ALP: When will the sale of an interest in real estate, or any enterprise for that matter, result in the issuance of a “security” under the law?

July 2005

Generally, interests in an enterprise in the form of shares of stock, bonds, notes, and LLC membership interests, to name a few, are well-recognized as securities.    Many of us do not realize that courts have defined the term “security” so broadly that any interest in an enterprise received in exchange for an investment of money, where the investment is made in a common enterprise with an expectation of profits principally from the efforts of others, may also be considered a security. 

The sale of real or personal property may be combined with management contracts to create a security.  In these situations, where managerial control is retained by the seller or a third party identified by the seller, the investor is typically purchasing a security, as in the sale of condominium units combined with collateral agreements often referred to as a “timeshare.”  Other examples include the sale of vending machines accompanied by a service contract and the sale of parking meters together with operating agreements.  Pyramid sales and referral schemes may also be deemed to be a security.

An unhappy investor will often attempt to characterize a transaction as one involving the sale of a security in order to rescind the purchase and obtain the amount of his or her investment plus interest burdening the issuer of the security with the loss.  The issuer of the security and those individuals involved can also be responsible for damages, fines and criminal penalties.  In addition, those individuals who are involved in the sale may be acting as unlicensed securities brokers.

Practices

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