Online investment platforms and the EB-5 Visa investment community have been abuzz lately following the June 23 announcement by the SEC that is has issued a final order against Ireeco, LLC and Ireeco Limited for acting as unregistered brokers in violation of Section 15(b) of the Securities Exchange Act. The practices by Ireeco, LLC included the establishment of an online portal that assisted foreign investors with selecting EB-5 Regional Centers and investment projects that suited the investor's interests. Ireeco was then paid a fixed amount of the administrative fee typically charged to EB-5 investors by the Regional Center when the investor made his or her investment.
At this point, it is not important to discuss what Ireeco did wrong, and what other investment platforms and Regional Centers are getting wrong. That has been covered by a number of other people. What is important is how Ireeco's actions affect issuers and investors. The flavors of the fallout come in three varieties — rescission, disqualification, and aiding and abetting.
The basic rule applicable here is Section 29(b) of the Securities Exchange Act which provides that any contract made in violation of any provision of the Exchange Act is voidable at the option of the investor. A successful claim by an investor would require the return of funds by the issuer and rescission of the purchase contract. This right extends for three years from the date of issuance of the securities or one year from the date of discovery, whichever is later.
For investors brought in by Ireeco in an EB-5 transaction, this means that any issuers could be liable for the return of the investment capital plus any administrative fees paid by the investors, as these were part of the contract that the investor would have a right to rescind.
One can imagine how investors rescinding the investment agreements could turn into a run on the issuer and Regional Center as investors try to get their money back before the issuer fails to deliver due to lack of capital.
While disqualification is not retroactive to deals that Ireeco participated in, it is worth mentioning that violations of Section 15(b) of the Securities Exchange Act is a Bad Actor triggering event under Rule 506(d) that extends for the life of the cease-and desist order. This means that Ireeco is essentially disqualified from participating in transactions with a Bad Actor disqualification until it satisfies the requirements of the order (i.e., registering as a broker-dealer) and any issuer that partners with Ireeco would itself lose the availability of any exemption that includes a Bad Actor disqualification.
Aiding and Abetting
This one is trickier and would require additional enforcement actions by the SEC. Section 20(e) of the Securities Exchange Act grants the SEC authority to take action against any person who aids and abets violation of federal securities laws. Those parties who are found to have aided and abetted any such violation are themselves considered to have committed the underlying offense.
In the case of Ireeco, it is possible that the Regional Centers that entered into agreements with Ireeco and paid Ireeco fees for finding investors have aided and abetted the violation of Section 15(b) of the Securities Exchange Act. As a result, they themselves could be found to have violated Section 15(b) as well and face the consequences that include disqualification from participation in securities offerings under Rule 506 and other exemptions that disqualify Bad Actors.