Real-Estate Deals And The Securities Laws

When assembling a real-estate deal involving other investors sometimes referred to as “syndication”, one must comply with state and possibly federal securities laws. When securities are issued, they must be registered or fit within an exemption. Otherwise the investors later may be able to sue the principals B and the State and – or SEC can impose fines and jail sentences. Frequently an offering is structured to fit within exemptions to the laws that otherwise require registration of the securities. One must weigh the advertising needed, whether financial requirements will eliminate too many investors, whether investors will come from more than one state, etc. to determine the best exemption.

Definition of ASecurities@

The definition of Asecurities@ is quite broad. Under federal law the term Asecurity@ means any A note, stock…evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement…@, etc. The California definition basically tracks the federal one. Note that this definition includes promissory notes secured by real estate, although there are exemptions to the securities laws that can apply in that case.

There are some exceptions to the definition of Asecurities@. General partnership interests are not considered securities, on the theory that general partners each have the authority to exercise meaningful control over the partnership. Limited partnership interests, though, are presumed to be securities.

If the investors are all tenants in common (meaning they are listed on the deed but there is no formal entity), then there are no securities — but the owners all have the same personal liability as if they were general partners. Good insurance coverage is key in that case.

Limited liability company interests generally constitute securities. This is certainly true for manager-managed LLC=s. Still, there is an exception under California law for member-managed LLC= s where all of the members are actively engaged in management of the LLC. The California statute states that Asecurity@ does not mean :

a membership interest in a limited liability company in which the person claiming this exception can prove that all of the members are actively engaged in the management of the limited liability company; provided that evidence that members vote or have the right to vote, or the right to information concerning the business and affairs of the limited liability company, or the right to participate in management, shall not establish, without more, that all members are actively engaged in the management of the limited liability company….

As the definition shows, though, the members must be truly engaged in management, and not merely have the right to do so.

It is not yet clear whether there is a similar federal exemption (the cases seem to conflict), so the safer course at this time is to assume that offerings of LLC interests to residents of different states are securities under federal law.

There is also an exemption under California law fo property in fethiye for sale r certain secured promissory notes. More specifically, there is an exemption for:

A promissory note secured by a lien on real property, which is neither one of a series of notes of equal priority secured by interests in the same real property nor a note in which beneficial interests are sold to more than one person or entity.

This works where there is just one investor per property. It does not work if there are different investors secured by the same property (unless each investor will have a lien with different priority). This is an unusual exemption in that it does not require any form to be filed with the State.

Also, if the promissory note has an equity (profit) “kicker” (versus just interest), then the note is a security.

Unfortunately, there is nothing comparable on the federal level.


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