CREATING A TRANSACTION WITHOUT SECURITY
When assembling a group, it is important to determine whether it is a security or a non-security, as defined by the Howey Test (see SEC v. Howey [1946] 328 US 293) and the Venture Capital Test (see Silver Hills Country Club v. [1961] 55 Cal. 2d 811). If the transactions satisfy any of the tests, they will be classified as a value (see People v. Schock [1984] 152 Cal. App. 3rd 379) and would not be allowed to advertise publicly to investors.
A NEW WAY MARKET A NON-SECURITY
How can you implement a marketing program to build a pool of investors without breaking securities laws? To achieve this, you must show that you are offering professional consulting services. Offer advice, not control. A marketing plan designed to achieve this goal would include your advertising publicly in the newspaper, on television, by direct mail, or by any other means for a “paid” educational seminar. For the best response, place your ads two weeks before the actual seminar date, with at least two exposures. If you have books, audiotapes, and videotapes on related topics, or are trying to get clients for your consulting services, you may want to turn it into a free seminar. Remember, never advertise for investors!
Prepare a meaningful, informative and educational program diligently and present it skillfully. Having you approved for continuing education credits by related professional organizations will help in marketing.
HOW TO FIND INVESTORS
Through the seminar, you will be able to access the group of investors interested in being informed about future real estate opportunities. You can submit property configuration sheets and make property presentations. In addition, you will be able to offer your professional services in locating areas of opportunity and property analysis.
If several people are interested in a particular property, a common tenant investment group (not under your control) must be formed to make an offer to you or through you, if you have the appropriate license.
If you are not a real estate licensee and you simply want to sell your position in the property instead of being part of the group, you can do so legally. In this particular case, not having a real estate license could work to your advantage due to various disclosure laws.
HOW TO PROTECT YOURSELF
To strengthen your position that the transaction is not a security, take only a minority interest in the group. Make sure the group is in control of the investment result, not you. All decisions must be strictly of the group. Inform the group of tenants in common that, under no circumstances, are you allowed to manage their affairs. If you do, you could be considered a promoter, subjecting the entire transaction to security laws, giving each investor a built-in insurance policy against all losses they may incur if the investment incurs losses.
If you enter into a real estate consultant contract, limit your activities to those performed by a real estate licensee, not a general managing partner.
If the property is not in your plans but you still want to share in the potential profits, sell the property to the joint tenant group and retrieve a participation note and deed of trust for the property. As compensation, offer a below-market interest rate and / or accruals. By taking this approach, you will not only save significantly on taxes, but you will also make a statement of your faith in the property to buyers.
ABSTRACT
Group ownership has clear advantages. Probably the most frequent is economy of scale. The common tenant form of ownership provides a simple and low-cost way for investors to form groups, while maintaining many tax benefits.
Depending on your preference, the pool of tenants in common can be formed as a guarantee or a non-security. If it is classified as a security, no public advertising is allowed unless it is registered as a public offering. Performing non-security transactions is relatively easy and inexpensive.
If you are forming a co-ownership group as a non-security, do not jeopardize your position by acting as a promoter or general partner. By doing so, you will indemnify your members for all losses.
