• Supreme Court’s Decision on Disgorgement Relevant to EB-5 Litigation
  • July 5, 2017 | Author: Douglas Hauer
  • Law Firm: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. - Boston Office
  • Our colleague Rebecca Zeidel just published a terrific blog posting on the U.S. Supreme Court’s recent decision in Kokesh v. SEC, in which the Court imposed a five-year statute of limitations on agency-sought disgorgement in SEC enforcement actions. This decision resolved a Circuit split and definitively categorized disgorgement as a statutory “penalty” under 28 U.S.C. § 2462. That statute applies a five-year limitations period to any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.”

    This development is relevant in the EB-5 litigation context, where courts often impose disgorgement as one penalty, among others, against issuers in EB-5 transactions who have engaged in activity that rises to the level of securities fraud. But any protection that this decision may offer to issuers or regional centers is likely very limited, as fraud in EB-5 offerings is often uncovered well within five years of an investment.

    With the SEC continuing to prioritize enforcement in the EB-5 context, it’s smart to take a second look at your offering documents now, even if your deal is on the market. Take steps now to mitigate risk of litigation or disgorgement later. Even though the Supreme Court is now imposing a statute of limitations on disgorgement, EB-5 securities litigation is costly and could be initiated well before the five-year window is up. High legal bills can erase the economic benefits of the EB-5 Program for an issuer and/or developer seeking this financing as an alternative to a higher priced construction loan. Costly litigation follows when issuers take deals to market that have insufficient disclosures to investors, or where funds are not used as specified in a business plan and offering document.

    What’s the best way to safeguard your offering from later allegations of securities fraud by either investors or the SEC? For starters, spend the time before you market your deal to ensure that you have offering materials that clearly and sufficiently disclose risks to investors. Ongoing, regular communication with investors is also key. Spending EB-5 funds in your project in line with your business plan and offering materials, and strict compliance with all securities laws as you market your deal, are also critical to mitigating any risk of litigation or disgorgement later.