Revisiting the SEC’s Stance on When Real Estate is a Security

After last week’s charges against Cay Clubs, I remembered that I wanted look at an old SEC Release on the applicability of the federal securities laws to condominiums and real estate development. Back in 1973 The Securities and Exchange Commission issued a release describing situations where a real estate offering could become a securities offering. At least according to the SEC.

SEC Release 33-5347 (pdf) discusses situations when the sale of condominium units, or other units in a real estate development, coupled with an agreement to perform rental or other services for the purchaser would become the offering of a security in the form of an investment contract or a participation in a profit sharing arrangement within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934.

The offering of real estate units in connection with any the following will cause the offering to be viewed as an offering of securities in the form of investment contracts:

1. The condominiums, with any rental arrangement or other similar service, are offered and sold with emphasis on the economic benefits to the purchaser to be derived from the managerial efforts of the promoter, or a third party designated or arranged for by the promoter, from rental of the units.
2. The offering of participation in a rental pool arrangement; or
3. The offering of a rental or similar arrangement whereby the purchaser must hold his unit available for rental for any part of the year, must use an exclusive rental agent or is otherwise materially restricted in his occupancy or rental of his unit.

In all of the above situations, investor protection requires the application of the federal securities laws.

Sources:

• SEC Release 33-5347 (pdf)
• SEC Charges Real Estate Executives with Investment Fraud
• When is Real Estate a Security?
• Is it a Security?
• When is Real Estate a Security?
• What is a Security? Is Real Estate a Security?

Image is Western shot of Edgehill Condominiums in Edgewater NJ by Tguless. http://commons.wikimedia.org/wiki/File:Edgehill_Condominium.JPG