The Securities Exchange Act of 1934 (the “Act”) was passed in the aftermath of the 1929 Wall Street Crash, where many investors discovered they had purchased worthless shares from fraudulent salesmen.

The Act defines a “broker” as “any person engaged in the business of effecting transactions in securities for the account of others.” A “dealer” performs the same function for their own securities. As they have the same requirements whether selling for themselves or others, they are referred to as “broker-dealers”. Learn more about the details here.

EB-5 Regional Centers as Unlicensed Broker-Dealers

With very few and difficult exceptions, regional centers and/or sponsors who sell EB-5 investments more than once in any 12-months are required to register as broker-dealers. We expect 2015 will be the year when the SEC and USCIS take on unlicensed regional centers in the EB-5 industry.

In an attempt to prevent fraudulent or misleading sales, broker-dealers are required to pass licensing exams and register with the Securities and Exchange Commission (SEC) and the states in which they conduct business. The SEC designated Financial Industry Regulatory Authority (FINRA) to manage individuals and firms in the securities business.. As registered broker-dealers and FINRA members, broker-dealers are subject to extensive requirements and oversight.

When EB-5 Regional Centers act as unlicensed broker-dealers, it creates a number of risks to the regional center, the issuer of the securities and its principals, and the EB-5 investors, including:

    1. The required broker-dealer has been central to the sale of the securities, which eliminates the concern that you may be working with an unlicensed broker-dealer,
    2. The offering has been reviewed by the broker-dealer with the high due diligence standards expected by the Financial Industry Regulatory Authority, Inc. (“FINRA”),
    3. FINRA, the SEC-designated authority, is in possession of the offering documents for securities compliance, and
    4. Sales of the offering transpire under the supervision of the broker-dealer, reducing the likelihood for misrepresentation.

How can you tell is an EB-5 Regional Centers is acting as an unlicensed broker-dealer?

All EB-5 investments offered by a licensed broker-dealer must be filed with FINRA under Rule 5123. Simply require a FINRA Rule 5123 Filing Receipt as a required due diligence item before engaging with an EB-5 promoter.