Expansion of Issuer Liability for Crowdfunding: What Might this Mean for the EB-5 Industry
Section 4A(c) of the Securities Act of 1933 ("The 1933 Act"), 15 USC § 77d-1(c), is part of the new crowdfunding regime. The JOBS Act of 2012, Pub. L. No. 112-106, 126 Stat. 306 (2012), created a liability scheme for issuers and intermediaries in an exempt crowdfunding offering. Because we could see similar statutory schemes created with the next wave of EB-5 change in Congress, EB-5 stakeholders should take note of Section 4(A)(c).
Expansion of issuer liability
Section 4(A)(c) is patterned after Section 12(a)(2) of the Securities Act of 1933. However, there is a significant difference. Under Gustafson v. Alloyd Co., 513 US 561 (1995), Section 12(a)(2) did not apply to private placements. Section 4(A)(c) now provides strong liability provisions similar to 12(a)(2) for certain private transactions exempted by §4(a)(6), 15 USC § 77d(a)(6). Section 4(a)(6) limits the offering to $1 million and has limits on aggregate amounts sold to any given investor.
These liability provisions are broader, sweeping potentially more issuers into the territory of needing to defend against investor claims. Specifically, an investor needs only allege materiality, privity and compliance with the statute of limitations in a suit against an “issuer.” The burden then falls on defendants. Unlike securities fraud claims that require a plaintiff to establish scienter, causation and reliance, it is easier to state a claim under Section 4(A)(c).
How is the term “issuer” defined?
An “issuer” in this section of the law is defined to include “any person who is a director or partner of the issuer, and the principal executive officer or officers, principal financial officer, and controller or principal accounting officer of the issuer (and any person occupying a similar status or performing a similar function) that offers or sells a security in a transaction exempted by the provisions of section 77d(6) of [Section 4A(c)], and any person who offers or sells the security in such offering.” 15 U.S.C. § 77d-1(c)(3). This “Issuer” definition is broader than the definition in the 2005 Release. Federal Securities Law Reporter, Securities Act Release No. 8591, p. 117-118.
What this means for the EB-5 industry
The EB-5 industry should watch developments in crowdfunding closely.
EB-5 offerings generally rely on exemptions from registration under the 1933 Act and are private placements. On the one hand, Gustafson appears to insulate EB-5 issuers in private placements from Section 12(a)(2) liability. On the other hand, expansion of issuer liability in the crowdfunding space could have implications for EB-5 issuers in lawsuits where plaintiffs seek to use Section 4(A)(c) as a blueprint for eviscerating Gustafson.
What’s our EB-5 take-away?
If you are an EB-5 issuer or regional center, there is no better time to tighten up practices on how you prepare and sell a private placement. Don’t rely on static due diligence checklists. Make sure your disclosures are material, clear and fair to investors.
We don’t know how Congress will reform the EB-5 Regional Center Program, but change is on the horizon. Issuer liability will be on the agenda of any efforts to ensure that investors have sound legal protections. Taking the pulse on litigation trends and legislative changes in the related area of crowdfunding can help you stay aware generally of where the EB-5 industry may be headed.
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