Ninth Circuit Affirms Ruling For SEC in EB-5 Case

The EB-5 immigration program was designed to encourage wealthy foreign nationals to immigrate to the U.S. and invest in the country. Under the program a foreign national can secure a green card by investing at least $500,000 to $1 million dollars in the United States in a project that creates a specified number of jobs in this country. Since the program often attracts investments in the construction of buildings, it has become popular in the construction industry –it can be an economical way to secure investment. At the same time, it has also resulted in a series of Commission enforcement actions. Critical issues in those cases typically center on the question of whether the investment is in fact a security and if the promoter acted as an unregistered broker. Each of these questions was addressed and resolved by the Ninth Circuit in favor of the Commission in a recent opinion. SEC v. Feng, No. 1756522 (9th Cir. August 23, 2019).

Mr. Feng conducted an immigration law practice in New York City. Over a six year period, beginning in 2010, he had about 150 clients who participated in the EB-5 program. Most were Chinese nationals. Clients were solicited through a website as well as overseas finders. The clients paid legal fees that ranged from $10,000 to $15,000. The attorney also had marketing agreements with the regional centers that were part of the program. Under those arrangements he sought to place clients in the program in return for a commission. Overall Mr. Feng was paid about $1.2 million.

Clients in the program made their investment under a PPM as well as the immigration laws. In general, the PPM called for the payment of the investment and required the investor to pay an administrative fee that ranged from $30,000 to $50,000. The PPM stated that the fees were for operating and marketing costs. The fees were not part of the investment and did not earn interest.

The Commission filed a complaint alleging violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). In the District Court the parties filed cross-motions for summary judgment. That Court ruled in favor of the Commission concluding, among other things, that the investments were securities and that Mr. Feng had acted as an unregistered broker. The Ninth Circuit affirmed.

First, the Circuit Court concluded that the investments by the EB-5 participants were securities within the meaning of Section 3(a)(10) of the Securities Act because they were investment contracts. While that term is not defined by the statute, the Supreme Court’s seminal decision in SEC v. W. J. Howey Co., 328 U.S. 293 (1946) defines the term as referring to an investment in a common enterprise with the expectation of profits from the efforts of others.

In this action it is undisputed that Mr. Feng’s clients invested money in a common enterprise managed by a third party. Nevertheless, Mr. Feng claims the transactions did not involve a security because the clients did not expect a profit. This occurs when the amount of the investment plus the administrative fee is considered, according to the attorney. The Court found this claim “unpersuasive.”

Here the PPM specifically states that the investments are “securities,” explaining that the offering is made pursuant to the federal securities laws. Indeed, the transactions were structure as limited partnership interests that paid a fixed annual return ranging from 0.5% to 5%. This is sufficient to comply with the expectation of profits for Howey.

The payment of the administrative fee does not change this fact as Mr. Feng claims. Rather, the PPM specifically distinguishes between the investment and the administrative fee. Perhaps more importantly, the documents and the program require that the investment, but not the administrative fee, be at risk as Attorney Feng agrees. Viewed in this context, it is clear that the investment is a security.

This conclusion is not changed by the motivation of the investor as claimed by Mr. Feng. Key to the EB-5 program is a successful at risk investment. Investors are motivated to make this type of investment to comply with the program. Attorney Feng thus marketed his program as one tied to a successful investment.

Second, the Court affirmed the District Court’s conclusion that Mr. Feng violated Section 15(b) of the Exchange Act. In assessing this question, the Court considered the totality of the circumstances surrounding the transaction. In this case, while Mr. Feng was not an employee of the issuer, he sought investors through his website and other means, negotiated with the regional centers regarding the terms of the transaction and was paid transaction based compensation.

While Mr. Feng disputes this conclusion, claiming that he was acting as an attorney and not a broker, in fact the advice he gave was beyond that of what an attorney would render. Rather, it involved the investment and the success of the program. When these facts are viewed in the context of Mr. Feng’s efforts to secure the type of client that would fit the program, its clear that the attorney was acting as an unregistered broker.

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