Recently, the North American Securities Administrators Association (NASAA), which is the oldest international organization devoted to investor protection, published an investor advisory for potential investors in EB-5 projects. In the United States, NASAA is the voice of state securities agencies responsible for efficient capital formation and grass-roots investor protection. Their fundamental mission is protecting consumers who purchase securities or investment advice, and their jurisdiction extends to a wide variety of issuers and intermediaries who offer and sell securities to the public.

EB-5 is now becoming more relevant to NASAA.

The investor alert makes several strong points about red flags that should cause investors to look carefully at a deal before making an investment. One of the classic warning signs in EB-5 deals or really any investment is a promoter minimizing or understating risk. The alert also raises the importance of investors conducting due diligence of a project and its sponsors before committing funds.

Vermont’s Blue Sky and EB-5

While the alert is an interesting read for prospective EB-5 investors and their advisors, NASAA should have taken a closer look at what the state of Vermont is doing to break new ground in EB-5 investor protection. State securities regulators (often termed “blue sky regulators”) are leading the charge and are very involved with the EB-5 Program in Vermont, which is at this time the only state in the country that has its securities agency overseeing directly an EB-5 regional center. Specifically, the Vermont Regional Center, which is state owned and controlled, is now under the direct oversight of the Department of Financial Regulation.

EB-5 projects in Vermont that affiliate with the Vermont Regional Center have obligations that EB-5 issuers in private regional centers would never have such as government regulated quarterly audits and project site visits overseen by state securities officials. The new DFR Commissioner in Vermont, Michael Pieciak, is a Skadden trained attorney with a broad background in securities. Commissioner Pieciak is already involved in helping to steer Vermont’s EB-5 Program into a national model for public/private partnership that can make EB-5 work and protect investors. Vermont is a unique case in EB-5 where state regulators are reviewing private offering documents before they are introduced into the EB-5 marketplace. Such a review provides investors with more confidence in the process of a deal going into the market.

NASAA Matters in EB-5

NASAA’s alert is important reading for investors, as well as EB-5 regional centers and other stakeholders in the EB-5 industry. While most states will not take Vermont’s path and open a regional center, state securities regulators becoming more visible in the EB-5 space is important. States are often a first and last stop for investors who are wronged by predatory Ponzi and pyramid schemes, as well as by promoters who make false promises or statements about the level of risk in a deal. With anti-fraud and integrity measures becoming more important in the EB-5 industry and states paying more attention to EB-5, we expect to see more from NASAA on investor protection in the EB-5 context.