SEC Expands Definition of Real Estate Security
The SEC charged a real estate developer and his financing partners with securities fraud for making misrepresentations and misusing investor proceeds. The SEC asserts that the fractional, tenant-in-common interests in real estate projects were securities subject to the anti-fraud rules. The SEC argues that investor monies were pooled and that each investor would receive a percentage of a specific piece of land and building and that the interests were sold as a passive investment. Also, rather than use the investor proceeds earmarked for specific projects, the defendants used funds to pay current operating expenses related to multiple projects.
For those in the private equity real estate space that think they are exempt from regulatory scrutiny, the SEC takes an expansive view of the definition of “security.” Most agree that an investment in a partnership or LLC that invests in real estate is an investment in a security. In this case, the SEC goes further by arguing that merely pooling multiple investments makes it a securities offering. We wonder if the SEC would have been able to come to the same conclusion had the defendants actually used the funds for the specifically earmarked real estate development projects.