FINRA’s Disclosure Requirements In EB-5 Offerings

FINRA Rule 2040 became effective late last month and has the potential to provide increased transparency in EB-5 Offerings. Rule 2040 requires broker-dealers who sell securities in EB-5 offerings to disclose finder’s fees paid to non-registered foreign persons and receive written acknowledgement from the investors that such fees were disclosed to them. FINRA Rule 2040 also limits the circumstances under which a foreign person may be paid a finder’s fee.

FINRA only permits broker-dealers to pay transaction based compensation to non-registered foreign finder if  the finders’ activity is limited to an initial referral, and the broker-dealer complies with the following requirements:

1. the broker-dealers has assured itself that the finder who will receive the compensation is not required to register in the U.S. as a broker-dealer nor is subject to a disqualification as defined in Article III, Section 4 of FINRA’s By-Laws, and has further assured itself that the compensation arrangement does not violate applicable foreign law;
2. the finder is non U.S. citizen or foreign entity domiciled outside the U.S.;
3. the investors are non U.S. citizens or foreign entities domiciled abroad transacting business in either foreign or U.S. securities;
4. investors are given a disclosures, similar to those required by Rule 206(4)-3(b) of the Investment Advisers Act of 1940, that disclose what compensation is paid to finders;
5. investors provide written acknowledgment to the broker-dealers of the existence of the finder’s fee agreement and the acknowledgment is retained by the broker-dealer and made available for inspection by FINRA;
6. records reflecting payments made to finders are maintained on the broker-dealer’s books, and written agreements between the broker-dealers and the finder are available for inspection by FINRA; and
7. the confirmation of each investment indicates that a finders fee is being paid pursuant to the written agreement between the finder and the broker-dealer.

It is not unusual for a company conducting an EB-5 offering to be approached by a Finder who offers to locate investors in exchange for a success fee. Most finders are not registered as broker-dealers with the SEC or FINRA. The possibility of receiving capital, even through the efforts of a Finder creates a tempting opportunity for issuers in need of capital. Matching companies with investors can be a lucrative proposition for the Finder. While it may seem harmless, the SEC does not think so and in fact, the SEC frequently brings cases against unregistered Finders and those who aid and abet them.In order to comply with the anti-fraud provisions of the securities laws, the issuer must disclose to investors all compensation paid to Finders. FINRA broker-dealers should make every effort to comply with Rule 2040 to avoid enforcement actions and claims by investors.

For further information about Finders, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real South, Suite 202 North, Boca Raton, FL, (561) 416-8956, or by email at [email protected].  This information is provided as a general or informational service to clients and friends of Hamilton & Associates Law Group, P.A. and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Going Public Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com