Here’s the GreenTech Deal that the SEC Is Investigating

Leading off the Tuesday edition of the Morning Jolt:

Did GreenTech’s Contract With EB-5 Visa Applicants Violate the Law?

Let’s connect some dots, and see if we can figure out why GreenTech Automotive is in such hot water. Here’s what the SEC investigation of Terry McAuliffe’s electric-car company is about, in part:

An electric-car company co-founded by Virginia gubernatorial candidate Terry McAuliffe (D) is being investigated by the Securities and Exchange Commission over its conduct in soliciting foreign investors, according to law enforcement documents and company officials.

In May, the SEC subpoenaed documents from GreenTech Automotive and bank records from a sister company, Gulf Coast Funds Management of McLean. The investigation is focused, at least in part, on alleged claims that the company “guarantees returns” to the investors, according to government documents.

Here’s the GreenTech Automotive promissory note, as obtained and published by the Franklin Center’s Kenric Ward:

“GTA Shall Issue Individual Certificate To The Fund For The Benefit Of The Individual Investor A Unit Of Preferred Stock To Be Converted At The End Of The Five-Year Term To GTA’s Common Stock Market Value Of Five Hundred And Fifty-Five Thousand Dollars ($555,000). Alternatively, GTA Promises To Purchase back Its Preferred Stock Unit As A Way Of Reducing The Proportion Of Preferred Equity From The Individual Investor Named Herein ________________, In Case GTA Fails To Go Public Upon Five-Year Anniversary Of The Named Investor’s Investment In The Amount Of Five Hundred Thousand US Dollars (USD $500,000.00)

Meaning either the investor gets preferred stock worth $555,000, or GreenTech buys back its preferred stock for $500,000.

An EB-5 visa requires an investment of $500,000 . . . and investors were charged $55,000 as an administrative fee, according to the offering memorandum.

So the only potential loss to investors was the $55,000 administrative fee. As any EB-5 site will tell you, the investment from the EB-5 applicant must involve risk; otherwise it’s not really an investment. As one immigration lawyer put it, “The law requires the capital to be at risk, and case law forbids guaranteed redemption agreements — a certain price and a certain time. That’s not really an investment; it’s more like a loan.”

I’m not a Securities and Exchange Commission lawyer, but don’t GreenTech Automotive’s terms sound an awful lot like guaranteeing a return?

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