If you read our previous blog series on exempt offerings (available here) or attended one of our presentations on raising capital through exempt offerings, you know that the definition of “security” under federal law is extremely broad and includes, among other things, “any note, stock, . . . , certificate of interest or participation in any profit-sharing agreement . . . , or in general, any instrument commonly known as a “security”. . . .” Interests in certain business entities, such as limited liability companies and limited partnerships, are likely to be securities, so if you have a fractional interest in a piece of real property owned by such entities, for example, chances are that it is a security subject to regulation as security (among other laws).
While anyone can fall victim to a real estate securities fraud, it seems to target immigrant investors with increasing visibility these days. The SEC has long warned of fraudulent securities offerings involving new commercial enterprises, which exploit immigrant investor program. Some have reasoned that, perhaps in some of these immigrant programs, the management team was so focused on complying with immigration law they forgot to comply with securities law. However, even negligent non-compliance with securities law can give rise to liability.
In SEC v. Path America, LLC, the SEC alleged that the defendants fraudulently raised at least $125 million through their sales of securities to 250 investors and collected at least $11 million in additional fees from foreign nationals seeking residency in the United States. According to the SEC, the defendants solicited the investments predominantly from Chinese citizens, claiming that the investments would qualify under the EB-5 program administered by United States Citizenship and Immigration Services (“USCIS”), which provides that foreign nationals may qualify for United States residency if they make a qualified investment of $500,000 or more in a specified project that is determined to have created or preserved at least ten (10) jobs for United States workers. The SEC claims that the defendants’ fraud is ongoing and requested the court to enter an order enjoining the defendants from soliciting anyone to purchase or sell any security and freezing the assets of the defendants, among other things.
This will be a two-part blog series on real estate securities fraud in connection with the EB-5 program. We will look at the details of the SEC’s allegations in our next post.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C., which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258; firstname.lastname@example.org, or www.mcbrideattorneys.com.
 15 U.S.C. § 78c(a)(10).
 SEC, Investor Alert: Investment Scams Exploit Immigration Investor Program (Oct. 9, 2014), http://www.sec.gov/investor/alerts/ia_immigrant.htm.
 Complaint at 2, SEC v. Path America, LLC, Civil Action No. 2:15-cv-01350 JRL (W.D. Wash. Aug. 24, 2015).
 Id. at 11–17.