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SEC Compliant Escrow Solution must be used when using Registered Broker-Dealers

As everyone in the EB-5 industry knows, the Securities and Exchange Commission (SEC) is continuing to scrutinize offerings of securities to investors under the EB-5 program. As a result, issuers are becoming more likely to work with FINRA registered broker-dealers. When registered broker-dealers are being used in the offering of EB-5 securities, they are bound by the SEC and FINRA rules.

One of the rules that may not be well known in the EB-5 community is SEC Rule 15c2-4. This Rule requires that when escrowing investor funds, a bank (independent of the brokerage firm or the issuer) must be used as the escrow agent. Not all escrow agents being used today in the EB-5 sector are actually banks. In some cases, a licensed third party escrow company or law firm is used to provide the escrow agent services on behalf of the bank where funds are deposited. These escrow agents are licensed by the state in which they operate, but do not have a bank charter. EB-5 escrow solutions that include these types of escrow agents are not compliant with SEC Rule 15c2-4.

NES Financial’s best practices suggest that issuers should always implement an SEC compliant escrow structure, even if they do not initially intend to use a registered broker-dealer in the marketing of their EB-5 securities. It has been our experience working with Regional Centers that as projects progress, circumstances often change. In some cases, issuers are forced to modify their marketing plans to include additional marketing agents and registered broker-dealers. Being SEC compliant from the beginning makes these adjustments far simpler and, as a result, broadens the universe of potential marketers for the project. On the other hand, changing your escrow agent, bank, or escrow terms is very complicated and often expensive after you have gone to market.  It pays to have the right escrow arrangement before you begin your capital raise.

Current and future clients of NES Financial can rest assured that in all cases our solution includes a relationship with a bank that holds the funds and also acts as the escrow agent. Our company’s guiding principles have always been to bring increased security, transparency, and compliance to highly specialized financial transactions.  We accomplish this by leveraging our purpose-built software solutions and partnerships with leading banks.

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