SEC Investigation Targets EB-5 Lawyers for Taking Finder Fees

 

A February 13, 2015 article by Bloomberg News noted that “[t]he SEC is preparing sanctions against as many as two dozen immigration lawyers … for collecting deal fees from foreign investors trying to access the EB-5 visa. The lawyers were prohibited from earning transaction fees because they weren’t registered as brokers.”

“Deal fees” or “finder fees” are common in industries, such as EB-5, that raise capital privately. If a project developer wants to raise money without the large time and expense of a public offering, the developer can still raise funds “privately.” As the name suggests, a “private” capital raise must avoid “general solicitation” (advertising or otherwise initiating contact with investors) in the U.S., and therefore it must rely on on broker-dealers or “finders” to locate investors. The broker-dealer typically receives a fee from the business raising the money if it succeeds in placing an investor in the project.  This is all perfectly lawful; but if the finder is operating in the U.S., the finder must be licensed by the U.S. Securities and Exchange Commission (SEC) and operate under the watchful eye of the Financial Industry Regulatory Association (FINRA) to conduct any work resulting in “transaction-based compensation” (“deal fees,” “finder fees,” “referral fees,” “success fees,” etc.). The problem with the lawyers under investigation is that none of them were registered with the SEC or FINRA and therefore their activity was unlawful.

The SEC is plainly loathe to allow anyone to receive fees from an issuer if they’re not registered because the SEC staff understands all too well that there will be great temptations for the unregistered broker to give advice in the finder’s interest rather than in the client’s interest. Licensed brokers, on the other hand, are obligated to act in the customer’s interests under a very strict multiple-tier regime of oversight and compliance by the SEC, state securities administrators, and FINRA to ensure that the broker is competent, diligent and acting in the best interests of the investor (for more specific details about what’s required, see my article at http://www.eb5fullservice.com/about-the-eb-5-visa/sec-compliance/).

When I entered the EB-5 arena in early 2008 there was still some debate as to whether an immigration attorney could receive a finder fee as a result a client’s investment in an EB-5 project. Top attorneys in the EB-5 arena would often warn fellow EB-5 attorneys not to take such fees because their bar association might prohibit it, and because they might face litigation down the road from clients disappointed in the investment the lawyer recommended. However, at this time, 2008, virtually no one in the industry was aware of the securities law implications of taking a finder’s fee. This changed in late 2009 when a very influential article achieved wide circulation in the EB-5 community warning regional centers and EB-5 attorneys that partnership interests in an EB-5 investment are securities, and this imposes certain strict prohibitions on anyone engaged in selling the security.[1] The authors argued that regional center should not be paying finder fees to any unlicensed brokers, including lawyers, unless the broker was registered as a representative of a broker-dealer. Most regional centers were paying finder fees at this time, and most lawyers were taking them (I did not). At that time, there was perhaps some “wiggle room” in securities law based on the so-called Paul Anka No Action letter and subsequent No Action letters wherein securities attorneys believe they could see a “finder exception” to the SEC registration requirement. However, it has become abundantly clear during the last three years that the SEC is very interested in EB-5 and that it regards the receipt of a finder’s fee or other kind of referral, commission or consultant fee – call it what you like – as sufficient standing virtually alone to implicate broker activity under the Securities Exchange Act of 1934, and to compel registration.

I realized in 2010 if I wanted to accept finder fees to support the research for my new business, EB-5 Analytics, I had to become registered with the the SEC. So, I first had to find a broker-dealer firm that would sponsor me for the Series 7 exam in the uncharted area of the EB-5 visa (a process that took months). Then I took the six-hour Series 7 and then the Series 63 exam, and passed them, becoming the first immigration attorney, and first EB-5 project selection advisor of any kind, to become licensed with the SEC. Most lawyers apparently did not want to go through this ordeal (I know of only one other attorney in the EB-5 industry who is licensed to accept finder fees). They did want the money, though.

I published many articles on my blog and in scholarly EB-5 books since 2011 and spoken at many industry events about the danger of accepting finder fees if a lawyer is not registered with the SEC. My colleagues publicly seemed to agree. But in private they would indulge in rationalizations that should have made them blush: “I’m too small for the SEC to bother to investigate me”; “my contract with the regional centers says I am receiving a ‘consultation’ fee, not a finder fee” (as though the SEC cares only about form and not about substance); “I am receiving the funds overseas and that puts it out of the SEC’s jurisdiction” (hmmm, so if Bernie Madoff had received all his fees to overseas bank accounts, he’d still be sipping Mai Tais in West Palm Beach now).

Since 2010 the American Immigration Lawyers Association and ILW.COM (and, in particular, the attorneys Lincoln Stone and Robert Juceum, and the web publisher Sam Udani) have done a superb job of including extensive participation by securities lawyers in all EB-5 conferences and online webinars. These securities attorneys have argued in an increasingly uniform voice that it is illegal for an unregistered broker to accept anything resembling a finder fee for directing a client to an EB-5 investment. The regional centers increasingly took heed, with only maybe a dozen or so continuing to risk paying lawyers finder’s fees. Too many lawyers’ however, remained in denial, with as many as half continuing to accept finder fees despite all the risks and all the warnings.

I also ran into some attorneys, often those practicing within a coterie of ethnic attorneys who relied on each other for information rather than EB-5 conferences and publications, who had no idea that accepting finder fees was illegal. Such attorneys were rare, however.

I thought that I and other attorneys were making good progress convincing EB-5 attorneys to give up the finder fees until 2013 when I heard from two regional centers and one fellow attorney that roughly half of EB-5 attorneys were still accepting finder fees from the regional centers to whom they referred clients.

This phenomenon of fewer and fewer regional centers offering to pay finder fees creates additional problems for the lawyers who continued to accept finder fees because they will be motivated to place their investors in a shrinking subset of investors whereas most investors wish to find the best and safest investments among the whole class of eligible EB-5 investments. Worse still, the lawyer should realize that he is directing his clients to regional centers that are plainly not risk averse since they are willing to accept the very substantial risk of an SEC investigation and resulting penalties that could put the regional center out of business. We can expect such lawyers to face very serious bar association inquiries questioning their fealty to a lawyer’s duty of loyalty to the client.

[1] Jennifer Mercier Moseley, Angelo A. Paparelli, Ladd W. Mark & Carolyn Lee, The Relevance of U.S. Securities Laws to Immigrant Investors, EB-5 Regional Centers and their Advisors, 14 Bender’s Immigr. Bull. 938 (Aug. 1, 2009).

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