Ten Things Foreign Migration Agents Need to Know About Broker-Dealers
By John Tishler and Lili Wang
Foreign migration agents play a critical role in most EB-5 offerings. They are a trusted resource for their clients, who in many cases rely on their agents to identify and recommend EB-5 investments. For issuers of EB-5 securities, foreign migration agents are an important source of investor leads.
More and more EB-5 projects are engaging broker-dealers in connection with their offers and sales of EB-5 investment opportunities. The primary driver for this trend has been investigation by the U.S. Securities and Exchange Commission (SEC) of a number of EB-5 market participants for possible violations of U.S. broker-dealer laws. Bloomberg Business reported in February 2015 that the SEC is close to bringing enforcement actions against as many as two dozen immigration attorneys accused of engaging in activities that require registration as a broker-dealer. The SEC has also issued subpoenas to various regional centers and other issuers of EB-5 securities that retained and compensated non-registered introducers of investors. Another driver is the increasing number of broker-dealer firms that are marketing their services directly to the EB-5 community.
Here are ten things foreign migration agents and others who locate EB-5 investors outside the United States need to know about the United States laws governing the registration of broker-dealers and the increasing participation of broker-dealers in the EB-5 marketplace.
1. Success-based payment for transactions in securities is the primary trigger for broker-dealer registration.
The Securities Exchange Act of 1934 (Exchange Act) defines a “broker” as “any person engaged in the business of effecting transactions in securities for the account of others.” Brokers (and dealers, a separately defined term) are required to register with the SEC and the states in which they conduct business. Once registered, they are required to become members of the Financial Industry Regulatory Authority (FINRA). As registered broker-dealers and FINRA members, broker-dealers are subject to extensive regulatory requirements and oversight.
The SEC evaluates a number of factors in considering whether activities related to investments require registration as a broker-dealer. In the joint stakeholder phone call with USCIS held on April 3, 2013, a representative from the SEC’s Division of Trading and Markets indicated that receipt of compensation for success in effecting transactions in securities, which the SEC calls transaction-based compensation, “in all likelihood . . . would trigger broker-dealer registration.” The SEC takes this position in all investment markets and makes no exception for the EB-5 market.
2. The SEC does not apply broker-dealer registration laws to persons conducting activities entirely outside the United States.
The SEC uses a territorial approach in applying broker-dealer registration requirements. Under this approach, all persons physically operating within the United States that elicit, induce, or attempt to induce any securities transactions are required to register as broker-dealers, even if these activities are directed only to foreign investors outside the United States. Conversely, U.S. citizens and companies are not required to register as broker-dealers in the U.S. if they conduct their activities with respect to securities transaction entirely outside the United States.
3. Foreign migration agents who conduct business while physically present in the United States may be subject to broker-dealer registration requirements, and the SEC has not clarified what activities trigger the registration requirement.
No definitive pronouncement from the SEC has explained exactly which activities performed by foreign migration agents while physically present in the U.S. would trigger broker-dealer registration requirements. However, during the April 2013 stakeholder call referenced above, the same SEC staff member stated that if a person is physically in the United States and performs any activity in furtherance of a securities transaction, “regardless of what activity, regardless of whether it involves foreign investors . . ., that’s within the territory, and therefore the registration hook is there.” He made this comment in response to a question as to whether solicitation of regional centers and developers by foreign migration agents while inside the United States would require broker-dealer registration, assuming all of the soliciting activities for investors were conducted outside the United States.
Some securities attorneys believe that foreign migration agents may accompany potential investors and/or persons who have already invested on trips to visit project sites in the U.S. for due diligence purposes. Some foreign migration agents are affiliated with companies that have offices in the United States that assist their clients with moving to and establishing themselves in the United States. These “landing services” may be provided to both EB-5 and non-EB-5 visa holders. These affiliate offices may also formally or informally assist personnel from the foreign migration agency in their relationships with EB-5 issuers and intermediaries in the United States.
The SEC has not provided any formal guidance indicating which of these activities, all of which involve some physical presence in the United States, would or would not trigger a broker-dealer registration requirement.
It is important to note that the application of broker-dealer registration laws to foreign migration agents will not be affected one way or the other by the EB-5 project having retained a broker-dealer.
4. EB-5 investors may be at risk if the regional center or EB-5 project pays commissions to a person that is required to be registered as a broker-dealer but is not.
Regional centers or project sponsors that employ and compensate non-registered broker-dealers may be subject to SEC enforcement actions.
For example, in March 2013, hedge fund Ranieri Partners settled charges brought by the SEC that it violated the Exchange Act in connection with employing and paying a non-registered “finder.” The penalties the SEC might impose could jeopardize the financial viability of a project and undermine investor and public confidence in the project.
