser to that investor. Of course, even where there is investment advice being provided, there must be compensation for a person to fall within the definition of investment adviser. Compensation is broadly defined and interpreted to include any direct or indirect economic benefit, whether in the form of an advisory fee or some other fee relating to the total services rendered, a commission, some business benefit of value to the adviser, or some combination thereof. Even if payment solely covers the cost of services rendered, the compensation element may be satisfied.

Registering as an Investment Adviser

If a person is deemed to be an investment adviser, registration will be required with either the SEC or the person’s home state unless an exemption from registration is available. Jurisdiction over adviser regulation is generally divided among the SEC and the states based on a variety of managed asset thresholds. In the fund context, assets are calculated based on the fund’s gross assets plus uncalled capital commitments. Generally, a non-fund adviser with assets under $25M is regulated by state regulators. Between $25M-$100M, jurisdiction generally is left to the state if the state requires the adviser to register and be subject to examination; otherwise, the adviser would be subject to SEC registration unless exempt. Over $100M, jurisdiction generally is left to the SEC unless the adviser is exempt from SEC registration, in which case the adviser would be subject to state registration, unless exempt. Both federal and state regulators have authority to regulate for anti-fraud purposes.

To register with the SEC, the adviser generally must electronically file an application on Form ADV, which must be updated annually and upon material changes. For SEC registrations, the adviser must develop, adopt and implement an Advisers Act compliance program upon the effectiveness of the adviser’s registration. This program generally consists of

  • Designating a chief compliance officer who is knowledgeable of and experienced in the Advisers Act,
  • Adopting written compliance policies and procedures designed to prevent and detect violations of the Advisers Act that are tailored to the adviser’s business, and
  • Adopting a code of ethics that must state the adviser’s business conduct standards and must address personal securities trading by employees with access to client information.

The adviser also must maintain the books and records required by section 204(a) and rule 204-2 of the Advisers Act, subject to both periodic and special examination by the SEC (which may be on an announced or unannounced basis). The adviser is also restricted from:

  • Receiving performance based compensation from anyone who is not a “qualified client” (generally defined as an investor (a) who has at least $1M in assets under management with the adviser, (b) with a net worth or net assets in excess of $2M or (c) is a “qualified purchaser,” (as defined in the Investment Company Act of 1940, as amended)), and
  • Entering into certain cash solicitation arrangements with third parties who find advisory clients.


As for exemptions from SEC registration, generally the only exemption that applies in the EB-5 fund context is the so-called “Private Fund Adviser” exemption under Advisers Act section 203(m), which is available for advisers who solely advise private funds if the adviser has aggregate assets under management of less than $150M. A private fund is defined as a fund qualifying for an exception from registration as an “investment company” under either section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940, as amended. If an EB-5 fund relies on Investment Company Act section 3(c)(5), but does not qualify for section 3(c)(1) or 3(c)(7), the Private Fund Adviser exemption is not available. Private Fund Advisers are still subject to SEC reporting and other compliance requirements.

Of course, this is just a summary of certain material provisions of the Advisers Act. Advisers to EB-5 investors and EB-5 fund sponsors should consult legal counsel to discuss the application of the Advisers Act to their particular transaction structures and business.

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