When a Foreign Investor’s U.S. Investment Is a Security, and When It Is Not

Short answer. Most of what our E-2 clients do is not a securities transaction at all. Buy the assets of a business, or form and actively control your own company, and no security changes hands. Buy the stock of an existing corporation and you have bought a security even at one hundred percent, but a one-off private purchase is exempt and requires no filings. The heavy compliance sits somewhere else entirely: on pooled offerings, which is what a regional center EB-5 investment is.

The distinction that runs through all of it is between “no registration required” and “no law applies.” Those are not the same thing, and the antifraud rules never switch off.

Is it a security at all?

The investment contract test. SEC v. W.J. Howey Co., 328 U.S. 293 (1946), asks “whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others.” Courts no longer read “solely” literally; the question is whether the efforts of others are the significant ones.

Stock is stock. Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985), held that an instrument called stock, bearing stock’s usual characteristics, is a security, and rejected the “sale of business” doctrine. Control is irrelevant. The companion case, Gould v. Ruefenacht, 471 U.S. 701 (1985), reached the same result on a fifty percent purchase.

Assets are not. The statutory definition at 15 U.S.C. § 77b(a)(1) enumerates instruments: notes, stock, bonds, investment contracts, and the like. Equipment, inventory, goodwill, leases, and customer lists are not among them, and Texas parallels the federal list at Tex. Gov’t Code § 4001.068(a). An asset purchase generally has nothing for the Acts to operate on.

But watch the seller note. Most asset acquisitions are partly seller-financed, and a note is presumptively a security. Reves v. Ernst & Young, 494 U.S. 56 (1990), applies a family-resemblance test with recognized exceptions including a note secured by a lien on a small business or its assets. A single secured acquisition note that is not distributed comfortably fits that exception. It is an analysis, not an automatic pass.

LLC interests depend on the operating agreement. There is no per se rule. Courts run Howey on the governance documents. A member-managed LLC interest held by a member with real governance rights, including the ability to remove managers, is usually not a security. A manager-managed interest held by a passive member usually is. What controls is the objective ability to exercise control under the agreement, not whether you exercise it. See Great Lakes Chemical Corp. v. Monsanto Co., 96 F. Supp. 2d 376 (D. Del. 2000), and Robinson v. Glynn, 349 F.3d 166 (4th Cir. 2003).

General partnerships, and a warning aimed at foreign investors. In the Fifth Circuit, which governs Texas, Williamson v. Tucker, 645 F.2d 404 (1981), holds that a general partnership or joint venture interest generally is not an investment contract, but the presumption is rebuttable. One of the three ways to rebut it is that the partner “is so inexperienced and unknowledgeable in business affairs that he is incapable of intelligently exercising his partnership or venture powers.”

Picture the man that describes. He arrived eight months ago. His English is functional but not fast. He has never run a U.S. company, he does not know what a UCC filing is, and his “partner” handles the bank, the payroll, the landlord, and the books. On paper he is a general partner with full voting rights. In practice he signs what he is handed. That is Williamson factor two, and it converts his partnership interest into a security, with everything that follows.

It is one more reason the governance documents matter, and one more reason a foreign investor should not take a U.S. partner’s word for what he is signing.

What that means in practice

The favorable half nobody mentions

Because a stock purchase is a securities transaction, an E-2 buyer misled by a seller’s misrepresentations has a federal Rule 10b-5 claim and, in Texas, a statutory rescission remedy under Tex. Gov’t Code § 4008.052 that an asset buyer would not have. That is a genuine reason a client might prefer a stock deal, and it belongs in the analysis alongside the tax and liability reasons. See Buying an Existing Business on an E-2.

The exemptions, when a security is involved

Section 4(a)(2), 15 U.S.C. § 77d(a)(2), exempts “transactions by an issuer not involving any public offering.” SEC v. Ralston Purina Co., 346 U.S. 119 (1953), asks whether the offerees can “fend for themselves,” and puts the burden of proving the exemption on the issuer. Exemptions are affirmative defenses you have to be able to prove, which is why documentation stays mandatory even when filings are not.

