Real estate syndicates in California offer investors a way to invest in real estate projects under the management of a syndicator, also known as a sponsor. The syndicate itself may use one of several different business forms under California law, such as a corporation or a limited partnership.
The individual investors own a portion of the syndicate. This raises an important question about state and federal securities laws: do investments in a real estate syndicate constitute “securities,” which might place them under the jurisdiction of state and federal securities regulators?
The rather complicated answer is that it depends on various factors, including how the syndicate was formed and the role of the investors in its ongoing operations. Determining the answer requires a careful and thorough review.
What is a “security?”
At the federal level, the Securities Act of 1933 regulates the offer, issuance, and sale of securities to the public. It defines “security” to include not only stocks, bonds, futures, and options, but also a wide range of “investment contracts” and other financial transactions.
California’s Corporate Securities Law of 1968 defines “security” in much the same way. It also adds provisions that exempt certain membership interests in limited liability companies (LLC) when the investors are “are actively engaged in the management of the limited liability company.”