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EB5Private offerings are a fantastic way to raise capital without having to officially register with the SEC.  The Regulation D exemption under the Securities and Exchange Act of 1933 makes private placement offerings possible.  According to the rules companies should raise money from accredited investors. These investors are thought to b e more savvy and financially able to withstand a loss if the investment doesn’t work out.

The SEC defines an Accredited Investor as someone who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of their primary residence and makes over $200,000 for the two most recent years, or $300,000 with a spouse.

The rules change when taking investment from overseas.  A U.S. based company may accept investment from non accredited investors that live outside of the United States.  This can be done through the EB-5 program.  This program allows investors outside of the United States to invest in local companies and use that investment to qualify for a visa to come to the U.S.  Some programs require a minimum investment of $500,000 while others require a minimum investment of $1 million.  The EB-5 program creates an opportunity for investors outside of the U.S. to connect with businesses that need capital.

This program has been frequently used for real estate projects but is specifically tied to direct and indirect job creation.  The investment needs to make or retain jobs in an effort to improve the local economy.  The United States Citizenship and Immigration administers the program and investment opportunities need to be approved for the investment to count toward the visa approval guidelines.

Why is the SEC more lax on foreign investors?

One has to ask why the SEC has more relaxed rules for investors that live outside of the United States.  Within the U.S. non accredited investors have been blocked from participating in investment opportunities due to their lack of income or net worth.  If those same people lived overseas they could invest in a non public offering through the EB-5 program without income or asset requirements.

When the JOBS Act passed it was supposed to open up investment opportunities to non accredited investors through crowdfunding platforms.  The SEC has released their proposed guidelines but, when passed, they will still greatly limit the amount of money a non accredited investor may invest on an annual basis.  Investors may only invest $2,000 or 5% of their income on an annual basis, unless they are accredited. Compare that with investors outside of the U.S. being able to invest $500,000 to $1 million.

Many foreign investors have lost their money in these EB-5 projects as they are loosely regulated and some projects never even get off the ground. Investors, locally and internationally, should always do their due diligence prior to investing.  Accredited Investors are perceived to have more knowledge an experience but much of this knowledge comes through making mistakes.  You can always check with the SEC to see if a company has registered their private offering using the Edgar system or if their are any complaints file against them.  That is a good, and easy way, to start the due diligence process.

This next year will be very interesting as the SEC finalizes their crowdfunding rules and non accredited investors are able to participate in a wide variety of offerings.  Even after this takes place it is beneficial to be an Accredited Investor, as you can invest without a cap in your favorite deals.

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