Regulation D. Rule 506(b) permits an unlimited number of accredited investors and no general solicitation. Rule 506(c) permits general solicitation but requires all purchasers to be accredited and reasonable steps to verify it. Rule 506 securities are “covered securities,” which preempts state registration. Rule 504 is not covered, which is why multi-state raises use 506.

Accreditation is not a residency concept. A foreign national qualifies on the same net worth and income tests at 17 C.F.R. § 230.501(a), and non-U.S. assets and income count. E-2 and EB-5 investors are very often accredited. Entity category (a)(8), where all equity owners are accredited, is the workhorse for a foreign family holding vehicle.

Regulation S matters most to this audience. Offers and sales occurring outside the United States are outside § 5, on two conditions: an offshore transaction, and no directed selling efforts in the United States. Equity of a non-reporting U.S. issuer, which describes nearly every EB-5 new commercial enterprise and every private U.S. operating company, falls into Category 3 and carries a one-year distribution compliance period, offering restrictions, purchaser certifications, and legends.

Two things clients consistently misunderstand about Reg S. It does not make the interest “not a security.” And it does not displace antifraud law. Regulation S says expressly that it relates solely to § 5 and not to the antifraud provisions.

What changed in 2025 and matters to EB-5. On March 12, 2025, SEC staff took the position in a no-action letter, with accompanying interpretations, that a high minimum investment amount is itself a relevant factor in verifying accredited status under Rule 506(c). Reported thresholds are $200,000 for natural persons and $1,000,000 for entities. Three conditions attach: the investor represents in writing that he is accredited; he represents that no third party financed the investment in order to make it; and the issuer has no knowledge to the contrary. Every EB-5 investment exceeds the natural-person threshold, which is a practice-changing development for offerings marketed to investors abroad who could not easily produce U.S.-style documentation.

Which state’s rules reach you

The two sections that follow are for two different readers. If your business and your investors are in Texas, read the Texas section and skip Illinois. If you are in Illinois, do the reverse. If your investors are in several states, you need all of them, and the preemption section after that explains why the list is shorter than you fear.

Texas: two exemptions, one filing, and a felony

The Texas Securities Act was recodified into Government Code Title 12, Chapters 4001 through 4008, effective January 1, 2022. The recodification was expressly nonsubstantive, so pre-2022 case law construing former Article 581 remains good authority.

One correction to a belief I hear regularly: the Texas State Securities Board was not consolidated into another agency. It continues as an independent agency, and was continued by the Legislature through 2031.

The exemptions likely to apply:

• 4005.004, isolated transactions.Where the seller is not in the business of selling securities and the sale is an isolated transaction not made in the course of repeated and consecutive transactions, involving personal investment of the seller’s personal holdings or a change in investment. This is the exemption that covers a one-off E-2 stock purchase from an individual owner.
• 4005.012, limited offerings.Sales made without any public solicitation or advertisement, where the issuer’s total security holders do not exceed thirty-five after the sale, or where the issuer sold to not more than fifteen persons in the preceding twelve months. No filing and no fee.
• 7 TAC § 139.19, the uniform accredited investor exemption. Notice of transaction within fifteen days, no fee.

The Rule 506 notice filing. A copy of the Form D through the NASAA Electronic Filing Depository, no later than fifteen days after the first sale in Texas, with a fee of one-tenth of one percent of the offering, capped at $500. No annual renewal.

And the part that makes this post honest. § 4005.001 exempts covered transactions “except as expressly provided otherwise in this title.” Civil liability under § 4008.052 applies “regardless of whether the security or transaction is exempt under Chapter 4005.” Criminal securities fraud under § 4007.203 is graded by amount, and at $100,000 or more it is a first-degree felony. Every EB-5 investment exceeds that threshold.