Also, investors recruited by a non-registered broker-dealer may have a right to rescind their investments under U.S. federal or state law. Rescission means the ability to require the issuer to reverse the transaction that is declared to be illegal. If rescission is obtained against the issuer of the securities, the issuer would be required to return the full investment amount to the investor, which likely includes the administrative fee, and the investor would then cease to hold its investment interest in the new commercial enterprise.
It is important to note that the law is not clear on the extent of rescission or damages remedies available against issuers whose sole securities law violation is retention of a non-registered broker-dealer. However, it is clear that should any one investor try to exercise rescission and demand return of his or her investment, the legal costs of defense, settlements and/or judgments against the issuer or the sponsor could jeopardize the financial viability of the project for all investors.
Moreover, if a court were to determine that investors in a project do have the legal right to return of their investments because of use of a non-registered broker-dealer, USCIS could conclude that the investments of all investors in that project are not “at risk” as required under USCIS adjudication policy and therefore deny I-526 or I-829 petitions for all investors. Note that USCIS has not spoken to what’s its adjudication policy would be in this case.
5. A foreign migration agent may be at financial risk for rescission or damages if its activities in the United States are deemed to have triggered a registration requirement.
The rescission remedy described above may be available to investors under United States law against foreign migration agents that are found to have engaged in activities in the United States requiring registration as a broker-dealer. That may mean that the investor could seek return of all compensation paid to the foreign migration agent by the investor, including compensation paid directly by the investor to the agent and compensation paid indirectly through use of the administrative fee. It may also mean that the foreign migration agent could be found responsible for return of the investor’s entire investment.
It is important to note that the law is not clear on the extent of rescission or damages remedies available against non-registered broker-dealers. It is also not clear whether such remedies would be available in a foreign court or whether an investor who obtains a judgment from a court in the United States could enforce that judgment in the country where the agent has assets to pay the claim.
As is the case with potential liability to EB-5 issuers, the power of these remedies and the uncertainty of their application create significant risk for foreign migration agents who may run afoul of United States broker-dealer laws.
6. Hiring a broker-dealer does not immunize the issuer against broker-dealer violations for also hiring non-registered investment finders.
Many projects that engage a registered broker-dealer also directly engage and/or compensate other non-registered persons to introduce investors. When the issuer engages and compensates other non-registered investment finders directly, the issuer’s relationship with the broker-dealer does nothing to protect either the issuer or such finders from penalties or consequences associated with lack of broker-dealer registration if such registration was required.
For example, imagine that a hypothetical regional center, “Big State RC”, hires a broker-dealer, “EZ Capital,” for an EB-5 project offering. EZ Capital does not actually introduce any investors. Big State RC instead receives referrals to investors from U.S. immigration attorneys and foreign migration agents hired directly by Big State RC. If the activities of the U.S. immigration attorneys (for example, receiving transaction-based compensation) or the foreign migration agents (for example, conducting offering activities while physically present in the United States) are found to have required broker-dealer registration, then Big State RC’s retention of EZ Capital for other services (or even for introducing other investors) will have no effect on the violations of law associated with also retaining non-registered persons to conduct activities requiring registration.
7. Registered broker-dealers are required to perform due diligence on their projects and make suitability determinations for investments they recommend. They are unique under U.S. law for having these obligations.
EB-5 offerings are private placements under U.S. securities laws, and FINRA requires broker-dealers to conduct a reasonable investigation of the issuer and the securities with respect to any private placement they recommend. FINRA rules also require broker-dealers to make suitability determinations with respect to investments they recommend. These suitability determinations include having a reasonable basis to conclude the investment is suitable for at least some investors and also having a reasonable basis to conclude that the investment is suitable for any particular investor to whom the broker-dealer has given a recommendation with respect to the security. FINRA has interpreted the suitability requirements in the EB-5 context to require an evaluation of both investment quality and immigration program compliance.
Other EB-5 professionals, including securities attorneys, are not subject to any similar due diligence or suitability requirements. Accordingly, the presence of a broker-dealer on a project provides validation that someone has performed some level of due diligence with a view towards assessing the suitability of the project for at least some investors.
To be clear, many projects not represented by broker-dealers have been subject to due diligence by the regional center, by a new commercial enterprise that is independent of the job creating entity, by a securities attorney that included due diligence its scope of work and/or by an outside due diligence firm. Such due diligence may be more extensive than the due diligence performed by a broker-dealer. However, none of those other market participants are required by law to perform due diligence on an EB-5 project.
