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ILW.COM EB-5 Blog

What’s The Difference Between a Broker-Dealer and a Finder?

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Foreign investors seeking permanent visas have different options available to them to help raise funds to finance EB-5 projects. For example, many investors use agents called broker-dealers or finders to raise capital on behalf of regional centers. Although broker-dealers and finders do generally the same thing - raise money for regional centers or refer investors to potential sources of funding - they are classified differently under the law. It is important for EB-5 project investors to be aware of those differences and of the the legal duties and regulatory frameworks governing these two classes of fundraisers, as failure to do so could put a regional center or EB-5 project in jeopardy.


Brokers


Brokers are defined by the Securities Exchange Act as "any person engaged in the business of effecting transactions in securities for the account of others." In the context of EB-5 projects, a broker is an individual, group or company that brings investors and regional centers together, generally by referring individuals with capital or other monetary and financial resources to regional centers. A broker normally receives a fee or commission for their services. Brokers must be registered with, and are regulated by, the Securities and Exchange Commission. The SEC's registration requirement helps ensure broker activities are properly monitored and discourages shady practices.


Regional centers and individuals affiliated with regional centers can raise money for their own EB-5 projects without registering with the SEC, but a regional center that "hires" a broker to locate sources of additional funding must be sure the broker is registered. If the SEC determines a regional center has employed an unregistered broker, it may impose severe penalties on the broker and the regional center, with serious consequences for both. An unregistered broker may be fined and prohibited from registering in the future, while a regional center may open itself up to lawsuits and criminal prosecution.


Dealers


A dealer is defined by the Securities Exchange Act as "any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise." The main difference between a dealer and a broker, then, is that a dealer works on his or own behalf, while a broker works for a client, such as a regional center or third-party investor. Dealers, generally, must also register with the SEC.


Finders


A finder, much like a broker, refers potential investors to regional centers. However, unlike a broker, a finder is awarded a set fee regardless of how successful the venture is, even if the investor decides not to invest. Finders are not required to register with the SEC; however, if a finder has previously engaged in activities similar to a broker-dealer without registering, their services may come under additional scrutiny. For that reason, investors in an EB-5 project would be well-advised to carefully screen the background of a potential finder and draft contracts with indemnification clauses that protect the regional center in the event the finder has violated SEC rules or regulations.


Ultimately, since the job descriptions of brokers, dealers and finders are quite similar and overlap in a number of ways, the SEC evaluates the activities of agents when determining how they will be classified and whether they are acting within the existing regulatory scheme. Investors in EB-5 projects, too, should carefully examine the credentials, track record and transaction histories of individuals who offer financial assistance to regional centers so that they do not run afoul of the law.

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