Definition of a Security

Skadden, Arps, Slate, Meagher & Flom LLP

SEC v. Feng, No. 17-56522 (9th Cir. Aug. 23, 2019)

The Ninth Circuit affirmed summary judgment in favor of the U.S. Securities and Exchange Commission (SEC), holding that pooled investments made pursuant to the EB-5 immigration program qualify as “securities” and therefore can give rise to liability under the federal securities laws.

The U.S. Immigrant Investor Program, known more commonly as the EB-5 program, provides legal permanent residency in the United States to foreign nationals who invest in U.S.-based projects. Under this program, qualified immigrants can gain U.S. visas if they make a direct investment of at least $1 million in a new commercial enterprise that creates at least 10 full-time jobs for U.S. workers. Multiple foreign investors are permitted to pool their money in the same enterprise, as long as each investment results in the creation of 10 jobs. Pooled investments are made through “regional centers,” which offer specific projects to investors and manage the pooled investments.

Hui Feng, the defendant, is an immigration lawyer who led approximately 150 clients through the EB-5 process. On December 7, 2015, the SEC filed a civil complaint against Feng and his law firm, alleging that Feng committed fraud and failed to register as a broker-dealer, both in violation of the federal securities laws. The parties cross-moved for summary judgment in the district court, with Feng arguing that the EB-5 investments were not “securities” because the investors had no expectation of profit, and only expected to obtain a green card. The district court held that the EB-5 investments were “securities” and granted summary judgment to the SEC.

On appeal, the Ninth Circuit affirmed. The court explained that the Securities Act defines “security” broadly, enumerating a long list of financial instruments that qualify, including any “investment contract.” An “investment contract,” in turn, is “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” The inquiry is an objective one, and courts are to consider the character of the instrument or transaction based on what the purchasers were led to expect, including what was contained in any promotional materials.

Here, the regional centers’ promotional materials repeatedly referred to the investments as “securities” and specifically stated that the offerings were made pursuant to U.S. securities laws. In addition, the EB-5 transactions were structured as investments in limited partnerships, with the promise of a fixed annual return on the investment, ranging from 0.5% to 5%. Both attributes — investment in a limited partnership and the promise of a fixed rate of return — are classic features of an investment contract. The court also rejected Feng’s argument that the investments should not be considered a “security” because the investors were motivated by the promise of a visa, not profits. While the court did not doubt that obtaining a visa was the investors’ primary motive, their interest in a visa was necessarily tied to the financial success of the regional center’s project. Indeed, only a successful investment that creates 10 full-time jobs can secure a visa for the investor. Moreover, the record showed that many of Feng’s client-investors sought out EB-5 projects with higher rates of return. Thus, the investments were made with an expectation of profit, and qualify as “securities.”

This summary can be found in the November 2019 issue of Inside the Courts.