In House EB-5 Broker/Dealers? Not Sure I Get It

EB-5 Investments fall under, we know, U.S. Securities laws...but I have a partial, academic disagreement with that concept as a blanket statement.   After all, the Howey Test requires there to be an expectation of financial gain to meet the accepted definition of "security".  So whenever I am approached by a prospective AVS EB5 investor and I explain that our deal uses a 5 year loan model, that they'll get a miserly 1% annual return, and that, at the end of the day, when they hopefully are U.S. Permanent Residents and get their $500,000 investment back, they KNOW from the first conversation that investing in AVS EB5 will represent a NET LOSS to their bank account, since the various fees and costs inherent in undertaking an EB-5 visa will no doubt EXCEED that $25,000 in interest they'll be getting.  The point: if an investor knows IN ADVANCE that they will be LOSING money in undertaking an EB-5 investment, that they will NOT be making a profit...how can it be a "security" under the Howey Test?

The answer doesn't matter, and even if I am "academically" right, the fact of the matter is with so many EB-5 scams out there, SEC pro-active involvement in EB-5 is in the public interest, and so we meticulously build securities compliance into our platform...even if my investor is acutely aware that, green card objectives aside, this will be one of the least intelligent FINANCIAL "investments" of their life since I am promising them they will LOSE money!

As terrified as I am of an SEC audit (or, for that matter, an IRS audit, or of my wife chastising me for totally messing up the order in the spice drawer of the pantry, etc.), I welcome all policing of the EB-5 program, from both the USCIS and the SEC.   After all, we can't seem to get it together enough as an industry to even acknowledge obvious abuses like TEA "gerrymandering" and The Myth of Tenant Occupancy New Job Creation...if WE won't watch ourselves, the feds have to; the millions spent by the leading EB-5 Regional Centers to prevent the reform our industry needs says it all. 

When viewed through the lens of historical jurisprudence, where laws are distilled and clarified over many decades, EB-5 is still very much a baby...and ALL of us - even the federal agencies -- are still sorting things out.  The EB-5 became law in 1990; after two and a half decades of court decisions, policy memorandum, and (often reeeeealllly boring) teleconferences,  we have a loosely regulated but powerful tool for bringing foreign direct investment (FDI) into the U.S.   Based on the documented abuses which have tarnished this great tool's reputation, the SEC specifically said in early 2016 that it would be watching EB-5 carefully.   Moreover, FINRA is cracking down harder than ever on the very financial institutions via which our investors fund their EB-5s: according to a report by law firm Sutherland, Asbill, & Brennan LLP, the overall sanctions imposed by FINRA increased significantly in 2015 due to $96 million of restitution; the 2015 restitution amount was a record for FINRA and an increase of 200% from the $32 million ordered in 2014. 

When you are raising funds exclusively for - humblebragging - the Forbes 400 group you've been lucky enough to work with for many years, securities compliance is handled by a veritable army of extremely expensive law firms which don't just cross my T's and dot my i's but who delete/redact/replace/approve every pixel on the page to insure that we are bulletproof in our compliance.  Other small Regional Centers are no so lucky and have to hire outside experts.   But the big EB-5 boys -- the same ones who spent all that money to buy one more year of the status quo -- would appear to have found a better solution.  They brought in In House EB-5 Regional Center Broker/Dealers, and when I first saw that, my reaction was the same as it is to all bright, shiny objects:  "I wish I could afford one of those...."

But then I thought about it carefully:  compliance is one thing.  An in-house broker presence is something altogether different...it is a sales tool...and that's just fine!  You see, whether you are big or little or medium USCIS-approved EB-5 Regional Center, the establishment of a reliable and sound plan ensuring consistent compliance is really neither that expensive nor complex.  It just means you have hire qualified securities counsel to define the rules and then you have to play by them.  Like by not broadcasting online ads in the U.S.  Or paying commissions to attorneys or unlicensed brokers.

It means getting EB-5 investors ONE AT A TIME...and that isn't quite as easy, is it?

So then, my question: if ANY EB-5 Regional Center can establish a securities compliance plan and stick with it...why do you need to bring in an In-house broker/dealer?  The answer is to create confidence in prospective investors by showing that your Regional Center is SOOOOO compliant that it has it's very own B/D!  Except that these B/Ds aren't the same folks who define the compliance plan...only one or two in the EB-5 sector are even attorneys.  So my conclusion is that while it is WAY cool to have an in-house RC B/D, it is more about appearance and marketing than it is about "compliance".

Mind you: there are both excellent Regional Centers with GREAT in-house B/Ds and lousy ones with less compelling in-house B/Ds.   There are some Regional Centers which didn't go "in-house" but specifically partnered with existing brokerage firms, equally efficient from an appearance/marketing point of view.  But my point is this: Regional Center securities compliance plans have ZERO to do with whether or not they have brought a B/D in house.   Sharp EB-5 prospects should neither be seduced by the presence of a broker/dealer in a given EB-5 Regional Center, nor discouraged by the absence of one at a smaller Regional Center.

I will leave you with a final question to ponder:

How many of you out there have ever seen a SINGLE EB-5 investor referred to an EB-5 project via the ONLY person with which the EB-5 registered broker/dealer can lawfully split fees (i.e., ANOTHER registered broker/dealer)?

Me neither... and that's why I'm not sure I get it.