The broker-dealer’s role in an offering may also cause the broker-dealer to become liable to investors for repeating misleading statements or omissions that originated with the issuer of the EB-5 securities. Accordingly, broker-dealers will normally carefully review the issuer’s offering materials, often with the assistance of their own securities lawyers.
8. Broker-dealers may collaborate with foreign finders and migration agents but are subject to restrictions in their ability to pay them transaction-based compensation.
FINRA permits its members (that is, registered broker-dealers) to pay transaction-based compensation to “foreign associates,” and in certain cases, “foreign finders.”
Foreign associates are persons who are FINRA-registered representatives. They can become FINRA members without taking the normally-required exams so long as they are not citizens, nationals or residents of the United States or any of its territories or possessions, they conduct all of their securities activities in areas outside the jurisdiction of the United States, and they will not engage in any securities activities with or for any citizen, national or resident of the United States. Because they are FINRA members, foreign associates are subject to FINRA rules and the broker-dealers who employ them must supervise them.
Foreign finders are persons who are not registered with FINRA. Current rules applicable to broker-dealers permit broker-dealers to pay transaction-based compensation to foreign finders if they meet the following requirements:
- the broker-dealer has assured itself that the finder is not required to register in the U.S. as a broker/dealer and is not subject to FINRA disqualification;
- the broker-dealer has assured itself that the compensation arrangement does not violate applicable foreign law;
- the finders are foreign nationals (not U.S. citizens);
- the customers are foreign nationals (not U.S. citizens);
- customers receive a descriptive document that discloses what compensation is being paid to finders;
- customers provide written acknowledgment to the broker-dealer of the existence of the compensation arrangement and retain such acknowledgment for inspection by regulators;
- the broker-dealer keeps appropriate records concerning its arrangements with foreign finders; and
- the confirmation of each transaction indicates that a referral or finder’s fee is being paid pursuant to an agreement.
Foreign migration agents paid by broker-dealers (as opposed to by their issuer-clients) are typically classified as foreign finders. As noted above, a broker-dealer must assure itself that the compensation arrangement with a foreign finder does not violate foreign law. Chinese migration agents are under the supervision of the applicable provincial Exit-Entry Bureau, and, in certain regions, are not permitted to publically market and solicit for investors without the proper licenses. It is the responsibility of the broker-dealer to ensure that foreign finders it pays are properly licensed.
Broker-dealers may also compensate foreign migration agents for certain services they provide that are unrelated to transactions in securities, such as services related to obtaining a visa and any required processes in the investor’s home country. Care is required in designing these arrangements so as to avoid FINRA concluding that the compensation was actually for transactions in securities.
9. FINRA is a membership organization and its rules apply only to registered broker-dealers. FINRA’s rules applicable to compensation paid by broker-dealers to foreign migration agents do not apply to EB-5 issuers that are not broker-dealers, even if such issuers have retained broker-dealers.
Broker-dealers registered with the SEC are required to become FINRA members and therefore subject to FINRA’s rules and enforcement procedures. FINRA generally has no authority over issuers of securities that are not themselves broker-dealers. Issuers of EB-5 securities are not directly subject to FINRA rules even if they retain a broker-dealer in connection with the sale of EB-5 securities.
Accordingly, the rules summarized in #8 above do not apply to issuers that retain and compensate foreign migration agents directly as finders. In those cases, a broker-dealer may wish to confirm the legality of the issuer’s arrangement with the foreign migration agent in connection with its general due diligence, but under current FINRA rules and public interpretations, the foreign finder compensation rules that apply to broker-dealers have no application to issuers that pay compensation directly to finders employed outside the broker-dealer relationship.
Nonetheless, as noted in the discussion earlier in this article, receipt of transaction-based compensation by foreign migration agents who themselves should have been registered as broker-dealers creates significant risk for the issuer that pays the compensation, the investors in the project and the foreign migration agents that were required to be registered.
10. Foreign migration agents may check the disciplinary history of broker-dealers online.
FINRA maintains a website where it posts the registration status and disciplinary history of all U.S. broker-dealers and registered representatives that work for broker-dealers. Foreign migration agents and their clients may use this site to confirm the registration status of broker-dealers on a project and determine if they have disciplinary history.
Foreign migration agents may also use this resource to find out if anyone associated with a project has a disciplinary history with FINRA.
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Broker-dealers will likely play an increasingly important role in EB-5 offerings. Broker-dealers can add significant value by bringing professional and regulated investment experience to an EB-5 offering. By becoming familiar with United States broker-dealer registration requirements and what broker-dealers do and do not do for an EB-5 offering, foreign migration agents can enhance their own value to their clients considering EB-5 investments as a means of emigrating to the United States and minimize the risks to their investors and themselves.
 The current address for this site is: http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/.