Is a “Man Camp” a Security?

There was a land rush in North Dakota because of the stuff in the ground. Fracking for shale oil turned towns around the Bakken oil field into boom towns. It takes people to run those rigs, so the local population swelled in size, resulting in a shortage of housing. Some of the housing was minimally designed “man-camps” designed to meet the basic housing needs of a worker. An enterprising developer came up with an idea to finance construction by selling fractional interests in the real estate. The Securities and Exchange Commission just filed a securities fraud case against the developer.

Can a man camp be a security?

man camp

According to the SEC’s complaint North Dakota Developments marketed “units” to investors”. But since the units were managed collectively, the SEC took the position that the units are actually securities. An investor could purchase a unit for $50,000 to $90,000, rent space at the NDD project and let NDD manage the unit.

So far that sounds like a real estate investment, not a securities investment. Ignoring the alleged fraud for now, the SEC only has jurisdiction over securities fraud and needs to show that this investment involved a security.

The securities laws define “security” to include an “investment contract.” The Supreme Court, in 1946, defined an investment contract as “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” SEC v. W.J. Howey Co., 328 U.S. 293(1946). The requirement that profits be expected “solely” from the efforts of the promoter has been given a liberal reading and has largely dropped the term “solely” from the investment contract test.

According to the complaint, NDD charged a high land rent for the unit. But NDD was willing to waive the land rent if the investor let NDD manage the unit. The SEC alleges that every investor had NDD manage the unit. The SEC described the land rent as punitive. Under the management agreement, investors could chose a guaranteed rate or a variable rate based on actual income received in a pooling program.

Typically, if the real estate investor is giving a choice to manage the unit separately, the developer can escape the transaction being designated as an “investment contract.” In this case the investor is given a choice, but the separately managed choice pays a large financial penalty. The SEC is going to argue that the choice is there in name only.

My view is that NDD took clever steps to avoid the treatment of the investments as securities. It may be enough to avoid the SEC’s case.

That does not mean there was or was not fraud involved in the investment scheme. The SEC’s complaint alleges some bad actions. It’s now up to NDD to defend itself from the SEC.

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