Interpretive Release Guidelines As to the Applicability of Federal Securities Laws to Offers and Sales of Condominiums or Units in a Real Estate Development 33-5347

SECURITIES AND EXCHANGE COMMISSION
Washington, 	D.C. 	20549
SECURITIES ACT OF 	1933
Release No. 	5347
GUIDELINES AS TO THE APPLICABILITY QF THE
FEDERAL SECURITIES LAWS TO OFFERS AND SALES
OF CONDOMINIUMS OR UNITS IN A REAL ESTATE
DEVELOPMENT
The Securities and Exchange Commission 	today called attention to 	the
applicability of the 	federal 	securities 	la~s to 	the offer and sale 	of
condonimium units, 	or other units in a 	real estate 	development, 	coupled with an offer
or agreement to perform or ·arrange certain rental or other 	services 	for 	the
purchaser. 	The Commission noted that such offerings may involve 	the 	offering
of a security in the 	form of an invest;ment contract or a participation in a
profit sharing arrangement within the meaning of the 	Securities Act of 	1933
and the Securities Exchange Act of 	1934. !/ 	Where 	this 	is the 	case any
offering of any such securities must comply with the 	registration and
prospectus delivery requirements of the Securities Act, 	unless an exemption
therefrom is available, 	and must comply with the anti-fraud provisions of
the Securities Act and the 	Securities Exchange Act and the 	regulations
thereunder. 	In addition, 	persons engaged in the 	business of buying or selling
investment 	contracts or participations· in profit sharing agreements of. this
type as agents 	for others, 	or as principal for 	their own account, may be brokers
or dealers within the meaning of the Securities Exchange Act, 	and .tbtn·fore may be
required to be registered as such with the 	Commission under 	the provisions
of Section 15 of that Act.
The Commission is aware 	that 	there 	is uncertainty about when offerings of
condominiums and other 	types of 	similar units may be considered to be 	offerings
of securities 	that 	should be registered pursuant 	to the 	Securities Act. 	The
purpose of this release 	is 	to alert persons engaged in the business of building
and selling condominiums and similar types of real estate 	developments 	to their
responsibilities under 	the Securities Act and to provide 	guidelines for a
~termination of when an offering of condominiums or other units may be viewed
as an offering of 	secutities. 	Resort condominiums are 	one 	of 	the more 	common
interests in real estate 	the offer of which may involve an offering of
securities. 	However, 	other 	types of units 	that are 	part of a development or
project present analogous questions under the 	federal 	securities 	laws. 	Although 	this
release 	speaks in terms of condominiums, 	it 	applies 	to offerings 	of all 	types
of units 	in real estate 	developments 	which have characteristics 	similar 	to 	those
described herein.
!/ 	It should be noted that where, an investment 	contract 	is present, 	it consists
of the agreement offered and the condbminium itself.

33-534-7	-2
The offer of real estate as such, without any collateral arrangemen~s
with the 	seller or others, 	does not involve. the offer of a 	security. 	When
the real estate 	is offered in conjunction with certain services, 	a 	security,
in the 	form of an investment contract, may be present. 	The Supreme Court
in Securities and Exchange Commission v. W. 	J. 	Howey Co., 	328 u.s. 	293
(1946) 	set forth what has become a generally accepted definition of an
investment contract:
"a contract, 	transaction or scheme whereby a
person invests his money in a common enterprise
and is led to expect profits solely from 	the
efforts of the promoter or a 	third party, 	it
being immaterial whether the 	shares in the
enterprise are evidenced by formal 	certificates
or by nominal 	interests in the physical assets
employed in the enterprise." (298)
The Howey case 	involved the 	sale and operation of orange 	groves. 	The
reasoning, 	however, 	is applicable 	to condominiums.
As the Court noted in Howey) 	substance 	should not be 	disregarded for 	form,
and the fundamental 	statutory policy of 1ffording broad protection to investors
should be heeded. 	Recent interpretations have 	indicated that the expected
return need not be 	solely from the efforts of others, 	as 	the holding in Howey
appears 	to indicate. 	17 	For this reason, 	an investment contract may be present
in situations where an investor is not wholly inactive, 	but even participates
to a 	limited dBgree 	in the 	operations of the business. 	The 	"profits" that 	the
purchaser 	is 	led to expect may consist of revenues received from 	rental of the
unit; 	these revenues and any 	tax benefits resulting from 	rentaf of 	the 	unit
are 	the economic 	inducements held out to 	the 	purchaser.
The existence of various kinds of collateral arrangements may cause an
offering of condominium units 	to involve an offering of 	investment contracts
or interests 	ina profit 	sharing agreement. 	The presence of such arrangements
indicates 	that 	the 	offeror 	is offering an opportunity through which the
purchaser may earn a 	return on his 	investment through the managerial affert& of
the 	promoters or a third party in their operation of the enterprisP.
For example, 	some 	public offering" of condominium units 	invol·.·e rental pool
arrangements. 	Typically, 	the 	rental pool 	is 	a device '\vhereby 	the promoter
or a 	third party undertakes 	to rent 	the 	unit on behalf of the actu~l 	owner
during 	that period of 	time when the 	unit 	is not 	in use by the 	owner. 	The
rents received and the 	expenses 	attributable 	to rental of all 	the 1nits 	in
the project are 	combined and the 	individual owner receives a ratable 	share
of the 	rental proceeds 	regardless of whether his 	individual unit was actually
rented. 	The offer L)f 	the unit 	together \Jith the offer of an opportunity to
Participate 	in such a 	rental pool 	involvf>'s the offer of 	investment 	contracts which
must be 	registered unless an exemption is available.
11 	SEC v. 	Glenn W. 	Turner Enterprises, 	Inc. 	CCH Fed Sec L. 	Rep. 	,93,605 	(D.C.
Ore. 	No. 	72-390, May 25, 	1972). 	See also State v. 	Hawaii Market Center, 	Inc.,
485 P. 	2d 105 	(1971) 	(cited in Securities Act Release :No. 	5211 	(1971 ); 	and
Securities Act Release No. 	5018 (1969) 	regar~ing the applicability o£ 	the 	federal
securities laws to the 	sale and distribution of whiskey warehouse 	receipts.

