Thomas M. Maney had a 1000-acre parcel of undeveloped, vacant, desert land in Kern County, California. He decided to find other interested in owning part of it and helping with the development decisions. He split it into 4000 undivided, fractional ownership interests. So far, that’s just a time-share and not a security.
Then Silver Saddle required buyers to contribute $500 of additional funds for each quarter share into a pooled fund for further development of the property. According to the complaint filed by the State of California Department of Business Oversight:
“Investors were told that the capital contributions of $500.00, $1,000.00 or $2,000.00 made to the Capital Improvement Fund would appreciate in value and that the investors would later use the funds to develop the 1,020 acres of undeveloped land into viable commercial and industrial properties.”
That sounds less like a real estate purchase and more like a pooled fund of capital with the purpose of generating a return.
As for control, purchasers could vote on how to spend the money in the Capital Improvement Fund. But only full-unit holders could vote. Half-share and quarter-share owners could not vote. Plus, the ranch’s board of directors made all of the management decisions. The board was controlled Mr. Maney. The owners were effectively relying on others to manage the money.
Pooled funds, relying on the work of others to earn a return puts it into the definition of “investment contract” and therefore a security.
Of course, there were other problems with the sales of interests at Silver Saddle. The DBO accused Maney of diverting funds for personal use, using high-pressure sales tactics, promising a lack of risk and high returns, and failing to disclose a past history of unlawful real estate sales.
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