Illinois: earlier trigger, annual filing, and an independent violation

Under the Illinois Securities Law of 1953, 815 ILCS 5/5, securities must be registered prior to their offer or sale in Illinois unless exempt. Note “offer.” Illinois attaches earlier than the federal Form D trigger at first sale.

Exempt transactions under 815 ILCS 5/4 include the limited offering exemption at 4(G), which requires that sales to Illinois residents in the preceding twelve months have been to not more than thirty-five persons or have involved an aggregate price of not more than $1,000,000, with no general advertising or solicitation in Illinois and compensation not exceeding twenty percent of the sale price; the accredited investor exemption at 4(H); and isolated transactions at 4(Q).

The Illinois trap. Under 815 ILCS 5/2a and 14 Ill. Adm. Code § 130.293, a Rule 506 issuer files Form D with a $100 fee within fifteen days of the first sale to an Illinois resident, and then annually thereafter. Illinois is not a one-and-done state the way Texas is. If the issuer fails to remedy a deficiency within ten business days of notice, the Secretary of State may treat it as a refusal and require registration. And a missed filing is an independent violation under 815 ILCS 5/12(D), not merely a delinquent fee.

What preemption does, and the row people miss

The National Securities Markets Improvement Act, 15 U.S.C. § 77r, preempts state registration and merit review for covered securities, including Rule 506 offerings.

NSMIA preempts state regulation of the security. It does not preempt state licensing of the people selling it.

EB-5, specifically

A regional center EB-5 interest is a security, essentially always. It is a limited partnership interest or a passive LLC interest whose returns depend on a manager’s efforts, which is Howey in textbook form. The SEC has said so in enforcement, charging a regional center operator and thirty-seven affiliated partnerships with offering unregistered EB-5 securities and with broker-dealer registration violations.

Three points for investors.

“Not registered” is not the same as “not regulated.” The SEC and USCIS joint investor alert notes that most regional center offerings are not registered with the SEC or any state regulator. They are unregistered because they are exempt, which is lawful. The alert’s warning is worth quoting: “If your investment through EB-5 turns out to be in a fraudulent securities offering, you may lose both your money and your path to lawful permanent residency.”

Form I-956K is not a broker-dealer registration. The 2022 Act requires direct and third-party promoters to register with USCIS on Form I-956K. That registration does not satisfy, substitute for, or excuse registration under § 15(a) of the Exchange Act or state agent registration. Separate regimes, separate agencies. A person taking transaction-based compensation for soliciting EB-5 investors is acting as a broker, and the SEC has brought cases on that theory. See The July 2026 EB-5 Rule.

A true standalone EB-5 where the investor forms, capitalizes, and actively manages his own enterprise, with no pooling and no promoter, may fall outside the definition of a security on the same reasoning that covers an E-2 founder. Note carefully, though: EB-5 requires only policy formulation, not day-to-day management, so an investor can satisfy the immigration test while remaining entirely passive for securities purposes. The two tests are not the same test, and satisfying the first does not answer the second.

Where that leaves you

For most of our E-2 clients, none of this applies, because no security is involved. For the ones buying stock, the transaction is exempt and the obligation is to deal honestly. For anyone investing in a pooled offering, including every regional center EB-5, the compliance is real, it belongs to the issuer, and it is a reason to read what you are signing.

Regulation D puts it plainly: its exemptions “are not exempt from the antifraud, civil liability, or other provisions of the federal securities laws,” and “nothing in Regulation D obviates the need to comply with any applicable state law relating to the offer and sale of securities.”

If you are buying a business, forming an entity with outside money, or subscribing to an EB-5 offering, the securities analysis belongs before the documents are signed. We handle it in the same engagement as the petition. Call or text 512.761.8479.

Read next: Buying an Existing Business on an E-2 · The July 2026 EB-5 Rule