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ral
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Also, 	the condominium units may be offered 1-1ith a contract or
agreement 	that places restrictions, 	such as 	required use 	of an exclusive
rental agent or limitations on 	the period of 	time 	the 	owner may occupy
the unit, 	on the purchaser's occupa:1n 	or rc;1tal of 	tlw 	nrop· r~L"
purchased, 	Such restrictions 	suggest 	that 	the purchaser 	is 	in 	fa,·l
investing in a business enterprise, 	the 	return from which will be
substantially dependent on the success of the managerial efforts of other
persons. 	In such cases, 	registration of the 	resulting 	investment contract
would be required.
In any situation where collateral arrangements are 	coupled with the
offering of condominiums, whether or not 	specifically of the 	types discussed
above, 	the manner of offering and economic 	inducements held out 	to the prospective
pvrchaser play an important 	role 	in determining whether 	the offerings
involve 	securities. 	In this connection, 	see Securities and Exchange Coallllission
v. 	C. M. 	Joiner Leasing Corp., 	320 U.S. 	344 	(1943). 	In Joiner, 	the Supreme
Court also noted that:
"In enforcement of 	[the Securities Act], 	it 	is not
inappropriate 	that 	promoters' 	offerings be 	judged as
being what 	they were 	represented to be." 	(353)
In other words, 	condominiums, 	coupled with a 	rental arrangement,
will be deemed to be 	securities if they are 	offered and sold through
advertising, 	sales 1 i terature, 	promotional schemes or 	oral repre sen tat ions
which emphasize 	the economic benefits to the 	purchaser to be 	derived from
the managerial efforts of the promoter, 	or a 	third 	party designated or arranged
[or by the 	promoter, in renting the 	units.
In summary, 	the offering of condominium units 	in conjunction with any
one of the 	following will cause 	the 	offering to f)e viewed as an offering
of securities in the 	form of 	inveBtment contracts:
1. 	The 	condominiums, 	\.i ch any rental arrangement or other
similar service, 	are offered and sold with emphasis on
the economic benefits 	to the 	purchaser to be derived
from 	the managerial efforts of the promoter, 	or a 	thinl
party designated or arranged 	for bv 	the p!:omoter, 	trom 	rental
of 	the 	units.
2. 	The 	offering· of participation in a 	rental pool arrangement;
and
3. 	The 	offering of a 	rental 	or 	similar arrangement wht·t·cby 	the
purchaser must hold his unit 	available 	for 	rental 	for any
part of 	the 	year, 	must use an exclusive rental 	agt>nl 	or 	is
otherwise materially restricted in his 	,)c:cupJ 1cy c. 	rc'·nal
of his 	unit,

v
.:.4- 	33-534-7
In all 	of 	the above 	situations, 	investor protection requires 	the application
of the 	federal 	securities 	laws.
If 	the condominiums are 	not offered and sold with emphasis on the
economic benefits 	to 	the 	purchaser 	to be 	derived from 	the managerial efforts
of others, 	and assuming 	that no plan to avoid the registration requirements
of 	the Securities Act 	is 	involved, 	an owner of a 	condominium unit may,
after purchasing his unit,enter 	into a non-pooled rental arrangement
with 	an agent 	not designated or required 	to be used 	as 	a condition to 	the 	pur
chase, whether or not 	such agent is 	affiliated with 	the offeror, 	without
causing 	a 	sale 	of a 	security 	to be 	involved 	in the 	sale of the unit. 	Further a
continuing affiliation between the developers or promoters of a project and 	the
project by reason of maintenance arrangements does 	not make 	the unit a 	security.
In situations where 	commercial 	facilities 	are 	a part of 	the 	common
elements 	of a 	residential project, 	no registration would be required under
the 	investment contract 	theory where 	(a} 	the 	income from 	such facilities
is used only to offset common area expenses and 	(b) 	the 	operation of such
facilities 	is 	incidental 	to the 	project as a whole and are 	not established
as a 	primary income source 	for 	the 	individual owners of a 	condominium
or cooperative unit.
The Commission recognizes 	the need for a 	degree 	of certainty in the
real estate 	offering area and believes 	that 	the above guidelines will be
helpful 	in assisting persons 	to comply with the 	securities laws. 	It 	is
difficult, 	however, 	to anticipate 	the variety of arrangements 	that may
accompany the 	offering of condominium projects. 	The Commission, 	therefore,
would like 	to remind those engaged in the 	offering of condominiums or other
interests 	in real estate withsimilar features 	that 	there may be 	situations, 	not
referred 	to 	in 	this 	release, 	in which 	the offering of 	the 	interests 	con
stitutes an ·offering of 	securities. 	Whether an offering of 	securities 	is
involved necessarily depends 	on the facts 	and circumstances of each parti
cular case. 	The 	staff of the Commission will be available 	to 	respond 	to
written inquiries on such matters.
By the Commission.
Ronald F. 	Hunt
Secretary